THE Organisation for Economic Co-operation and Development (OECD) has recommended that the goods and services tax (GST) be reintroduced in Malaysia, as part of the country’s medium term fiscal strategy. GST was replaced with the sales and service tax (SST) regime in September 2018.

       Following the OECD’s recommendation, Minister in the Prime Minister’s Department (Economy), Datuk Seri Mustapa Mohamed, indicated that policy makers should consider re-introducing the GST in Malaysia when the time is right to do so.

       The benefits of GST

       The GST is a more efficient tax system than SST. Under the GST regime, most businesses are able to fully recover the GST charged by their suppliers through an “input tax” mechanism. Hence, the GST is borne by the ultimate consumer, mitigates the tax-cascading impact of the SST regime, and does not add to the cost of doing business.

       The GST is also easier for businesses to apply and administer compared with the SST, with its multiple exemptions and relief facilities and the requirement of a significant element of judgement in certain cases.

       The GST will broaden Malaysia’s tax base and increase tax collections, enabling the government to reduce reliance on corporate income tax and petroleum income tax. When it was implemented in Malaysia, the average annual GST collection was approximately RM40bil, while the SST only brought in an average of RM25bil per year. The tax authorities are focused on taxing the shadow economy.

       The GST would encourage businesses to be registered to claim input tax credits on their supplies.

       Following the OECD’s recommendation, Minister in the Prime Minister’s Department (Economy), Datuk Seri Mustapa Mohamed, indicated that policy makers should consider re-introducing the GST in Malaysia when the time is right to do so.

       Some taxpayers may even prefer to deal with GST-registered vendors and customers.

       This will result in a higher number of GST registrants compared with SST registrants, and lead to greater transparency of the supply chain. The tax authorities will also have multiple avenues to detect tax evasion through GST audits and reconciliations.

       The GST, known in many countries as Value Added Tax or VAT, is also a very familiar tax system to investors. Familiarity and consistency are valued by investors; hence the GST could result in increased investor interest in Malaysia.Key considerationsFor the GST to be successfully reimplemented in Malaysia, the support of the public and businesses is paramount. The timing of the reintroduction will be crucial.

       Whilst the GST is an efficient tax collection mechanism and could reduce the cost and tax-reporting complexity of doing business, a “new” tax will always cause anxiety. Now is an especially difficult time for major changes to our tax system. Consumers will be concerned about price hikes, whilst business owners would want to focus their time and energy on rebuilding their businesses instead of implementing new accounting systems and learning new tax rules.

       As such, the government must ensure that businesses are given ample time to prepare for the reintroduction of the GST, as there will be a need to calibrate accounting and reporting systems and train and upskill staff.

       In-depth consultations must be held with industry groups and other stakeholders to ensure that concerns are addressed. To the extent possible, the “new” GST should allow businesses to leverage as much as possible the systems and knowledge that were developed during the previous GST regime in Malaysia.

       This will minimise disruption and cost to businesses. The Royal Malaysian Customs Department (Customs) should ensure that clear and comprehensive guidance is issued to businesses, that the the GST filing system is efficient, and that hotlines and online support channels are prepared to handle large volumes of queries. There should also be a process to allow for written rulings to be issued within a reasonable period of time by Customs in response to taxpayer queries.

       Zero-price hike

       The government should also aim for a zero-price hike with the reintroduction of the GST, and ensure that any tax savings of businesses from the input tax credit mechanism are passed on to consumers.

       The benefits of the GST should also be communicated to the public through the media. The previous GST regime was not without its flaws, and it is important that the government learns from past experiences to implement a more effective GST system this time.

       Consultations with stakeholders will enable the government to fully understand the issues (or perceived issues) with the previous GST system. One complaint was the delay in businesses obtaining GST refunds. This caused a cash flow burden and also reporting concerns, with businesses and auditors having to assess whether a long-outstanding input tax credit claim is truly recoverable. GST refunds should be more streamlined and as prompt as possible, potentially via a “refund first, audit later” approach. The government may also set up a “self-audit” initiative by working with accredited tax consulting professionals for busineses to achieve an acceptable level of compliance.

       The GST system should also be simplified, and the requirement for judgement in the classification of supplies be minimised. This can be done by reducing the categories of supplies exempted from the GST and by assigning the zero-rated category to essential goods and services. All other supplies should be standard rated, with the GST charged at a palatable rate.

       To alleviate the financial burden on businesses, the government could provide grants for companies to upgrade their accounting and reporting systems and to train key personnel. The government should also consider introducing income tax incentives such as accelerated capital allowances on hardware and software required for GST reporting, and double deductions on staff training expenses. It is important that the reintroduction of the GST is not considered in isolation and that it is assessed as part of a holistic assessment of Malaysia’s fiscal position and tax systems.

       Jalbir Singh Riar is a partner in Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writer’s own.