Tax Structure
Introduction)
Tax Structure in Malaysia
Generally, all income of companies and individuals accrued in, derived from or remitted to Malaysia are liable to tax. However, income remitted to Malaysia by resident companies (other than companies carrying on the business of banking, insurance, air and sea transportation), non-resident companies and non-resident individuals are exempted from tax.
Apart from income tax, there are other direct taxes such as real property gains tax, and indirect taxes such as sales tax, service tax, excise duty and import duty.
Currently, income tax is assessed on the income earned in the preceding year according to the Official Assessment Systems.
As a measure to modernise and streamline the tax administration system, the assessment of income tax will be changed to the current year assessment from the year 2000. The present Official Assessment System will be changed to the Self-Assessment System in stages as follows:
|Group |Year of Implementation |
|Companies |2001 |
|Businesses, partnerships and cooperatives |2003 |
|Salaried group |2004 |
To facilitate the changeover, all income received in 1999 will be waived from income tax and losses incurred 1999 will be allowed to be carried forward.
SOURCES OF INCOME LIABLE TO TAX
Sources of income which are liable to income tax are as follows :
· Gains and profits from trade, profession and business
· Salaries, remunerations, gains and profits from an employment
· Dividends, interest or discounts
· Rents, royalties or premiums
· Pensions, annuities or other periodic payments
· Other gains or profits of an income nature not mentioned above.
Chargeable income is arrived at after adjusting for expenses incurred wholly and exclusively in the production of the income. Specific provisions or reserves for anticipated losses or contingent liabilities are not tax deductible. No deduction for book depreciation is allowed although capital allowances are granted. Unabsorbed losses may be carried forward indefinitely to offset against future income.
COMPANY TAX
A company, whether resident or not, is assessable on income accrued in or derived from Malaysia. Income derived from sources outside Malaysia and remitted by a resident company is not subject to tax, except in the case of banking and insurance business and sea and air transport undertakings. A company is considered a resident in Malaysia if the control and management of its affairs are exercised in Malaysia. Places of control and management are considered on the basis of where meetings of the Board of Directors are held.
A tax rate of 28% is applicable to both resident and non-resident companies. In the case of a company carrying on petroleum production, the applicable tax rate is 38%.
PERSONAL INCOME TAX
All individuals are liable to tax on income accrued in, derived from or remitted to Malaysia. The rate of tax depends on the resident status of the individual which is determined by the duration of his stay in the country (as stipulated under Section 7 in the Income Tax Act 1967).
Resident Individual
A resident individual is taxed on his chargeable income at graduated rates from 2% to 30% after the deduction of tax reliefs. However, an individual with chargeable income of less than RM 2,500 is taxed at zero rate.
Personal Reliefs
|The chargeable income of an individual resident is arrived at by deducting from his total income the following personal reliefs :|
|· Personal |RM5,000 (a further relief of RM 5,000 if the |
| |taxpayer is a disabled person) |
|· Wife |RM3,000 (a further relief of RM 2,500 if the wife |
| |is a disabled person) |
|· Medical expenses of parents |up to a maximum of RM 5,000 |
|· Medical expenses for serious illnesses for the individual, his wife or |up to a maximum of RM 5,000 |
|child | |
|· Expenditure for the purchase of basic support equipment for the individual,|up to a maximum of RM 5,000 |
|his wife, child or parent who is disabled | |
|· The maximum relief for unmarried children (regardless of age) receiving full-time education in universities and institutions of|
|higher education in Malaysia is four times the normal relief. |
|· Incapacitated children per child |RM 5,000 |
|· Contributions to the Employees Provident Fund and insurance or takaful premiums for life policies are allowed a maximum total |
|tax relief of RM 5,000. A further tax relief of RM 2,000 is given for insurance or takaful premiums with respect to medical and |
|educational purposes. |
A married woman whose income is separately assessed generally has her overall tax liability reduced, although this may not always be the case. The separate assessment covers all her income sources. She may, however, elect for joint assessment, in which case, the husband is given a wife relief of RM 3,000.
Tax rebate
Tax liability of a resident individual is reduced by rebates which are granted as follows :
· For an individual with income not exceeding RM 10,000, a rebate of RM 110 is given. A further rebate of RM 60 is given for his wife. A wife who is assessed separately will be entitled to a rebate of RM 110 if her chargeable income does not exceed RM 10,000.
· The equivalent of amount paid in respect of any zakat, fitrah or other Islamic religious dues which are obligatory
· A sum of RM 400 for the purchase of a computer by an individual or his wife.
· The amount of fee paid to the government for the issue of an employment pass, visit pass or work permit.
Non-resident Individual
Generally, a non-resident individual is liable to tax at the rate of 30% and he is not entitled to any personal relief. However, for the following types of income, non-resident individuals are subject to a withholding tax which is a final tax :
|· Special income of classes |10% |
|· Technical advice, assistance or services | |
|· Installation services on the supply of plant, machinery, etc. | |
|· Personal services associated with the use of intangible property | |
|· Services of a public entertainer |15% |
|· Interest rate |15% |
An employee on a short-term visit to Malaysia enjoys tax exemption in respect of his income from an employment exercised in Malaysia when his presence does not exceed 60 days in a calendar year. However, the income of a non-resident individual who performs independent services such as consultancy services is not exempted from tax.
REAL PROPERTY GAINS TAX
Capital gains are generally not subject to tax in Malaysia. Real Property gains Tax is charged on gains arising from the disposal of real property situated in Malaysia or of interest, options or other rights in or over such land as well as the disposal of shares in real property companies. The rates of tax are as follows :
|· Disposal within 2 years |30% |
|· Disposal in the 3rd year |20% |
|· Disposal in the 4th year |15% |
|· Disposal in the 5th year |5% |
|· Disposal in the 6th year and thereafter - company |5% |
|- individual |nil |
For individuals who are citizens or permanent residents, gains from disposal of real property held after five years are not subject to this tax. They are also entitled to an exemption of RM5,000 or 10% of the gains, whichever is the greater. In addition, they also enjoy a one-time tax exemption on the gains arising from the disposal of one private residence.
For non-citizens and non-permanent resident individuals, gains from disposal of real property within 5 years are subject to tax at a flat rate of 30%. However, disposal in the sixth year and thereafter will be taxed at 5%.
SALES TAX
This is an ad valorem stage tax imposed at the import and manufacturing levels. Manufacturers are required to be licensed under the Sales Tax Act 1972. Manufacturers whose annual sales turnover do not exceed RM100,000 are exempted from licensing. These companies are taxed based on their inputs. However, to alleviate the burden of small manufacturers from sales tax upfront on their inputs, these companies can opt to be licensed under the Sales Tax Act 1972 in order to purchase tax-free inputs. With this option, manufacturers will only have to pay sales tax on their finished products.
The general rate for sales tax is 10%. However, raw materials for use in the manufacture of taxable goods are eligible for exemption from the tax. Inputs for selected non-taxable products are also exempted. Certain non-essential foodstuffs and building materials are taxed at 5% while cigarettes and liquor are taxed at 15%. Primary commodities, basic foodstuffs, basic building materials, certain agricultural implements and heavy machinery for use in the construction industry are exempted. Certain tourist and sports goods, books, newspaper and reading materials are also exempted.
SERVICE TAX
This tax is imposed on certain goods and services provided in certain prescribed establishments. The goods include food, drinks and tobacco, while the main services are provision for premises for meetings, conventions and cultural and fashion shows; health services, and professional and consultancy services provided by legal, engineering, surveyor, architectural, accounting, advertising and other consultancy firms and services provided by insurance companies, motor vehicles service and repair centres, telecommunication services, security and guard services, recreational clubs, estate agents, parking space services, courier service firms, dentist, veterinary doctors, provision of accommodation and food by private hospitals and credit cards companies.
Goods and services tax (GST)
The implementation of a GST in Malaysia was proposed in the 2005 Budget to replace sales tax and service tax. No date or rate has yet been fixed for GST although the authorities have indicated that it could be implemented within the next year to three years. There is no draft legislation for GST. Goods and Services Tax (GST) is a consumption tax imposed on the sale of goods and services. In some countries it is also called Value Added Tax (VAT). Personal end-users of products and services cannot recover GST on purchases.
