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GST to SST in Malaysia, 3 Important Key Impacts explained +InfoGraphic

2018 was an eventful year for Malaysia. Pakatan Harapan (PH) has emerged as the ultimate winner of the country’s 14th general election and thus, effectively replaced Barisan Nasional (BN) as Malaysia’s ruling government. Soon after, PH has worked to fulfil its manifestos which include the replacement of GST to SST.

Here, I’ll provide a chronology of events that lead to the implementation of SST beginning on 1 September 2018.

No. Events Date
1 Implementation of GST 1 April 2015
2 Declaration of GST Tax Holiday 1 June 2018
3 Passing of Sales Tax Bill 2018 by Dewan Rakyat 14 August 2018
4 Passing of Service Tax Bill 2018 by Dewan Rakyat 15 August 2018
5 SST Acts Gazetted 28 August 2018
6 Abolishment of GST 31 August 2018
7 Implementation of SST 1 September 2018

So, what is the significance to us as Malaysians from this change of tax laws?

Before I share my views, I would like to first explain their differences in concept between GST and SST in brief. It is best explained with a simple illustration that shows the pricing mechanism of a product which passes through a simple value chain from suppliers of its raw materials, to its manufacturer, to its retailer, and finally to its consumers.

The Basic Concept of GST

GST is a consumption tax where taxes are imposed throughout the entire value chain of a product under the value-added concept. The pricing mechanism of a product and the amount of GST payable is illustrated as follows:

Value Chain Sales Price
(RM)
Sales
Price
 6% GST (RM)
GST Payable
(RM)
GST Claimable
(RM)
Net GST Payment
(RM)
Supplier of Raw Materials 10.00 10.60 0.60 0.00 0.60
Manufacturer 50.00 53.00 3.00 0.60 2.40
Wholesalers 70.00 74.20 4.20 3.00 1.20
Retailers 140.00 148.40 8.40 4.20 4.20
Total GST Payable to the Government 8.40

From the point of view of:

1. Manufacturers:
Their cost of raw materials remain at RM 10.00 as local manufacturers can claim back RM 0.60 in GST paid for their raw materials. Their sales price of a product to their retailers is set at RM 53.00 where RM 3.00 is GST payable to the government. Thus,

– Profits: RM 50.00 – RM 10.00 = RM 40.00
– Profit Margin: (RM 40.00 / RM 50.00) x 100% = 80%
– Net GST Payable: RM 3.00 – RM 0.60 = RM 2.40

2. Wholesalers
Their product cost remains at RM 50.00 as the RM 3.00 in GST paid can be claimed back from the government. Their sales price for a product is RM 74.20 where RM 4.20 is GST payable to the government. Thus,

– Profits: RM 70.00 – RM 50.00 = RM 20.00
– Profit Margin: (RM 20.00 / RM 70.00) x 100% = 28.6%
– Net GST Payable: RM 4.20 – RM 3.00 = RM 1.20

3. Retailers
Their product cost remains at RM 70.00 as the RM 4.20 in GST paid can be claimed back from the government. Their sales price for a product is RM 148.40 where RM 8.40 is GST payable to the government. Thus,

– Profits: RM 140.00 – RM 70.00 = RM 70.00
– Profit Margin: (RM 140.00 / RM 70.00) x 100% = 50.0%
– Net GST Payable: RM 8.40 – RM 4.20 = RM 4.20

4. Customers
They would pay RM 148.40 for their product where RM 8.40 consists of 6% GST.

The Basic Concept of SST

SST is a one-stage output tax and is governed under two separate laws, namely:

  1. Sales Tax (mainly for manufacturers and importers)
  2. Service Tax (mainly for service providers such as accounting, IT, F&B …)

For this illustration, I would focus on sales tax where the rate is fixed at 10% on manufactured goods. The subsequent sales of goods would be free of SST. Let’s also assume that the manufacturer has obtained exemption of SST payments of its raw materials purchases that are used solely to manufacture its products. As such, the pricing mechanism of a product and SST payable are as follows:

Value Chain Sales Price
(RM)
Sales Price
(10% GST)
(RM)
SST Payment
(RM)
Supplier of Raw Materials 10.00 (Exempted) 0.00 0.00
Manufacturer 50.00 55.00 5.00
Wholesalers 70.00 0.00 0.00
Retailers 140.00 0.00 0.00
Total GST Payable to the Government 5.00

From the point of view of:

1. Manufacturers:
Their sales price of a product is set at RM 55.00, where RM 5.00 is SST, which is RM 2.00 more than its price of RM 53.00 set during the era of GST. Its profit margin remains unaffected.

