The single largest and divisive issue in the Malaysia Budget 2014 announcement was the introduction of the GST and abolishment of the 10% Sales Tax and 6% Service Tax (SST) starting 1st April 2015. Whether you like it or not, the Goods and Services Tax (GST) will be implemented effective a week from now and the rate is fixed at 6%.
Sales Tax of 10% and Service Tax of 6% will be replaced with GST.
What is this GST that everyone keeps talking about and are afraid of?
GST, which is also known as VAT (value added tax) in many countries is a multi-stage consumption tax on goods and services. GST is levied on the supply of goods and services at each stage of the supply chain from the supplier up to the retail stage of the distribution In short, it’s tax on your spending based on a tax-on-value-add concept which avoids duplication of taxes.
Of course, this is different from the Sales and Service Tax in Malaysia which is just added at one stage – Sales Tax at manufacturer level and Service Tax at consumer level).
Under GST, most of the goods and services (except basic necessities) will be charged at every stage of the supply chain – even the ones that was previously not charged with SST. For that to take effect, all companies with yearly revenue of RM500,000 or more is required to register for GST. This would mean that any large supplier for raw materials above RM500,000 is required to be GST registered. The list may include manufacturer of slippers that require rubber, raw materials to build homes, plastics to manufacture a computer, and the list goes on.
A company that is not GST registered will have no option but to absorb GST as a consumer. Because of that, this may mean that a lot of smaller companies will also voluntarily register for GST such smaller retailers or service providers such as plumber for your toilet, contractor for your renovation, lawyers, and many more. This will enable them to charge a GST tax which will in turn to be passed to consumer hence, we will likely be paying more to purchase or use these goods and services, which were not taxed previously.
Oh, so how does GST work in Malaysia?
Malaysian money community website savemoney.my gave a pretty good example: In the current tax regime, the 10% Sales Tax (on manufacturing and imports) and 6% Service Tax (on the F&B and professional services industry) is collected by one party (usually the seller) and passed on to the tax authorities.
For example, in the previous 6% Service Tax regime, when you buy a cup of coffee from Starbucks that says RM15 on the menu, you pay RM15.90 (including the current Service Tax of 6%). Starbucks will keep RM15 and pass on RM0.90 to the tax authorities.
In a GST regime (6% GST in this calculation), the following happens:
1. Starbucks buys the coffee beans from the wholesaler to make your cup of coffee for RM10 (RM10+ 6% GST). The Wholesaler keeps RM10 and passes on RM0.60 from Starbucks to the tax authorities.
2. You buy that cup of coffee from Starbucks which the beans were used to make, and pay RM15.90 (RM15 + 6% GST). Starbucks now keeps RM15 and passes on RM0.30 to the tax authorities (RM0.90 – RM0.60). The reason why Starbucks only passes RM0.30 to the tax authorities is because they have effectively already “paid” RM0.60 in tax earlier on the first RM10, and only RM0.30 tax is left to be paid on the RM5 “value-add”.
Now, on to the next question,
What are some of the things that will be taxed with GST?
1. Credit card
The RM50 government tax charged annually on credit cards and the RM25 fee for supplementary cards, will be abolished from 1st April when GST is implemented. Instead, the 6% GST will apply on the credit card’s annual fees – which can range from RM70 to RM1,000 or more annually, depending on the type of card.
There will be no GST charges if the annual fee is waived, for example for free-for-life credit cards or those with annual fees waived, with stipulated minimum spending or transactions on a monthly or yearly basis.
To reflect the changes, the GST charged will be reflected as a separate item in the credit card statement. However, purchases will be reflected as a total amount inclusive of GST. There is some good news though; loyalty points or cash rebates will be given based on the 6% GST paid when using the credit card for retail purchases.
GST will also see basic construction materials such as cement, bricks and sand being taxed the standard 6% GST rate for both residential and commercial properties. Currently, these raw materials are not taxed under the existing SST. Heavy machineries such as cranes will be taxed too. Property developers normally don’t buy such heavy machineries but rent them from other contractors – and it typically is factored into the construction cost.