Custom duties
Custom duties are levied on goods imported in and exported from Malaysia. Custom duty refers to any import duty, surcharge or cess imposed by or under the Countervailing and Anti-Dumping Duties Act and includes any royalty payable in lieu of an export duty under any written law, or a contract, lease or agreement to which the Federal Government has consented.
Excise duty
Excise Duty is a form of taxation levied on locally manufactured goods of intoxicating liquors, tobacco products and by-products, petroleum and conversion of organic or non-organic materials into new products.
Examples of direct tax
Direct taxes
Income tax - is levied on individuals, companies and other taxable entities Real property gains tax - this is levied on capital gains arising from disposal of real estate, rights on real estate and shares in real property companies where the property is situated in Malaysia.
Petroleum income tax - this is levied on upstream petroleum companies
Examples of indirect taxes
Indirect Taxes
An example of this is the air passenger duty of RM 12 per flight for domestic flights. Most airlines pass this straight onto the consumer when the final price is published.
The responsibility to administer indirect taxation in Malaysia lies with the Royal Customs and Excise Department. The various types of indirect taxes are:
Custom duties
Custom duties are levied on goods imported in and exported from Malaysia. Custom duty refers to any import duty, surcharge or cess imposed by or under the Countervailing and Anti-Dumping Duties Act and includes any royalty payable in lieu of an export duty under any written law, or a contract, lease or agreement to which the Federal Government has consented. .
Excise duty
Excise Duty is a form of taxation levied on locally manufactured goods of intoxicating liquors, tobacco products and by-products, petroleum and conversion of organic or non-organic materials into new products. .
Sales tax
Sales Tax in Malaysia is a single stage ad valorem tax, imposed on taxable goods manufactured by any person or company in Malaysia. Sales tax is a consumer tax. .
Service tax
Service Tax is charged and levied in respect of any taxable service provided by any taxable person or service except for exported taxable service which means service provided to an entity in a country other than Malaysia. The rate is 5%.
Tax Legislation
Direct Taxes Legislations
The Income Tax Act 1967 (ITA) is the principal legislation for taxing income. The general scope encompasses the income of any person accruing in or derived from Malaysia or received in Malaysia from abroad. It is a question of fact as to what constitutes income, that is, gains or profits from a business or employment, dividends, interests, discounts, rents, royalties, premiums, pensions, annuities or other periodical payments, and other gains or profits.
Special provisions govern the taxation of income of, for example, insurance companies, shipping and air transport companies, banks and financial institutions, leasing companies, unit trusts and property trusts.
Malaysian income tax is imposed on a territorial, not worldwide, basis. The prevailing corporate tax rate is 25% with effect from YA 2009 but with applicable tax holidays, incentives, exemptions and concessionary or reduced tax rates, effective tax rates can be significantly reduced. With the abolition of the imputation system, a single-tier tax system has been in force from YA 2008.
Indirect Taxes Legislations
Service Tax
Scope of Tax
Service tax is applicable throughout Malaysia, excluding Langkawi, Labuan, Free Zones and the Joint Development Area.
Basis of Taxation
The principal legislation governing service tax is the Service Tax Act, 1975. The Act provides that service tax shall be charged on and paid by any taxable person who carries on a business of providing taxable services. A 5% service tax is chargeable on the value of taxable services provided by a taxable person, except for exported taxable services (which are exempt from tax).
Exported taxable service has been defined as “service supplied for and to a person in a country other than Malaysia (excluding Langkawi, Labuan and free other than insurance services zones), provided that the service is not supplied in connection with goods or land situated in Malaysia and the person is not in Malaysia at the time the service is performed.”
Rate of Tax
Generally, the rate of service tax is 5% ad valorem. However, a specific rate is applicable in the following case:
" RM2 per room per night in the case of free hotel rooms to an approved person responsible for the development of the tourism industry.
Licensing
A taxable person who carries on a business of providing taxable services has to apply for a service tax licence with the Customs station nearest to the place of business and charge service tax on all taxable services provided.
Charge and Remittance of Service Tax
Service tax charged and received by the taxable person must be paid to Customs within 28 days after the end of a taxable period. A taxable period is defined as 2 calendar months. Service tax is only due at the time when payment is received for the taxable service provided by the taxable person. However, where the whole or any part of the payment for any taxable service is not received from the customer within a period of 12 calendar months from the date of the invoice for the taxable service provided, service tax shall be due on the day following that period of 12 calendar months.
Penalties
Any amount of service tax which is unpaid after the due date (i.e. 28 days after the end of a taxable period) will attract a penalty of 10% of such unpaid amount. If the amount remains unpaid, the penalty will be increased by a further 10% for every succeeding period of 30 days or part thereof subject to a maximum of 50% of the taxes unpaid.
Objective of taxtation & Good Tax System
Taxation is any compulsory levy from individuals, households and firms to central or local government. The Malaysian Government imposes a wide range of taxes on people. The system is always evolving as the government seeks to develop and maintain a tax system that meets objectives and targets.
WHY DO WE NEED TO PAY TAXES?
To raise revenue to finance spending on goods and service by central & local government
The government when managing the level of AD output and prices uses taxation. When demand is perceived as being too strong the government can increase direct taxation, to reduce the level of real disposable income and household spending.
A progressive system of taxation can be utilised to achieve great equality in income & wealth between individuals and households
Taxes can correct for externalities and other forms of market failure (such as monopoly)
Import taxes may control imports and therefore help the country's international balance of payments and protect industries from overseas competition.
OBJECTIVES FOR THE TAX SYSTEM
The Labour Government has identified six main objectives for its tax system - these are summarised below:
• To keep the overall tax burden as low as possible
• To reduce tax rates on income to sharpen incentives to work and create wealth in the economy
• To maintain a broad tax base - having a range of taxes helps to keep each separate tax rate low
• To shift the balance of taxation away from taxes on income towards taxes on spending
• To ensure taxes are applied equally and fairly to everyone
• To use taxes to make markets work better (including the use of environmental taxes to make both consumers and producers aware of external costs)
Generally, indirect taxes are seen as regressive; the proportion of income paid in tax decreases as income rises.
Direct taxes are progressive because the proportion of income paid in tax increases as income rises. With a progressive tax, the marginal rate of tax exceeds the average rate of tax. As a result, progressive taxes act to reduce inequalities in the distribution of income. The post-tax distribution of income will be less dispersed than the pre-tax distribution
Elements of a Good Tax System
Taxes on earnings should be based around a progressive income tax with a transparent and coherent rate structure, with all income subject to the same rates
A single integrated benefit for those with low income and/or high needs
No transactional taxes
Indirect taxes should be largely uniform – VAT on almost everything – with a small number of targeted exceptions on economic efficiency grounds
Environmental taxes should target road congestion (not fuel use) and there should be a consistent price on carbon emissions
For savings taxes, there should be no tax on normal savings returns, and low tax on dividends to bring the equivalent rate on dividends to the same as other income after recognising corporation tax paid
A lifetime wealth transfer tax should replace IHT
A single rate of corporation tax with no tax on the normal return on investment
Equal treatment of income derived from employment, self employment and running a small company
ADVANTAGES OF TAX
• To boost the economy & increase GDP.
• Decreases inflation.
• Decreases poverty.
• Increases government treasures.
• Development in public sector.
• Strong defense for a nation.
At the time of emergency when country is in need of fund, direct taxes serve the purpose. Improves economic infrastructure. Funds for welfare and public services.
Revenue for govt:
Taxes raise money to spend on armies, roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems.
Redistribution:
Normally, this means transferring wealth from the richer sections of society to poorer sections.
DISADVANTAGES OF TAX
There are three main disadvantages to taxtation.
1. Discourage Business
2. Increase Government Control
3. Penalize Hard Work
Discourage Business
When taxes rise, the citizens and businesses of a country pay more of their income to the government. This can create a disincentive to invest in business, as investors will necessarilyreceive a smaller return on their investment. Businesses, in turn, may be discouraged from expanding, as the profits they make will be curtailed by a high tax rate. This discouragement can have many direct effects on a country related to the retardation of its economy.
