This article first appeared in The Edge Malaysia Weekly on July 23, 2018 - July 29, 2018

IF anyone is expecting to see significant changes in the Sales and Services Tax (SST) that will come into effect on Sept 1, they are likely to be underwhelmed by the proposed framework.

It is more or less similar to what was previously implemented, but with some changes, say tax analysts. While the changes are not drastic, some things have been made much simpler this time around, they say.

The proposed sales tax rates are 5% and 10% while the service tax rate is 6%, which is similar to what was imposed under the previous SST regime.

One of the things that stands out in the proposed framework is the standardised registration threshold of RM500,000. Under the proposed sales tax model, a person who manufactures taxable goods is liable to register for sales tax if he reaches a sales threshold of RM500,000 over a 12-month period.

Service providers are required to register for service tax when the value of taxable services exceeds RM500,000 in a 12-month period.

Previously, the threshold for sales tax was generally at RM100,000 while service tax was deferred, depending on what service was being provided.

Axcelasia Inc chairman Dr Veerinderjeet Singh says the ability to file the sales tax and service tax, as well as apply for exemptions electronically, is a positive because it promotes efficiency.

“We welcome the opportunity to cut out face-to-face dealing with the authorities because it can help take away the element of corruption that could occur,” he says.

Deloitte Malaysia’s Senthuran Elalingam says businesses that will be impacted will appreciate the fact that the ability to file electronically will continue under the new SST. Under the Goods and Services Tax (GST) regime, filings were also done electronically.

The scope is definitely broader than the previous sales tax and service tax, adds Senthuran, who is financial services industry indirect tax leader at Deloitte.

“As an example, we have seen new additions to the scope such as domestic flights (excluding rural air service), electricity and a widening of the scope for insurance, hotel and restaurant providers,” he says.

Nevertheless, the scope of SST is definitely much narrower than the GST regime it is replacing and will impact a much smaller basket of goods and services.

It is notable that Finance Minister Lim Guan Eng said in parliament recently that SST will only be imposed on 38% of the Consumer Price Index’s (CPI) basket of goods, compared with 60% under GST.

However, this will mean the federal government’s revenue will be trimmed by 50% from switching back to the SST regime.

If the government had continued with GST, it would have collected RM43 billion from the consumption tax. It is estimated SST will only raise revenue of RM21 billion per year.

“The growth in revenue from SST will be slow. It will be fuelled by economic growth and when more businesses are registered, revenue will increase,” says Veerinderjeet.

One of the issues he foresees is that some manufacturers who have not reached the prescribed threshold and who have not registered for sales tax may also take the opportunity to raise prices.

“This mentality is very hard to curtail and we can’t use price controls because this is a free market. We also don’t have a clear mechanism to monitor prices,” he says.

The Sales Tax and Service Tax will be tabled in the current parliamentary session but there are some who are still not convinced the SST regime should make a comeback.

One argument is that businesses in Malaysia have spent close to RM15 billion in implementing the GST systems that have been in use for less than four years. Now that GST has been shelved, the bulk of the investments spent on these systems will now be sunk costs.

But more pertinently, some accounting professionals point out that while the basket of goods under SST is narrower than under GST, consumers have to be prepared to pay a higher price for certain products under the new tax system.

An accountant says switching back to SST is akin to foregoing mechanisms for risk control and in some ways, also forgoing anti-profiteering control mechanisms. “The SST system tends to have a cascading cost effect whereas under GST, it is prevented through the system that allows for businesses to claim input tax.

“Everyone is now moving towards a multi-stage tax and here we are moving back to the single-stage tax. My view is that we shouldn’t throw out the baby with the bathwater,” he comments.

While the merits of GST and SST continue to be debated, Malaysians will have to be prepared for the SST when it kicks in on Sept 1 and face the reality that the 0% tax holiday will come to an end.

“Consumers have a short memory. People will start to complain when prices move up on Sept 1 because of the implementation of SST. But that is the risk the government chose to take when it introduced the three-month 0% tax period,” says Veerinderjeet.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.