We are finally on the other side of the Goods and Services Tax (GST) discourse post April 1, 2015 – but the ride to date hasn’t been smooth.
The tax in itself is a mechanism proven by other countries to be a working method to collect tax. To date, over 100 countries around the world have adopted GST or some form of Value-Added Tax.
Before the first of April, most discussions about GST were mostly theoretical, with many people unsure of how it would directly affect their wallet.
After April 1, though there are many who are still confused with how GST works, we can now see ‘realistically’ how much of our finances will be affected.
With the month of April half way through since the implementation of GST, Maybank Investment Bank Bhd’s research division (Maybank IB Research) did a quick survey on the immediate impact based on latest available data, focusing on consumer spending and prices.
Their Early Impact Assessment report on the GST also includes the experiences of a number of countries that have implemented GST to observe the effect on consumer spending and inflation rate.
“Based on the latest available data from BNM’s Monthly Statistical Bulletin in Feb 2015, we noted the surges in annual percentage growth of narrow money supply (M1) and credit card transactions – both in the numbers and values of transactions,” it unveiled.
“M1 consists of currency in circulation and demand deposits, hence a measure of ‘transactions demand for money’ mainly for consumer spending purposes.
“M1 growth has been on a downtrend since early last year, before spiking to 7.8 per cent year-on-year (y-o-y) in February 2015 from 4.3 per cent y-o-y in Jan 2015.”
More tellingly, Maybank IB Research said the number and values of credit card transactions surged in Feb 2015 to 16.4 per cent y-o-y (against minus 1.9 per cent in January) and 21.2 per cent respectively.
Further channel checks by the research firm with the banking industry sources showed pre-GST surges in credit card spending at or on ‘Department & General Stores’, ‘Electronics and Telecommunications Equipment’, ‘Jewelry, Watch & Camera’, ‘Furniture & Furnishings’, ‘Apparels’ and ‘Automotive’.
In addition, indications are that the value of credit card spending surged further in March 2015 to 30 to 35 per cent.
“There are no pre-GST rush to buy big ticket items like cars and properties,” Maybank IB Research said. “However, we also noted that there was no pre-GST spending on passenger cars and residential properties.
“Passenger car sales growth was 2.7 per cent y-o-y in Feb 2015, though rebounded from minus 0.7 per cent y-o-y in Jan 2015, was weaker cumulatively.
“At the same time, passenger car loans rose by 2.7 per cent y-o-y, maintaining the sub-three per cent YoY growth since Sep 2014.”
The uncertainties – even confusion – on the GST impact on car prices didn’t help and served to encourage a “wait-and-see” attitude, it said.
Meanwhile, residential property loan growth in Feb 2015 was relatively unchanged at 13 per cent y-o-y compared with 12.9 per cent y-o-y in Jan 2015 and slower than 13.7 per cent y-o-y in Feb 2014.
“These data suggests no rush to purchase homes despite the developers indicating that house prices will go up by three to four per cent post-GST to factor in the rise in cost due to the imposition of GST inputs like building materials and related services.”
The consumer confidence and spending intention in Malaysia has been on the decline for a while, not just since the implementation of GST, says Malaysian financial comparison startup Intelligent Money Sdn Bhd (iMoney).
“A study conducted by Nielsen released April last year found that the top three concerns for Malaysian consumers are the economy, increasing food prices and job security.
“With GST, we can immediately see the difference in prices. Our daily consumption may not increase much in price, but these increases snowball into a significant figure in our monthly expenses,” noted chief executive officer Lee Ching Wei to BizHive Weekly.
“I believe it is wise for consumers to continue to be more prudent with their spending, tighten their belts and above all, be smart about their money.”
Common misunderstandings on the new tax system
As the government, businesses and consumers fine tune the rules and regulations that come with the implementation, the general consensus remains that many remain in the dark over salient points of the new tax regime we live in.
“Some of us may think that by knowing what the GST zero-rated and exempted items are, we can avoid paying GST,” iMoney’s chief executive officer Lee Ching Wei observed.
“Basic foods like rice, chicken and vegetables are all zero-rated items, but by ordering these items at the restaurants does not mean you are exempted from paying GST.
“These items are only zero-rated in their raw form. For example, buying rice grains at the hypermarket, or vegetables from the market will not incur GST.
“However, once they are processed and cooked, for example in the form of fried rice, you would still be charged 6 per cent GST by the restaurant.”
Another common misperception that consumers may have is that they would probably save money by buying their goods from a non-GST registered shop.
“Ideally, prices should not go up if the shop or business is not registered for GST,” Lee said. “For example, a bottle of bath soap should not increase in price if you buy at a non-GST registered sundry shop, compared to buying it at the hypermarket.
“However, unknown to the consumers, their operation cost might go up as their suppliers would be charging them GST, and they are unable to claim for it. To keep their profit, they might just increase their selling price.”
Some may even to think that dining out should cost the same, since the six per cent GST will just replace the six per cent Government Tax.