Increase Government Control
When a government collects more in tax revenues, it accumulates more money to spend. This increase in discretionary income, compared with the money available to the citizens and businesses of the country, causes a shift in power away from the people towards the government.
Penalize Hard Work
In addition to discouraging investment, taxes can also stifle the motivation of individual workers. As citizens work harder and earn more money, more and more of their income is given to the government. This can appear unfair and lead to a decline in a country's morale.
Operation & Issues of GST
GST is a consumption tax charged on a wide range of domestic & international products, goods and services. It’s a broad-based tax imposed on every level of a product, from raw materials all the way to finished goods. It affects all layers of business and consumers – And whether you realize it or not, you’re being taxed for almost everything.
Introduction of GST
While there is no VAT/GST legislation in Malaysia, there is a sales tax and service tax regime. A supply of electricity is not subject to service tax.
A Malaysian Goods and Services Tax (GST) will replace the existing sales and services Tax (SST) regimes with an expected standard-rate of 4 percent (lower than the current prevailing sales tax rate of 10 percent and service tax of 5 percent).
It is expected that businesses with annual turnover below MYR500,000 will not be required to register for GST purposes. The Malaysian GST is expected to be implemented in 2012.
Expected GST treatment of electricity
The supply of electricity is treated as a supply of goods. The generation, transmission, and distribution of electricity to domestic and business customers are proposed to be standard rated. However, the supply of the first 200 units of electricity to domestic consumers is proposed to be zero-rated. Electricity on loan is subject to GST at the standard rate. Hence, the supplier must account for GST.
There is no GST on the supply of electricity between members of a GST group.
Exported electricity is proposed to be zero-rated. Self supply of electricity (own consumption) is proposed to be a non supply. Losses are not required to account for GST. The power/electricity exchange between ASEAN countries under the ASEAN Power Grid program is proposed to be treated as a zero-rated supply for export. As for imports, the reverse charge mechanism will be applicable. Compensation due to interruption of power supply is to be treated as not a supply, thus it is not subject to GST. The penalty on power loss/power factor surcharge is subject to GST as it relates to the earlier supply. Back billing through issuance of debit notes is also a supply and will be subject to GST.
HOW IT WORKS AND EFFECTS ON BUSINESS
In order to charge GST and claim input tax credits, businesses have to be registered for GST purposes with the Royal Malaysian Customs (“Customs”). Registration will be compulsory for businesses where the annual sales turnover of its taxable supplies exceed the prescribed threshold. The liability to register is determined based on either taxable turnover of the current month and the preceding 11 months or taxable turnover of the current month and the next 11 months. Businesses whose annual sales turnover is below the prescribed threshold may apply for voluntary registration. The indicative threshold is RM500,000.
One of the reasons to voluntarily register for GST is to enable the business to claim the input tax credits. Businesses which fall below the threshold may also be compelled to be licensed by their business customers who wish to claim the credit on the supplies acquired. Once registered, the business registrant must remain in the system for at least 2 years. We understand from the Customs Public Consultative meeting that pre-registration will be allowed a few months before the GST implementation date.
ACCOUNTING FOR GST / CHARGING OF GST
A GST registered person making a taxable supply to a taxable person must provide a tax invoice within a stipulated period (indicated as 21 days) after supply is made.
The GST “tax invoice” has to contain certain information as required by the law. Some of the information which is normally required is listed below:- a) The word ‘tax invoice’ in a prominent place; b) The invoice serial number; c) The date of issue of the invoice; d) The name, address and GST identification number of the supplier; e) The name and address of the person to whom the goods or services are supplied; f) A description sufficient to identify the goods or services supplied; g) For each description, the quantity of the goods or the extent of the services and the amount payable, excluding GST; h) Any discount offered; i) The total amount payable excluding tax, the rate of tax and the total tax chargeable shown as a separate amount; j) The total amount payable including the total tax chargeable; k) Any amount referred to in subparagraph (i) and (j), expressed in a currency, other than Malaysian currency, must also be expressed in Malaysian currency; and l) If the goods or services supplied are exempt or zero rated, they must be separately identified in the invoice and the gross total amount payable on them must be separately stated.
TAXABLE PERIOD AND FILING RETURNS
Businesses will be required to furnish GST returns and pay GST to Customs no later than a month after each taxable period. A taxable period is a regular interval period where a taxable person is liable to account for GST. Taxable periods may be 1 month, 3 months or 6 months depending on the businesses’ annual turnover.
At the end of a taxable period, if taxable supplies are made, GST registered businesses will need to compare output tax it charges to the input tax it incurs. Where the output tax is more than the input tax, businesses will need to remit the difference in the tax return to Customs no later than the last day of the month after the taxable period. If the input tax claimed is more than the output tax, businesses may be entitled to a refund subject to certain conditions.
Where there is late submission, a mandatory penalty at the prevailing rate will be imposed on any unpaid amount.
CLAIMING OF INPUT TAX CREDIT
To claim input tax credits, GST registrant business will need to have a valid tax invoice from the supplier of taxable supplies acquired. In addition, there are other conditions that need to be fulfilled by the GST registered business for the input tax credit claim. These include: • The claimant must be a taxable person; • Invoice (i.e. tax invoice) is issued under the name of the claimant; and • Goods and services acquired are not subject to any input tax restriction. These are acquisitions whereby even though GST is paid, no input tax credit is allowed. These include the purchase of passenger motorcar (including importation), club subscriptions fee, medical and personal accident insurance premiums, medical expenses, family benefits, entertainment expenses and others. It should be noted that no GST is chargeable on the subsequent supplies of these items.
RECORD KEEPING
All business and accounting records relating to GST would be required to be kept in Bahasa Malaysia or the English language for a period of 7 years. If proper records are not maintained, the Customs may insist in making an assessment of tax which may not be due if full information in examined.
GST is generally not meant to be a tax on businesses, it imposes certain compliance requirements on businesses to account and remit the tax to Government. In case of non-compliance, businesses may be subject to penalties. As such, businesses are encouraged to exercise due care in preparing themselves to be GST compliant. As the implementation date approaches, the Government is anticipated to provide various avenues to help businesses do just that and businesses should make full use of this assistance.
Evaluation on implementation of GST structure
Implications and Impact of GST
Like any tax regime, there are implications and impacts, both negative and positive, to be expected. All government policies have their supporters and detractors. The public tends to be alarmed that any tax will impact directly on its wallet, and immediately bring about an increase in the cost of living. It may be true, but the macro perspective needs to be applied to these views.
There are many long-term factors to consider. A nationwide tax is never imposed capriciously; a great deal of thought goes into its formulation and application. In the case of GST, its sustainability is the reason for its implementation. This runs parallel to other social factors, such as an ageing population, the desirability of lower taxes in the long run, creation of a high-income society and more equitable overall distribution of the nation's wealth.
Statistics have shown that as a country’s wealth increases, its population tends to decline. Better healthcare increases lifespan, but the working population will very likely be overshadowed by a growing ageing population that, although retired, will still require resources. It is hoped that the quantum of GST, and its application over a wider segment of the population, will be able to address this shortfall and enable the population to maintain desired standard of living.
The interim period between the announcement of the tax, and its commencement and enforcement, is also a time for businesses to re-look their operations and make the necessary adjustments. Businesses affected by the recent recession could take this opportunity to overhaul the way they operate, and to start doing business differently.
Register to benefit.
How then should businesses prepare for the switch to a totally different tax regime? Because it is intended to be all-encompassing, GST will ultimately affect everyone. There is a need, therefore, to identify all existing suppliers of a business, and check to see if they have already registered under the scheme. The path will not be easy, but once all systems are in place, up and running, the benefits will become evident.
In the meantime, there are several areas of the business that need to be considered, especially in the areas of price negotiation, long-term or non-reviewable contracts, billing and accounts receivable, procurement and accounts payable, and the negotiation of credit terms. All areas of business and operations should be readied in preparation, including systems & processes, accounting & finance, purchasing & supply, sales & marketing, human resources and government liaison.