– Profits: RM 50.00 – RM 10.00 = RM 40.00
– Profit Margin: (RM 40.00 / RM 50.00) x 100% = 80%
– SST Payable: RM 5.00

2. Wholesalers
Their total cost of a product is RM 55.00 inclusive of RM 5.00 in SST. As retailers could not claim their SST payments, their profit margins would fall to 21.4% if they maintain their sales price of a product at RM 70.00. Their profit margin was 28.6% during the era of GST.

– Profits: RM 70.00 – RM 55.00 = RM 15.00
– Profit Margin: (RM 15.00 / RM 70.00) x 100% = 21.4%

But, what if wholesalers intend to maintain profit margin at 28.6%?
In this case, wholesalers may opt to adjust their sales price of a product to RM 77.00 from RM 70.00 and thus, enabling them to maintain profit margin at 28.6%.

– Profits: RM 77.00 – RM 55.00 = RM 22.00
– Profit Margin: (RM 22.00 / RM 77.00) x 100% = 28.6%

3. Retailers
The cost of a product depends on whether:

(1) Wholesaler Maintains its Price at RM 70.00
The retailer would maintain its sales price at RM 140.00, thus, retaining its profit margin at 50%.

(2) Wholesaler Increases its Price to RM 77.00
The retailer may either:

a. Maintain its sales price at RM 140.00
In this case, the retailer’s profit margin would fall to 45% from 50%.

– Profits: RM 140.00 – RM 77.00 = RM 63.00
– Profit Margin: (RM 63.00 / RM 140.00) x 100% = 45.0%

b. Increase its sales price to RM 154.00
In this case, the retailer would maintain its profit margin at 50%.

– Profits: RM 154.00 – RM 77.00 = RM 77.00
– Profit Margin: (RM 77.00 / RM 154.00) x 100% = 50.0%

4. Customers
If both wholesalers and retailers choose to maintain profit margins for their sale of the product during the GST-era, the final retail price of the same product would increase from RM 148.40 to RM 154.00. Yikes!


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Okay, the 3 Impacts of SST to Malaysians

In general, there are 3 impacts to Malaysians from the transition of GST to SST.

1. Less Paperwork for Businesses
SST is a simple and straightforward tax regime where businesses do not need to spend time and effort on calculating GST refunds. As such, they can allocate more resources on productive matters which may result in higher sales and profits to their owners.

2. SST may lead to Cascading Rise in Prices. 

Unfortunately, SST paid by trading companies (wholesalers or retailers) would be included as a cost to the product. As illustrated above, if both of them intend to maintain their profit margins, traders would increase their sales prices of the product to their customers. Meanwhile, GST is never a cost to manufacturers and traders as it is a consumption-based tax. Hence, for consumers, SST may lead to higher product prices from the GST-era.

Note: 
This, however, is offsetted by increasing the amount of both exempted goods and business registrants under the SST-era. Source: Star Online – 
Total of 5,445 Consumer Goods Exempted from SST.

3. Government Makes Lesser Money
From the illustration above, we find that the government would receive lesser tax payments for a product after the transition of GST to SST. As I write, SST is applicable to a lesser amount of goods and is being collected by fewer business registrants. Thus, moving forward, Malaysia could be more reliant on oil & gas for government revenue as our government is expecting lower revenues to be generated from SST than GST. Hence, in the event of a steep fall in global oil & gas prices, there is a tendency of our budget deficits to be widened and thus, placing our currency at risk of being weakened in the future.

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Conclusion:

The transition from GST to SST has its gives and takes. Its impact would indeed be felt over the long-term mainly in terms of costs of living and the strength of our Ringgit. Time would tell, whether or not, the transition is a bright move for us as a nation.

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