“Prior to GST, most restaurants charged 10 per cent service charge and 6 per cent government tax. After GST, most people assume that there would be no difference to dining out because the 6 per cent GST would just replace the 6 per cent government tax.
“However, there is a slight difference, as previously the government tax is not applicable to the 10 per cent service charge.”
A crucial misconception which consumers may misunderstand easily but is crucial for businesses to note is that “zero-rated and exempted items are the same thing” since both prices will not change after GST.
“In an ideal world, it is right to think that way. Unfortunately, businesses are still businesses, and at the end of the day,
it’s all about their profit margin.
“From the consumers’ point of view, both zero-rated and exempted items seem the same both will not be charged GST. However, if we understand what each of these terms really mean, we will understand
how they can affect our prices.”
Zero-rated items are items that are charged zero per cent GST. They are still being charged but at zero per cent, which means the businesses are still able to claim input tax for the GST they incurred.
“For example, a rice farmer will sell his rice at zero per cent GST to the retailer, and is will able to claim input tax for GST incurred for things like fertilizer,” iMoney explained.
“Exempted on the other hand means the businesses are not allowed to charge GST at all, and they are not eligible to claim input tax too. One of the
examples of exempted
supply is residential property.
“This means that even though the property developer is registered for GST, they could not charge the buyer GST, or claim the GST input tax from the GST incurred in their business operation.
“This could affect their profit margin as they would be forced to pay six per cent GST on their raw materials like cement,
bricks and tiles, but
they are unable to claim for these.
“To maintain their profit margin, they would most likely increase their price to include the GST charges.”
While some of the prices of goods or services may be going down, such as milk and detergent, the prices of others things are still going up, iMoney highlighted.
“It is worrying that without education and awareness, consumers may sit on their hands in the false sense of security that their cost of living will not be impacted by GST.”
Not all businesses can charge GST
Since April 1, many merchants and businesses that have registered with the Royal Malaysian Customs are charging GST for the various products and amenities they provide.
GST will be charged as long as these goods and services are not zero-rated or exempted, or the consumers have been granted relief from the tax.
Some unscrupulous business owners will no doubt seize the opportunity to increase prices, underlined iMoney.
Some consumer groups claim that they have started doing so even before the implementation of the GST. This has created distrust and confusion among consumers, with many still unsure on how the new consumption tax works, and how it will affect them.
“By understanding how GST works, it will help understand why this is happening, and to an extent, protect you against these errant businesses,” Lee tells BizHive Weekly.
“Are these “unscrupulous” businesses just being opportunistic, or are they trying to survive?
“If a small time business did not register for GST, he will not be allowed to charge their customers GST, or claim the GST incurred in their business.
“This means their profit margin is directly impacted by GST, and they may not be able to run their business profitably if they do not increase their price, even though they don’t charge GST.”
To avoid getting ripped off, consumers must ensure that they pay GST only to merchants or businesses that have been duly registered and authorised to charge the tax.
“Not all businesses need to be registered under GST as only businesses with an annual sales turnover of RM500,000 and above are liable to be registered under GST.
“The threshold is fixed at RM500,000 to ensure that smaller businesses do not have to bear the costs of registration (including start-up and compliance costs) under the GST.”
It is estimated that about 78 per cent of total business establishments in Malaysia will not fall within the GST system.
However, businesses that have not reached the RM500,000 turnover thresholds can apply to be registered under the GST. Once registered, the businesses must remain in the system for at least two years.
Consumers can find out by accessing the Taxpayer Access Point (TAP) website by the Royal Malaysian Customs at www.gst.customs.gov.my/TAP/
“Consumers can check for the authenticity of the number and its registration using the same TAP website above. They need to ensure that the GST number and company or business name that appears on the screen matches what is printed on the invoice.
“If there is no match for the business or company in the system, it means they are not authorised to charge GST to customers.
“Consumers can take action on these businesses by lodging a report with the Ministry of Domestic Trade and Consumer Affairs so that action can be taken against them.”
Lee said there are many opportunistic business owners who are taking advantage of the situation, increasing prices of their goods or services by 10 per cent or more.
“The best thing for consumers to do is to report these businesses, and stop giving them business. If we are all willing to do our part, we can put a stop to this.”
Investment guide: Taking ‘stock’ of GST
The GST has replaced the current Sales and Service Tax as part of the Malaysian Government’s tax reform initiative to enhance the capability, effectiveness and transparency of tax administration and management.
Investment products and services are a form of goods and services and are thus subject to GST treatments.
iMoney’s Lee said although investors are not charged GST on their profits, the various fees and charges involved in the investment are charged GST.
“Investors must be more alert and hands-on with their investment. Barely scrapping through their investment with low or just high enough rates of return is no longer good enough.
“You need to look for higher rate of return to take into account the GST incurred. Your investment should be carefully thought out for the long term as constant transactions on your investment will incur more fees and charges, which are charged GST.”
Collective investment schemes such as unit trust funds and real estate investment trusts (REITS) are managed by fund managers who provide various management services for the investor.