All Malaysian manufacturers of taxable goods or services with an annual turnover exceeding the prescribed GST threshold must register. Manufacturers whose turnover does not exceed the threshold can opt for voluntary registration. "Annual turnover" includes the total value of all taxable supplies of goods and services and imported services which are standard-rated or zero-rated. All GST incurred by a registered business can be treated as input tax credit, and the manufacturer can offset this input tax credit against the output tax that must be paid to the Director-General of Customs.
This section discusses several problems or factors that might retard the development of the GST system which should be taken into account by the government before GST become into the force as problems can occur on both sides of taxpayers and administrators.
Computerization and trained personnel
Implementation and enforcement of GST will need administrators to have an efficient computerization system which could carry out the task of checking and auditing the revenues from GST. James and Zheshi (2004) proposed three things to enhance the management and supervision of the VAT invoices. Firstly, the printing of the VAT invoices must be further upgraded. It must have the ability of anti-counterfeit. Secondly, the management of the VAT invoices must be based on computers, and then a network, especially for the administration of the VAT invoices and tax collection, must be formed all over the country. Finally, tax collectors must more strictly verify the VAT invoices with large amount. In all, the management and supervision of the VAT invoices must have the instant information processing capability. Apart from this, the administrators should also be ready with well trained personnel to operate the computerization system. The personnel should also be knowledgeable about the GST since in the initial period, the public which does not very familiar with the new tax system will need extra guidance from the administrators. From the discussion above the implementation of GST needs advance preparation, adequate investment in tax administration because the management of the GST must have efficient computerization system. This requires that the government spend money to buy computers and also train the staff that will operate this computerization system in addition to provide an extensive public education program .These considerations should be taken into account before the GST become effective lest there will be a serious delay in the implementation of this system .
Rate of tax and exemption
The government should carefully choose the most suitable tax rate so that the tax will not burden the poor. Considerations should be made on whether the GST to be levied at a single rate, or a higher rate to certain products which is considered luxury products However the government will face some problems when it takes into account these considerations. For example, if the government takes into account the poorest in the country and offers lower tax rate on necessities this will benefit the rich more because they will spend relatively less of their income and receive more benefits from these concessions. But if the government imposes high rate in luxury goods, taxpayers may seek to lower their tax liability through both legal and illegal means. Edmiston and Bird (2004) argue that imposition of high tax rates on sales of ‘luxury’ goods are an ineffective means of increasing progressive fiscal system and any minute
‘benefit’ attained in this fashion is unlikely to suffice to offset the costs in terms of reduced efficiency and effectiveness of the tax. Furthermore, the government will also have to consider products that should be exempted from GST. Usually necessity products such as food should be exempted from tax. Kenny (2000) examined whether food should be exempted from GST.
They found that there is a strong support for GST food exemption. However implementing the GST on a broader base will reduce the administrative cost and increase the revenue. The broader the base the better it is for two reasons. First, with a broader base, the rate required for any revenue is obviously lower, which means that the efficiency cost of raising revenue is correspondingly lower. Second, administration is simpler with a broader base, in part simply because there are fewer avenues of escape and in part because a larger proportion of all activities are encompassed in the tax net to (Edmiston & Bird, 2004) From this discussion it can be understood that the choice between a single-rate and a multiple-rate VAT depends on balancing tax administration considerations: If the government uses differentiated rates by lowering the tax rate on necessities and imposing high rate in luxury goods this may increase the administration cost and will lead to reduced revenue. However, if the government uses a single rate on broader base this will reduce the administration costs and will increase the revenue but a single rate will affect the poorest in the country .So the government should choose the most suitable tax rate so that the burden of tax will not be too aggressive to the poor and should not lead to reduced revenue. Choose the most suitable tax rate and determine the goods that should exempt are not easy for government and may take long time.
Impact on general price level
In the early stage of GST implementation, the fact that the price level will be increased cannot be denied. Since the public is still in the transitional process, traders will go for option in pulling up the price. However, according to Singh (2007), the introduction of GST may bring about a one-time increase in the cost of living, the probability of it leading to inflation is not high. GST may lead to increase in consumer price at the early stage of implementation, but GST will not have a huge effect on inflation James and Zheshi (2004) maintain that when the VAT was introduced in China in 1994, it did not cause any inflation. Compared with the taxation reform of 1994, the proposed transformation of the VAT is far less complex.
The size and duration of the goods and services tax (GST) effect on the quarterly growth rate of the 11 groups of the consumer price index (CPI) in Australia using the Box and Tiao intervention analysis. It was found that prices did not increase significantly before or after the introduction of GST. Furthermore, the varying one-off effect of GST on prices was significant in seven out of 11 CPI groups; the effect was found insignificant for the other four CPI groups.
Based on the above discussion, it is clear that the imposition of GST by itself cannot be considered inflationary or deflationary even if sellers able to raise price to cover what they pay since this would constitute one time increase in their prices but would not necessarily lead to inflation which is continuous increase in the average of price over the time.
CHALLENGES AND STRATEGIES TO IMPLEMENTATION OF A GST STRUCTURE
The key challenges to the Government are: • Balancing the conflict between the need to make it simple and to cater for social needs; • The more social needs are catered for, the more complex the tax becomes; and • The more complex the tax becomes, the more costly it is for the Government to administer and for businesses to comply with it.
Among other important considerations are knowing precisely what is to be taxed, including setting the right threshold, the applicable tax rate, the need to create public awareness and education and in particular, to secure “buy-ins” from the business community, and addressing the transitional issues in migrating from the existing regime.
If an item costs RM1 before GST and the seller charges a 15% GST and sells it for RM1.15, then the buyer actually pays the tax. If the seller sells it for RM1 after adding GST at 15%, then he has lowered his price and the consumer is spared the burden of GST.
The seller could lower his price partially requiring the consumer to bear the remainder of the tax. In reality, what happens will depend on the relative responsiveness of sellers and consumers to price changes. This complex situation tends to lead to the conventional expedient view that the tax is fully shifted from seller to the final consumer.
In most advanced economies, the introduction of GST would be accompanied by significant cuts in personal income tax as a means to reduce the income tax burden. This is because the share of tax revenue from personal income tax is higher than corporate tax. In Denmark, the ratio is 52% against 6%.
In Malaysia the ratio is reversed. As only three million of the working population pay income tax, the remaining would not benefit from any reduction in direct income tax but would face GST in most of their everyday purchases.
GST could result in inflationary pressures, since some businesses may not understand the tax and treat the upfront tax as their costs and thus a reason to increase prices. Some may indulge in profiteering, taking advantage of the imposition of GST to increase prices.
The challenge is to police the implementation process to control inflationary pressures and this is not an easy task since there are many parties involved.
The implementation of GST in the final analysis must involve the political process. No responsible government can ignore the inherent regressive nature of the tax and that it will hit the lower income group most, an impact that will be exacerbated where there is an inflationary spiral of prices.
Long-Term Vision and Timing
The key strategy behind GST implementation is to introduce the tax as a part of a tax reform exercise to broaden the tax base, and not for the purpose of raising revenue. The tax was introduced at a time when Government did not require the additional revenue.
Generous Offsets
It was expected that GST would be criticised as a regressive tax, and that it would affect the lower income group more adversely than the higher income group. To counter this, GST should be introduced with a generous package of tax cuts and rebates to nullify the impact of GST on the lower income group. Much care and effort into designing a wide-ranging package of offsets, which included lower income taxes, lower property taxes, rebates on rental and service & conservancy charges for public housing, and additional subsidies for health, education and community services.
http://finance.klmanagement.com.my/gst-goods-and-services-tax/ http://www.scribd.com/doc/36749624/Introduction-to-Taxation http://www.vlc.com.my/malaysia_tax_system.html#Tax%20Legislation
http://www.mida.gov.my/invest.html
http://thestar.com.my/news/story.asp?file=/2010/2/21/focus/5711137&sec=focus
http://www.malaysianmirror.com/nationaldetail/6/37063
http://cob.uum.edu.my/journals/images/EBulletin/paper_7_goods_and_services_tax[1].pdf
http://www.maicsa.org.my/article_cg/2010/article_cg_1007.aspx
http://bajet.treasury.gov.my/pdf/gstbi/gst_bi.pdf
Tax Structure in Malaysia
Generally, all income of companies and individuals accrued in, derived from or remitted to Malaysia are liable to tax. However, income remitted to Malaysia by resident companies (other than companies carrying on the business of banking, insurance, air and sea transportation), non-resident companies and non-resident individuals are exempted from tax.