Steel, bricks, and sand make up 44% of the construction cost and with these being charged GST, the cost of building a property is inevitably going to increase. Property companies expect GST to result in a maximum of 2.6% increase in house prices.
When the GST is implemented in April, residential property including SoHo (small office/home office) will be exempted but commercial properties including SoFo (small office/flexible office) and SoVo (small office/virtual office) would be subject to the 6% GST.
3. Books and e-books
The standard 6% GST will be imposed on all types of books except dictionaries, encyclopedias, newspapers, textbooks, references, works, children’s colouring books, and religious books – these books will be zero-rated and not be subjected to GST.
Local e-book suppliers like e-sentral and MPHonline will also be charging GST whereas foreign firms such as Google Play and Apple iBookstore would not be.
RON95, Diesel, and LPG (liquefied petroleum gas) will be exempted from GST implementation. However, RON97 will be subjected to the new 6% GST.
The government has also raised GST for electricity from the previous 200 units to 300 units which means that a household will have GST tax on electricity bill after exceeding the 300 units usage. Hence, a household will have 6% GST charged to the electricity bill for usage above 300 units. This is believed to be beneficial for 70% of the households in the country.
6. Beauty services
The price of beauty services like manicure, and hair and facial treatments will be subjected to 6% GST too. Massage services are also chargeable with the GST if the annual turnover for such businesses is RM500,000 and above.
Aside from beauty services, cosmetics and other products for skin, hair and body care will also be charged GST.
However, operators registered to implement the GST will be able to lower their costs by claiming the input tax credit for premises rental fees, electricity costs and equipment purchased to carry out the services. Input tax refers to the GST paid by businesses on the purchase of goods and services used to perform their businesses.
Beauty products sold at airports as duty-free items will not be subjected to GST.
7. Used cars
Currently, used cars are not subjected to SST and is not a GST zero rated item either. Therefore the car industry predicts that used cars will be subjected to an extra 6% tax after the implementation of GST in April.
8. Banking services
The RM1 MEPS fee charged when we withdraw from another bank’s ATM will increase to RM1.06. No GST will be charged if you make a withdrawal from your own bank’s ATM.
Similarly, other services offered by the bank, such as money transfers (e.g. cashier’s order and demand draft), telegraphic transfers, money exchange, loan, cheque, credit card, and debit card will see 6% GST charged to its service, commission or subscription fee.
9. Tuition fees
Beginning April, 6% GST will be imposed on tuition fees, as tuition centres are not categorised under educational institutions.
10. Insurance fees
All insurance policies except for life insurance will be charged 6% GST from April. GST would also impact all traditional and investment-linked policies which had medical, critical illness, or personal accident benefits attached.
For traditional policies, the GST is imposed on the premium, while for investment-linked policies, it is charged on the insurance charges. For investment-linked policies, insurance charges will escalate with age because of higher insurance charges.
While it is still not clear how much prices will increase, or in some instances, decrease, it is prudent to know your exempted and zero-rated items to avoid opportunists merchants who may be profiteering on GST.
If that isn’t clear enough, here are some examples of taxable sundry goods courtesy of Kementerian Perdagangan Dalam Negeri, Koperasi dan Kepenggunaan (KPDNKK), ranging from Barbie dolls to sanitary napkins, and even to ice cream:
*Disclaimer: The above is subject to amendments.
What about what’s exempted from GST, otherwise known as “zero rated”?
- Basic food/Essential items such as rice, sugar, salt, flour, noodles, coffee, tea, cooking oil, all types of imported and local fruits, among others
- Public transport e.g. LRT, KTM, buses
- Sale and rental of property
- Important medicines including 2,900 medicine brands used to treat 30 types of diseases e.g. heart failure, diabetes, hypertension
- Fertility treatments
- Electricity consumption up to 200kwH (about RM50), presumably per month
It’s important to understand how GST will affect the way we spend our money (daily or seasonal) because we’re only a week away from the implementation, you guys.
If you’ve never been accustomed to financial planning, there’s no better time to start than now.