This article first appeared in The Edge Malaysia Weekly, on November 2 - 8, 2015.

While consumers are rejoicing at the rebate for the Goods and Services Tax (GST) on prepaid mobile phone cards, questions abound over the implementation mechanism and who bears the tax ultimately.

On Oct 23, Prime Minister Datuk Seri Najib Razak announced that the 6% GST on prepaid phone cards will be returned to consumers from Jan 1 to the end of 2016.

Subsequently, Communications and Multimedia Minister Datuk Seri Mohd Salleh Said Keruak said the rebate will be borne collectively by the government through an internal fund, the Malaysian Communications and Multimedia Commission (MCMC), and the telecommunications companies themselves.

The rebate will be given only to Malaysians, he added, and a system to execute it will be ready by January.

Meantime, questions that have cropped up include which fund will pay for the rebate, how the rebate’s mechanics work and how only a specific user segment will get the rebate.

An MCMC spokesman declined to comment when queried by The Edge about the rebate’s mechanism and payment structure. The chiefs of

Maxis Bhd, Axiata Bhd’s Malaysian service provider Celcom Axiata (M) Bhd and DiGi.Com Bhd — the Big Three telcos — tell The Edge that they will share the information when discussions with MCMC have ended.

Imposing a 6% surcharge on prepaid mobile phone cards is an issue that has been debated since GST was implemented in April. This is because previously, the Sales and Service Tax (SST) was absorbed by the telcos but under the new regime, the GST is to be borne by the users.

The telcos raised their prices simultaneously, leading to accusations of profiteering.  

At one point, the government flip-flopped on its stand on whether to allow the telcos to impose the surcharge.

In May, the then Communications and Multimedia Minister Datuk Seri Ahmad Shabery Cheek said the decision to impose GST on prepaid mobile phone cards will be made by November. In the meantime, users are taxed 6%.

Then two weeks ago in Budget 2016, the decision to give users a rebate for GST was announced.

Some market observers and tax consultants argue that using the term “absorb” is a nice way of putting it because corporate income comes from sales transacted with customers. Besides, the bulk of a telco’s expenditure comprises its investments in infrastructure and is a sunk cost.

“Depending on the cost structure of a company, telcos have a certain amount of fixed cost and relatively small operating expenditure. Thus, there could be higher profit with every additional minute sold after the fixed cost is covered. So, indirectly, people were still paying the SST,” says a tax consultant.

With Jan 1 just two months away, it is unclear how the rebate mechanics works.  

PwC Malaysia executive director Raja Kumaran tells The Edge that it is still early days to discuss the mobile credit rebate. But in essence, the intention is “a good move to relieve the rakyat’s burden” during these trying times.

“The majority of prepaid mobile phone subscribers are low-income earners. We have to wait and see how this [implementing rebate for GST] is going to be done. One way I can think of is there could be an involvement with the identity card to determine whether the mobile phone user is Malaysian or not,” he says.

There were 36.02 million prepaid mobile phone users in Malaysia as at June 2015, according to MCMC. At the same time, the Big Three reported a combined prepaid subscriber base of 28.6 million and average revenue per user ranging from RM32 (Celcom) to RM38 (DiGi). Their postpaid counterparts’ revenue tends to be more than double.

News reports in May quoted Ahmad Shabery as saying the GST from prepaid credit could amount to RM800 million. That’s equivalent to 2% of the government’s targeted revenue of RM39 billion from GST collection next year.

According to Hong Leong Investment Bank (HLIB) Research’s note last Wednesday, the government could tap MCMC’s Universal Services Provision (USP) to pay the GST rebate next year.

The USP, according to its last available report for its financial year ended Dec 31, 2013 (FY2013), had accumulated funds of RM7.41 billion. HLIB — which assumes the GST charges for prepaid credit could amount to RM705.6 million — says the rebate “should be comfortably funded” by this source. MCMC declined to comment on HLIB Research’s report.

Nevertheless, the USP fund was established to build communications infrastructure in underserved areas. Projects such as 1Malaysia Wireless Village and Cellular Coverage Expansion-Time 3

were financed by the fund, to which  telecoms players give 6% of their annual revenue.

Looking at MCMC’s FY2013 ended Dec 31 accounts, the regulator had RM2.02 billion in cash and equivalents. It made an income of RM633.88 million, most of it coming from spectrum fees. Net income was RM48.11 million.

Raja Kumaran says if there is a direct contribution from the government to the GST rebate, it should not be seen as taxpayers paying for it. “Low-income earners, who make up most of the prepaid subscriber segment, do not pay the effective tax rate,” he says, adding that it is a way for the tax burden to be shared.

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