Apart from income tax, there are other direct taxes such as real property gains tax, and indirect taxes such as sales tax, service tax, excise duty and import duty.
Currently, income tax is assessed on the income earned in the preceding year according to the Official Assessment Systems.
As a measure to modernise and streamline the tax administration system, the assessment of income tax will be changed to the current year assessment from the year 2000. The present Official Assessment System will be changed to the Self-Assessment System in stages as follows:
|Group |Year of Implementation |
|Companies |2001 |
|Businesses, partnerships and cooperatives |2003 |
|Salaried group |2004 |
To facilitate the changeover, all income received in 1999 will be waived from income tax and losses incurred 1999 will be allowed to be carried forward.
SOURCES OF INCOME LIABLE TO TAX
Sources of income which are liable to income tax are as follows :
· Gains and profits from trade, profession and business
· Salaries, remunerations, gains and profits from an employment
· Dividends, interest or discounts
· Rents, royalties or premiums
· Pensions, annuities or other periodic payments
· Other gains or profits of an income nature not mentioned above.
Chargeable income is arrived at after adjusting for expenses incurred wholly and exclusively in the production of the income. Specific provisions or reserves for anticipated losses or contingent liabilities are not tax deductible. No deduction for book depreciation is allowed although capital allowances are granted. Unabsorbed losses may be carried forward indefinitely to offset against future income.
COMPANY TAX
A company, whether resident or not, is assessable on income accrued in or derived from Malaysia. Income derived from sources outside Malaysia and remitted by a resident company is not subject to tax, except in the case of banking and insurance business and sea and air transport undertakings. A company is considered a resident in Malaysia if the control and management of its affairs are exercised in Malaysia. Places of control and management are considered on the basis of where meetings of the Board of Directors are held.
A tax rate of 28% is applicable to both resident and non-resident companies. In the case of a company carrying on petroleum production, the applicable tax rate is 38%.
PERSONAL INCOME TAX
All individuals are liable to tax on income accrued in, derived from or remitted to Malaysia. The rate of tax depends on the resident status of the individual which is determined by the duration of his stay in the country (as stipulated under Section 7 in the Income Tax Act 1967).
Resident Individual
A resident individual is taxed on his chargeable income at graduated rates from 2% to 30% after the deduction of tax reliefs. However, an individual with chargeable income of less than RM 2,500 is taxed at zero rate.
Personal Reliefs
|The chargeable income of an individual resident is arrived at by deducting from his total income the following personal reliefs :|
|· Personal |RM5,000 (a further relief of RM 5,000 if the |
| |taxpayer is a disabled person) |
|· Wife |RM3,000 (a further relief of RM 2,500 if the wife |
| |is a disabled person) |
|· Medical expenses of parents |up to a maximum of RM 5,000 |
|· Medical expenses for serious illnesses for the individual, his wife or |up to a maximum of RM 5,000 |
|child | |
|· Expenditure for the purchase of basic support equipment for the individual,|up to a maximum of RM 5,000 |
|his wife, child or parent who is disabled | |
|· The maximum relief for unmarried children (regardless of age) receiving full-time education in universities and institutions of|
|higher education in Malaysia is four times the normal relief. |
|· Incapacitated children per child |RM 5,000 |
|· Contributions to the Employees Provident Fund and insurance or takaful premiums for life policies are allowed a maximum total |
|tax relief of RM 5,000. A further tax relief of RM 2,000 is given for insurance or takaful premiums with respect to medical and |
|educational purposes. |
A married woman whose income is separately assessed generally has her overall tax liability reduced, although this may not always be the case. The separate assessment covers all her income sources. She may, however, elect for joint assessment, in which case, the husband is given a wife relief of RM 3,000.
Tax rebate
Tax liability of a resident individual is reduced by rebates which are granted as follows :
· For an individual with income not exceeding RM 10,000, a rebate of RM 110 is given. A further rebate of RM 60 is given for his wife. A wife who is assessed separately will be entitled to a rebate of RM 110 if her chargeable income does not exceed RM 10,000.
· The equivalent of amount paid in respect of any zakat, fitrah or other Islamic religious dues which are obligatory
· A sum of RM 400 for the purchase of a computer by an individual or his wife.
· The amount of fee paid to the government for the issue of an employment pass, visit pass or work permit.
Non-resident Individual
Generally, a non-resident individual is liable to tax at the rate of 30% and he is not entitled to any personal relief. However, for the following types of income, non-resident individuals are subject to a withholding tax which is a final tax :
|· Special income of classes |10% |
|· Technical advice, assistance or services | |
|· Installation services on the supply of plant, machinery, etc. | |
|· Personal services associated with the use of intangible property | |
|· Services of a public entertainer |15% |
|· Interest rate |15% |
An employee on a short-term visit to Malaysia enjoys tax exemption in respect of his income from an employment exercised in Malaysia when his presence does not exceed 60 days in a calendar year. However, the income of a non-resident individual who performs independent services such as consultancy services is not exempted from tax.
REAL PROPERTY GAINS TAX
Capital gains are generally not subject to tax in Malaysia. Real Property gains Tax is charged on gains arising from the disposal of real property situated in Malaysia or of interest, options or other rights in or over such land as well as the disposal of shares in real property companies. The rates of tax are as follows :
|· Disposal within 2 years |30% |
|· Disposal in the 3rd year |20% |
|· Disposal in the 4th year |15% |
|· Disposal in the 5th year |5% |
|· Disposal in the 6th year and thereafter - company |5% |
|- individual |nil |
For individuals who are citizens or permanent residents, gains from disposal of real property held after five years are not subject to this tax. They are also entitled to an exemption of RM5,000 or 10% of the gains, whichever is the greater. In addition, they also enjoy a one-time tax exemption on the gains arising from the disposal of one private residence.
For non-citizens and non-permanent resident individuals, gains from disposal of real property within 5 years are subject to tax at a flat rate of 30%. However, disposal in the sixth year and thereafter will be taxed at 5%.
SALES TAX
This is an ad valorem stage tax imposed at the import and manufacturing levels. Manufacturers are required to be licensed under the Sales Tax Act 1972. Manufacturers whose annual sales turnover do not exceed RM100,000 are exempted from licensing. These companies are taxed based on their inputs. However, to alleviate the burden of small manufacturers from sales tax upfront on their inputs, these companies can opt to be licensed under the Sales Tax Act 1972 in order to purchase tax-free inputs. With this option, manufacturers will only have to pay sales tax on their finished products.
The general rate for sales tax is 10%. However, raw materials for use in the manufacture of taxable goods are eligible for exemption from the tax. Inputs for selected non-taxable products are also exempted. Certain non-essential foodstuffs and building materials are taxed at 5% while cigarettes and liquor are taxed at 15%. Primary commodities, basic foodstuffs, basic building materials, certain agricultural implements and heavy machinery for use in the construction industry are exempted. Certain tourist and sports goods, books, newspaper and reading materials are also exempted.
SERVICE TAX
This tax is imposed on certain goods and services provided in certain prescribed establishments. The goods include food, drinks and tobacco, while the main services are provision for premises for meetings, conventions and cultural and fashion shows; health services, and professional and consultancy services provided by legal, engineering, surveyor, architectural, accounting, advertising and other consultancy firms and services provided by insurance companies, motor vehicles service and repair centres, telecommunication services, security and guard services, recreational clubs, estate agents, parking space services, courier service firms, dentist, veterinary doctors, provision of accommodation and food by private hospitals and credit cards companies.
Goods and services tax (GST)
The implementation of a GST in Malaysia was proposed in the 2005 Budget to replace sales tax and service tax. No date or rate has yet been fixed for GST although the authorities have indicated that it could be implemented within the next year to three years. There is no draft legislation for GST. Goods and Services Tax (GST) is a consumption tax imposed on the sale of goods and services. In some countries it is also called Value Added Tax (VAT). Personal end-users of products and services cannot recover GST on purchases.