For unit trusts, fee-based services such as the sale or transfer of units as well as trustee services, would incur GST.
As for REITS, charges on property, lease and marketing management services are subject to GST. Brokerage commissions or clearing fees are also subject to GST at a standard rate.
In share trading, services offered by banks such as arranging, structuring and underwriting equity issuances, and the placement and trading of shares, and advisory, custody and nominee services are subject to GST.
As a consequence, the cost of owning a share or fund would rise. This also means that your shares or funds will need to produce higher yields in order to make up for all the charges and fees paid, as well as GST expenses.
The same applies for private sector managed funds such as retirement plans offered by banks, investment and insurance companies.
“Investors are always urged to understand all investment costs and charges applicable before deciding to invest their hard-earned money.
There is a need to ensure that investments will yield sufficient returns, even after deducting the necessary fees and charges.
“With the implementation of GST, this becomes even more important as investors will be paying more in terms of costs and charges, thus reducing actual profits.
“Being aware of the extra fees and charges you incur for each investment allows you to manage your total transaction costs and maximise return on investment.
“Knowing the applicability of GST on your investments will enable you to make informed investment decisions for a brighter financial future.”
Conclusion
GST has been a hot topic since it was announced in Budget 2014, back in 2013.
Like many hot and controversial topics in Malaysia, you will see a lot of discussion, sharing of information and sometimes even paranoia, among Malaysians – especially online.
“The best thing to do is for us to truly understand how something like this works, know how it will impact our bottom line, whether we are a consumer or a business owner,” Lee says.
“With that understanding, we will be able to protect ourselves from errant businesses, manage our money better, and also come up with a new strategy to protect our finances.”
Times like these call for more than just cutting your expenses and saving your money in a savings account, he added.
“We need to boost our savings with higher yield investment products, take advantage of available financial services such as reward or cash back credit cards to help us trim our daily expenses.”
To GST or not to GST?
What small-time business owners need to know
It is the month of April and many merchants and businesses have already started charging Goods and Services Tax (GST) for the various goods and services they provide.
Currently, only businesses with an annual sales turnover of RM500,000 and above are liable to be registered under GST. The threshold is set at RM500,000 to ensure that smaller businesses do not have to shoulder the costs of registration (including start-up and compliance costs) under the new taxation system.
Businesses that have not reached the RM500,000 turnover thresholds can voluntarily apply to register for GST. Once registered, the businesses will remain in the system for at least two years.
“There are a number of benefits that businesses can obtain by registering for GST. For example, under SST, some businesses pay multiple taxes and higher levels of tax-on-tax, and they are not allowed to claim,” says iMoney.
“With GST in place, businesses can claim on taxes paid on inputs and reduce the overall cost of doing business.”
Despite its overt benefits, businesses with a yearly turnover of under RM500,000 should weigh in the following aspects to accurately gauge the financial implications that will follow should they register for GST, says iMoney.
Are your suppliers GST-registered?
One of the foremost things to consider when determining whether to register for GST is whether your current or future suppliers are or will be GST-registered.
If your suppliers are GST-registered and charge a standard rate of 6 per cent, your business will benefit from GST registration as it will be able to make claims for the GST incurred on the purchases made from the GST-registered supplier.
“Your business will not be able to claim back the GST on your expenses or any goods you purchase for sale if it is not GST-registered,” iMoney highlighted.
“In this case, your business will have to either absorb the GST it has paid to its suppliers (resulting in a lower profit margin), or pass on the tax charges to consumers by increasing the prices of its goods and services (but risk losing customers).
“For GST-registered companies, If your business supplies products that are zero-rated (such as agriculture products and exported goods and services), it will be able to claim back the GST it had incurred in the production of the zero-rated supplies.”
What are the costs of compliance?
Registering for GST can involve significant compliance and administrative costs that can burden a business, especially for a start-up.
To begin with, staff will need to be trained to ensure proper business and accounting records for GST, as well as the correct charging and claiming of the tax.
Systems will also need to be enhanced to cope with GST regulations.
For example, you may have to set up an electronic payment infrastructure to enables sales to be captured accurately.
Price displays and invoices will also need to be changed to reflect GST-inclusive charges.
How will registering for GST affect your cash flow?
Businesses are required to pay GST when the file for return, upon the delivery of goods or completion of services, even if they have not received the GST payment from their customers.
This can impact their cash flow and result in increased financing cost.
“If they are unable to retrieve the money in six months or the debtor has become insolvent, the businesses are entitled to a relief for bad debt, where the GST paid will be returned.
“Another concern is if the expectation of a major sale or contract does not come into fruition. If this occurs, the business may have difficulty paying its tax bill.
“Businesses with a tight cash flow are especially susceptible to this risk. This is because they do not have the financial capacity to handle any unexpected cash flow problems.”
So, should you register?
Depending on the scale and nature of the business, it may be advisable for you to engage the services of a tax agent or a tax expert to ensure that all your dealings with GST are properly accounted for, iMoney concluded.