GST vs SST: What You Need to Know

GST vs SST is an argument commonly heard among Malaysians, especially during the initial roll-out phase of GST in 2014-2015. GST vs SST became one of the hottest debate topics among the politicians from the government as well as the opposition.

Goods and Services Tax (GST) is a form of multi-layer tax introduced by the Malaysian Government in 2014. It was first announced during Budget 2014. It came into effect on 1 April 2015. GST works by taxing each level of production and consumption. It may look like a lot of revenue to the government but the businesses are able to claim most of the tax incurred to them by Input Tax claim.

However, Barisan Nasional, the ruling government at that time lost (for the first time) to their opponent, Pakatan Harapan in a historic Malaysian General Election on 9 May 2018. Since the politicians at Pakatan Harapan have been actively campaigning against GST, they have to abolish GST and replace it with SST.

Sales and Service Tax aka SST is a taxation system practised by the Malaysian government since the 1970s. Sales Tax is usually imposed during production and is commonly set at 10% while Service Tax is charged at 6% to the consumers.

SST is subjected to transfer pricing. Transfer pricing happens when two or more companies do transactions with each other as separate entities but in reality, they are related to each other. For example, if I have a toothpaste company under the brand name Dennis, perhaps I will produce my toothpaste with a company named Dennis Manufacturing Sdn Bhd and distributing it with a company named Dennis Distribution Sdn Bhd (more info about transfer pricing here)

We can infer that the GST is a more superior tax system because it is more transparent and the government can trace the pricing from the production until consumption level.

GST vs SST: Reverting back to SST helps to reduce the cost of living?

Well, there are many perspectives on this issue. Let’s look at the possible explanations as outlined below:

  1. It will help to reduce inflation. Naturally, the cost of goods will continue to rise over the years. By reverting back to SST, the operational costs of small retailers can be reduced since they no longer need to process tax to retail customers. Due to the operational cost reduction, we can see the lower price being displayed at the stores. Even the Finance Minister himself has said that abolishing GST produces positive impact when Malaysia reportedly has a 1.5% inflation rate, one of the lowest in the world. Keep in mind that the low inflation rate comes right after the abolition of GST, which means less revenue to the government.
  2. It does not change the price of goods. This is true in some cases. For example, we can see how some parking operators commented on how much is the GST cost they have been absorbing. When SST is implemented, the fees charged to the end consumer is still the same. In the services sector, most consumers will not notice the difference as the rate for GST is also 6%. However, for businesses requiring services, it means they are no longer able to claim Input Tax under the new SST system.
  3. It brings up the price of some items. Under the SST regime, some items may cost higher. On 28 February 2019, The Star reported that SST has increased the cost of doing business by 10%. This is based on the findings of FMM-MIER Business Conditions Survey.

While the effect of the SST can vary among the people, the government can definitely feel the pinch from the loss of revenue. It is not within the tune of millions of ringgit. Instead, we are talking about at least RM 20 billion is lost from the potential GST revenue (RM 40 billion with GST vs RM 20 billion with SST). This is evident when the government has expanded the scope of SST in early 2019, resulting in several services are now taxable. If SST aims to reduce the burden of the people, why the government decided to expand the scope after many months of SST implementation?

GST is not a perfect system. Since its inception days in 2015, regular citizens have already been complaining about the increase of price in consumer goods while business owners are voicing out their dissatisfaction with the way the government is handling Input Tax claim.

The best solution for the current Pakatan government is that they should just admit that GST is a better taxation system and pledge to improve it further, rather than feeding their ego by blatantly ignoring the benefits of GST.

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Sources

  1. Know The Difference Between GST and SST – LITE (lite.my)
  2. GST abolition helped contain inflation, says Lim – The Star, 5 Oct 2019
  3. SST: Not much difference for service sector – NST, 31 August 2018

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