Custom duties
Custom duties are levied on goods imported in and exported from Malaysia. Custom duty refers to any import duty, surcharge or cess imposed by or under the Countervailing and Anti-Dumping Duties Act and includes any royalty payable in lieu of an export duty under any written law, or a contract, lease or agreement to which the Federal Government has consented.
Excise duty
Excise Duty is a form of taxation levied on locally manufactured goods of intoxicating liquors, tobacco products and by-products, petroleum and conversion of organic or non-organic materials into new products.
Examples of direct tax
Direct taxes
Income tax - is levied on individuals, companies and other taxable entities Real property gains tax - this is levied on capital gains arising from disposal of real estate, rights on real estate and shares in real property companies where the property is situated in Malaysia.
Petroleum income tax - this is levied on upstream petroleum companies
Examples of indirect taxes
Indirect Taxes
An example of this is the air passenger duty of RM 12 per flight for domestic flights. Most airlines pass this straight onto the consumer when the final price is published.
The responsibility to administer indirect taxation in Malaysia lies with the Royal Customs and Excise Department. The various types of indirect taxes are:
Custom duties
Custom duties are levied on goods imported in and exported from Malaysia. Custom duty refers to any import duty, surcharge or cess imposed by or under the Countervailing and Anti-Dumping Duties Act and includes any royalty payable in lieu of an export duty under any written law, or a contract, lease or agreement to which the Federal Government has consented. .
Excise duty
Excise Duty is a form of taxation levied on locally manufactured goods of intoxicating liquors, tobacco products and by-products, petroleum and conversion of organic or non-organic materials into new products. .
Sales tax
Sales Tax in Malaysia is a single stage ad valorem tax, imposed on taxable goods manufactured by any person or company in Malaysia. Sales tax is a consumer tax. .
Service tax
Service Tax is charged and levied in respect of any taxable service provided by any taxable person or service except for exported taxable service which means service provided to an entity in a country other than Malaysia. The rate is 5%.
Tax Legislation
Direct Taxes Legislations
The Income Tax Act 1967 (ITA) is the principal legislation for taxing income. The general scope encompasses the income of any person accruing in or derived from Malaysia or received in Malaysia from abroad. It is a question of fact as to what constitutes income, that is, gains or profits from a business or employment, dividends, interests, discounts, rents, royalties, premiums, pensions, annuities or other periodical payments, and other gains or profits.
Special provisions govern the taxation of income of, for example, insurance companies, shipping and air transport companies, banks and financial institutions, leasing companies, unit trusts and property trusts.
Malaysian income tax is imposed on a territorial, not worldwide, basis. The prevailing corporate tax rate is 25% with effect from YA 2009 but with applicable tax holidays, incentives, exemptions and concessionary or reduced tax rates, effective tax rates can be significantly reduced. With the abolition of the imputation system, a single-tier tax system has been in force from YA 2008.
Indirect Taxes Legislations
Service Tax
Scope of Tax
Service tax is applicable throughout Malaysia, excluding Langkawi, Labuan, Free Zones and the Joint Development Area.
Basis of Taxation
The principal legislation governing service tax is the Service Tax Act, 1975. The Act provides that service tax shall be charged on and paid by any taxable person who carries on a business of providing taxable services. A 5% service tax is chargeable on the value of taxable services provided by a taxable person, except for exported taxable services (which are exempt from tax).
Exported taxable service has been defined as “service supplied for and to a person in a country other than Malaysia (excluding Langkawi, Labuan and free other than insurance services zones), provided that the service is not supplied in connection with goods or land situated in Malaysia and the person is not in Malaysia at the time the service is performed.”
Rate of Tax
Generally, the rate of service tax is 5% ad valorem. However, a specific rate is applicable in the following case:
" RM2 per room per night in the case of free hotel rooms to an approved person responsible for the development of the tourism industry.
Licensing
A taxable person who carries on a business of providing taxable services has to apply for a service tax licence with the Customs station nearest to the place of business and charge service tax on all taxable services provided.
Charge and Remittance of Service Tax
Service tax charged and received by the taxable person must be paid to Customs within 28 days after the end of a taxable period. A taxable period is defined as 2 calendar months. Service tax is only due at the time when payment is received for the taxable service provided by the taxable person. However, where the whole or any part of the payment for any taxable service is not received from the customer within a period of 12 calendar months from the date of the invoice for the taxable service provided, service tax shall be due on the day following that period of 12 calendar months.
Penalties
Any amount of service tax which is unpaid after the due date (i.e. 28 days after the end of a taxable period) will attract a penalty of 10% of such unpaid amount. If the amount remains unpaid, the penalty will be increased by a further 10% for every succeeding period of 30 days or part thereof subject to a maximum of 50% of the taxes unpaid.
Objective of taxtation & Good Tax System
Taxation is any compulsory levy from individuals, households and firms to central or local government. The Malaysian Government imposes a wide range of taxes on people. The system is always evolving as the government seeks to develop and maintain a tax system that meets objectives and targets.
WHY DO WE NEED TO PAY TAXES?
To raise revenue to finance spending on goods and service by central & local government
The government when managing the level of AD output and prices uses taxation. When demand is perceived as being too strong the government can increase direct taxation, to reduce the level of real disposable income and household spending.
A progressive system of taxation can be utilised to achieve great equality in income & wealth between individuals and households
Taxes can correct for externalities and other forms of market failure (such as monopoly)
Import taxes may control imports and therefore help the country's international balance of payments and protect industries from overseas competition.
OBJECTIVES FOR THE TAX SYSTEM
The Labour Government has identified six main objectives for its tax system - these are summarised below:
• To keep the overall tax burden as low as possible
• To reduce tax rates on income to sharpen incentives to work and create wealth in the economy
• To maintain a broad tax base - having a range of taxes helps to keep each separate tax rate low
• To shift the balance of taxation away from taxes on income towards taxes on spending
• To ensure taxes are applied equally and fairly to everyone
• To use taxes to make markets work better (including the use of environmental taxes to make both consumers and producers aware of external costs)
Generally, indirect taxes are seen as regressive; the proportion of income paid in tax decreases as income rises.
Direct taxes are progressive because the proportion of income paid in tax increases as income rises. With a progressive tax, the marginal rate of tax exceeds the average rate of tax. As a result, progressive taxes act to reduce inequalities in the distribution of income. The post-tax distribution of income will be less dispersed than the pre-tax distribution
Elements of a Good Tax System
Taxes on earnings should be based around a progressive income tax with a transparent and coherent rate structure, with all income subject to the same rates
A single integrated benefit for those with low income and/or high needs
No transactional taxes
Indirect taxes should be largely uniform – VAT on almost everything – with a small number of targeted exceptions on economic efficiency grounds
Environmental taxes should target road congestion (not fuel use) and there should be a consistent price on carbon emissions
For savings taxes, there should be no tax on normal savings returns, and low tax on dividends to bring the equivalent rate on dividends to the same as other income after recognising corporation tax paid
A lifetime wealth transfer tax should replace IHT
A single rate of corporation tax with no tax on the normal return on investment
Equal treatment of income derived from employment, self employment and running a small company
ADVANTAGES OF TAX
• To boost the economy & increase GDP.
• Decreases inflation.
• Decreases poverty.
• Increases government treasures.
• Development in public sector.
• Strong defense for a nation.
At the time of emergency when country is in need of fund, direct taxes serve the purpose. Improves economic infrastructure. Funds for welfare and public services.
Revenue for govt:
Taxes raise money to spend on armies, roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems.
Redistribution:
Normally, this means transferring wealth from the richer sections of society to poorer sections.
DISADVANTAGES OF TAX
There are three main disadvantages to taxtation.
1. Discourage Business
2. Increase Government Control
3. Penalize Hard Work
Discourage Business
When taxes rise, the citizens and businesses of a country pay more of their income to the government. This can create a disincentive to invest in business, as investors will necessarilyreceive a smaller return on their investment. Businesses, in turn, may be discouraged from expanding, as the profits they make will be curtailed by a high tax rate. This discouragement can have many direct effects on a country related to the retardation of its economy.
Increase Government Control
When a government collects more in tax revenues, it accumulates more money to spend. This increase in discretionary income, compared with the money available to the citizens and businesses of the country, causes a shift in power away from the people towards the government.
Penalize Hard Work
In addition to discouraging investment, taxes can also stifle the motivation of individual workers. As citizens work harder and earn more money, more and more of their income is given to the government. This can appear unfair and lead to a decline in a country's morale.
Operation & Issues of GST
GST is a consumption tax charged on a wide range of domestic & international products, goods and services. It’s a broad-based tax imposed on every level of a product, from raw materials all the way to finished goods. It affects all layers of business and consumers – And whether you realize it or not, you’re being taxed for almost everything.
Introduction of GST
While there is no VAT/GST legislation in Malaysia, there is a sales tax and service tax regime. A supply of electricity is not subject to service tax.
A Malaysian Goods and Services Tax (GST) will replace the existing sales and services Tax (SST) regimes with an expected standard-rate of 4 percent (lower than the current prevailing sales tax rate of 10 percent and service tax of 5 percent).
It is expected that businesses with annual turnover below MYR500,000 will not be required to register for GST purposes. The Malaysian GST is expected to be implemented in 2012.
Expected GST treatment of electricity
The supply of electricity is treated as a supply of goods. The generation, transmission, and distribution of electricity to domestic and business customers are proposed to be standard rated. However, the supply of the first 200 units of electricity to domestic consumers is proposed to be zero-rated. Electricity on loan is subject to GST at the standard rate. Hence, the supplier must account for GST.
There is no GST on the supply of electricity between members of a GST group.
Exported electricity is proposed to be zero-rated. Self supply of electricity (own consumption) is proposed to be a non supply. Losses are not required to account for GST. The power/electricity exchange between ASEAN countries under the ASEAN Power Grid program is proposed to be treated as a zero-rated supply for export. As for imports, the reverse charge mechanism will be applicable. Compensation due to interruption of power supply is to be treated as not a supply, thus it is not subject to GST. The penalty on power loss/power factor surcharge is subject to GST as it relates to the earlier supply. Back billing through issuance of debit notes is also a supply and will be subject to GST.
HOW IT WORKS AND EFFECTS ON BUSINESS
In order to charge GST and claim input tax credits, businesses have to be registered for GST purposes with the Royal Malaysian Customs (“Customs”). Registration will be compulsory for businesses where the annual sales turnover of its taxable supplies exceed the prescribed threshold. The liability to register is determined based on either taxable turnover of the current month and the preceding 11 months or taxable turnover of the current month and the next 11 months. Businesses whose annual sales turnover is below the prescribed threshold may apply for voluntary registration. The indicative threshold is RM500,000.
One of the reasons to voluntarily register for GST is to enable the business to claim the input tax credits. Businesses which fall below the threshold may also be compelled to be licensed by their business customers who wish to claim the credit on the supplies acquired. Once registered, the business registrant must remain in the system for at least 2 years. We understand from the Customs Public Consultative meeting that pre-registration will be allowed a few months before the GST implementation date.
ACCOUNTING FOR GST / CHARGING OF GST
A GST registered person making a taxable supply to a taxable person must provide a tax invoice within a stipulated period (indicated as 21 days) after supply is made.
The GST “tax invoice” has to contain certain information as required by the law. Some of the information which is normally required is listed below:- a) The word ‘tax invoice’ in a prominent place; b) The invoice serial number; c) The date of issue of the invoice; d) The name, address and GST identification number of the supplier; e) The name and address of the person to whom the goods or services are supplied; f) A description sufficient to identify the goods or services supplied; g) For each description, the quantity of the goods or the extent of the services and the amount payable, excluding GST; h) Any discount offered; i) The total amount payable excluding tax, the rate of tax and the total tax chargeable shown as a separate amount; j) The total amount payable including the total tax chargeable; k) Any amount referred to in subparagraph (i) and (j), expressed in a currency, other than Malaysian currency, must also be expressed in Malaysian currency; and l) If the goods or services supplied are exempt or zero rated, they must be separately identified in the invoice and the gross total amount payable on them must be separately stated.
TAXABLE PERIOD AND FILING RETURNS
Businesses will be required to furnish GST returns and pay GST to Customs no later than a month after each taxable period. A taxable period is a regular interval period where a taxable person is liable to account for GST. Taxable periods may be 1 month, 3 months or 6 months depending on the businesses’ annual turnover.
At the end of a taxable period, if taxable supplies are made, GST registered businesses will need to compare output tax it charges to the input tax it incurs. Where the output tax is more than the input tax, businesses will need to remit the difference in the tax return to Customs no later than the last day of the month after the taxable period. If the input tax claimed is more than the output tax, businesses may be entitled to a refund subject to certain conditions.
Where there is late submission, a mandatory penalty at the prevailing rate will be imposed on any unpaid amount.
CLAIMING OF INPUT TAX CREDIT
To claim input tax credits, GST registrant business will need to have a valid tax invoice from the supplier of taxable supplies acquired. In addition, there are other conditions that need to be fulfilled by the GST registered business for the input tax credit claim. These include: • The claimant must be a taxable person; • Invoice (i.e. tax invoice) is issued under the name of the claimant; and • Goods and services acquired are not subject to any input tax restriction. These are acquisitions whereby even though GST is paid, no input tax credit is allowed. These include the purchase of passenger motorcar (including importation), club subscriptions fee, medical and personal accident insurance premiums, medical expenses, family benefits, entertainment expenses and others. It should be noted that no GST is chargeable on the subsequent supplies of these items.
RECORD KEEPING
All business and accounting records relating to GST would be required to be kept in Bahasa Malaysia or the English language for a period of 7 years. If proper records are not maintained, the Customs may insist in making an assessment of tax which may not be due if full information in examined.
GST is generally not meant to be a tax on businesses, it imposes certain compliance requirements on businesses to account and remit the tax to Government. In case of non-compliance, businesses may be subject to penalties. As such, businesses are encouraged to exercise due care in preparing themselves to be GST compliant. As the implementation date approaches, the Government is anticipated to provide various avenues to help businesses do just that and businesses should make full use of this assistance.
Evaluation on implementation of GST structure
Implications and Impact of GST
Like any tax regime, there are implications and impacts, both negative and positive, to be expected. All government policies have their supporters and detractors. The public tends to be alarmed that any tax will impact directly on its wallet, and immediately bring about an increase in the cost of living. It may be true, but the macro perspective needs to be applied to these views.
There are many long-term factors to consider. A nationwide tax is never imposed capriciously; a great deal of thought goes into its formulation and application. In the case of GST, its sustainability is the reason for its implementation. This runs parallel to other social factors, such as an ageing population, the desirability of lower taxes in the long run, creation of a high-income society and more equitable overall distribution of the nation's wealth.
Statistics have shown that as a country’s wealth increases, its population tends to decline. Better healthcare increases lifespan, but the working population will very likely be overshadowed by a growing ageing population that, although retired, will still require resources. It is hoped that the quantum of GST, and its application over a wider segment of the population, will be able to address this shortfall and enable the population to maintain desired standard of living.
The interim period between the announcement of the tax, and its commencement and enforcement, is also a time for businesses to re-look their operations and make the necessary adjustments. Businesses affected by the recent recession could take this opportunity to overhaul the way they operate, and to start doing business differently.
Register to benefit.
How then should businesses prepare for the switch to a totally different tax regime? Because it is intended to be all-encompassing, GST will ultimately affect everyone. There is a need, therefore, to identify all existing suppliers of a business, and check to see if they have already registered under the scheme. The path will not be easy, but once all systems are in place, up and running, the benefits will become evident.
In the meantime, there are several areas of the business that need to be considered, especially in the areas of price negotiation, long-term or non-reviewable contracts, billing and accounts receivable, procurement and accounts payable, and the negotiation of credit terms. All areas of business and operations should be readied in preparation, including systems & processes, accounting & finance, purchasing & supply, sales & marketing, human resources and government liaison.
All Malaysian manufacturers of taxable goods or services with an annual turnover exceeding the prescribed GST threshold must register. Manufacturers whose turnover does not exceed the threshold can opt for voluntary registration. "Annual turnover" includes the total value of all taxable supplies of goods and services and imported services which are standard-rated or zero-rated. All GST incurred by a registered business can be treated as input tax credit, and the manufacturer can offset this input tax credit against the output tax that must be paid to the Director-General of Customs.
This section discusses several problems or factors that might retard the development of the GST system which should be taken into account by the government before GST become into the force as problems can occur on both sides of taxpayers and administrators.
Computerization and trained personnel
Implementation and enforcement of GST will need administrators to have an efficient computerization system which could carry out the task of checking and auditing the revenues from GST. James and Zheshi (2004) proposed three things to enhance the management and supervision of the VAT invoices. Firstly, the printing of the VAT invoices must be further upgraded. It must have the ability of anti-counterfeit. Secondly, the management of the VAT invoices must be based on computers, and then a network, especially for the administration of the VAT invoices and tax collection, must be formed all over the country. Finally, tax collectors must more strictly verify the VAT invoices with large amount. In all, the management and supervision of the VAT invoices must have the instant information processing capability. Apart from this, the administrators should also be ready with well trained personnel to operate the computerization system. The personnel should also be knowledgeable about the GST since in the initial period, the public which does not very familiar with the new tax system will need extra guidance from the administrators. From the discussion above the implementation of GST needs advance preparation, adequate investment in tax administration because the management of the GST must have efficient computerization system. This requires that the government spend money to buy computers and also train the staff that will operate this computerization system in addition to provide an extensive public education program .These considerations should be taken into account before the GST become effective lest there will be a serious delay in the implementation of this system .
Rate of tax and exemption
The government should carefully choose the most suitable tax rate so that the tax will not burden the poor. Considerations should be made on whether the GST to be levied at a single rate, or a higher rate to certain products which is considered luxury products However the government will face some problems when it takes into account these considerations. For example, if the government takes into account the poorest in the country and offers lower tax rate on necessities this will benefit the rich more because they will spend relatively less of their income and receive more benefits from these concessions. But if the government imposes high rate in luxury goods, taxpayers may seek to lower their tax liability through both legal and illegal means. Edmiston and Bird (2004) argue that imposition of high tax rates on sales of ‘luxury’ goods are an ineffective means of increasing progressive fiscal system and any minute
‘benefit’ attained in this fashion is unlikely to suffice to offset the costs in terms of reduced efficiency and effectiveness of the tax. Furthermore, the government will also have to consider products that should be exempted from GST. Usually necessity products such as food should be exempted from tax. Kenny (2000) examined whether food should be exempted from GST.
They found that there is a strong support for GST food exemption. However implementing the GST on a broader base will reduce the administrative cost and increase the revenue. The broader the base the better it is for two reasons. First, with a broader base, the rate required for any revenue is obviously lower, which means that the efficiency cost of raising revenue is correspondingly lower. Second, administration is simpler with a broader base, in part simply because there are fewer avenues of escape and in part because a larger proportion of all activities are encompassed in the tax net to (Edmiston & Bird, 2004) From this discussion it can be understood that the choice between a single-rate and a multiple-rate VAT depends on balancing tax administration considerations: If the government uses differentiated rates by lowering the tax rate on necessities and imposing high rate in luxury goods this may increase the administration cost and will lead to reduced revenue. However, if the government uses a single rate on broader base this will reduce the administration costs and will increase the revenue but a single rate will affect the poorest in the country .So the government should choose the most suitable tax rate so that the burden of tax will not be too aggressive to the poor and should not lead to reduced revenue. Choose the most suitable tax rate and determine the goods that should exempt are not easy for government and may take long time.
Impact on general price level
In the early stage of GST implementation, the fact that the price level will be increased cannot be denied. Since the public is still in the transitional process, traders will go for option in pulling up the price. However, according to Singh (2007), the introduction of GST may bring about a one-time increase in the cost of living, the probability of it leading to inflation is not high. GST may lead to increase in consumer price at the early stage of implementation, but GST will not have a huge effect on inflation James and Zheshi (2004) maintain that when the VAT was introduced in China in 1994, it did not cause any inflation. Compared with the taxation reform of 1994, the proposed transformation of the VAT is far less complex.
The size and duration of the goods and services tax (GST) effect on the quarterly growth rate of the 11 groups of the consumer price index (CPI) in Australia using the Box and Tiao intervention analysis. It was found that prices did not increase significantly before or after the introduction of GST. Furthermore, the varying one-off effect of GST on prices was significant in seven out of 11 CPI groups; the effect was found insignificant for the other four CPI groups.
Based on the above discussion, it is clear that the imposition of GST by itself cannot be considered inflationary or deflationary even if sellers able to raise price to cover what they pay since this would constitute one time increase in their prices but would not necessarily lead to inflation which is continuous increase in the average of price over the time.
CHALLENGES AND STRATEGIES TO IMPLEMENTATION OF A GST STRUCTURE
The key challenges to the Government are: • Balancing the conflict between the need to make it simple and to cater for social needs; • The more social needs are catered for, the more complex the tax becomes; and • The more complex the tax becomes, the more costly it is for the Government to administer and for businesses to comply with it.
Among other important considerations are knowing precisely what is to be taxed, including setting the right threshold, the applicable tax rate, the need to create public awareness and education and in particular, to secure “buy-ins” from the business community, and addressing the transitional issues in migrating from the existing regime.
If an item costs RM1 before GST and the seller charges a 15% GST and sells it for RM1.15, then the buyer actually pays the tax. If the seller sells it for RM1 after adding GST at 15%, then he has lowered his price and the consumer is spared the burden of GST.
The seller could lower his price partially requiring the consumer to bear the remainder of the tax. In reality, what happens will depend on the relative responsiveness of sellers and consumers to price changes. This complex situation tends to lead to the conventional expedient view that the tax is fully shifted from seller to the final consumer.
In most advanced economies, the introduction of GST would be accompanied by significant cuts in personal income tax as a means to reduce the income tax burden. This is because the share of tax revenue from personal income tax is higher than corporate tax. In Denmark, the ratio is 52% against 6%.
In Malaysia the ratio is reversed. As only three million of the working population pay income tax, the remaining would not benefit from any reduction in direct income tax but would face GST in most of their everyday purchases.
GST could result in inflationary pressures, since some businesses may not understand the tax and treat the upfront tax as their costs and thus a reason to increase prices. Some may indulge in profiteering, taking advantage of the imposition of GST to increase prices.
The challenge is to police the implementation process to control inflationary pressures and this is not an easy task since there are many parties involved.
The implementation of GST in the final analysis must involve the political process. No responsible government can ignore the inherent regressive nature of the tax and that it will hit the lower income group most, an impact that will be exacerbated where there is an inflationary spiral of prices.
Long-Term Vision and Timing
The key strategy behind GST implementation is to introduce the tax as a part of a tax reform exercise to broaden the tax base, and not for the purpose of raising revenue. The tax was introduced at a time when Government did not require the additional revenue.
Generous Offsets
It was expected that GST would be criticised as a regressive tax, and that it would affect the lower income group more adversely than the higher income group. To counter this, GST should be introduced with a generous package of tax cuts and rebates to nullify the impact of GST on the lower income group. Much care and effort into designing a wide-ranging package of offsets, which included lower income taxes, lower property taxes, rebates on rental and service & conservancy charges for public housing, and additional subsidies for health, education and community services.
http://finance.klmanagement.com.my/gst-goods-and-services-tax/ http://www.scribd.com/doc/36749624/Introduction-to-Taxation http://www.vlc.com.my/malaysia_tax_system.html#Tax%20Legislation
http://www.mida.gov.my/invest.html
http://thestar.com.my/news/story.asp?file=/2010/2/21/focus/5711137&sec=focus
http://www.malaysianmirror.com/nationaldetail/6/37063
http://cob.uum.edu.my/journals/images/EBulletin/paper_7_goods_and_services_tax[1].pdf
http://www.maicsa.org.my/article_cg/2010/article_cg_1007.aspx
http://bajet.treasury.gov.my/pdf/gstbi/gst_bi.pdf
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