An Introduction to Malaysian GST

By: Dezan Shira & Associates 
Editor: Marquise Clarke

Malaysia’s recent addition of a Goods and Service Tax (GST), which was passed by the government during the third quarter of 2011 but delayed until April 2016, has been the cause of much confusion within ASEAN’s second most developed economy. The hope and purpose of GST is to replace the sales and service tax which has been used in the country for several decades. However, with the rollout of the tax seeing delays and numerous clarifications, questions remain over what GST is and how it will impact business costs. 

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What is GST?

GST is a brand new consumption tax and is similar to Value Added Tax (VAT) found in many other countries. In terms of its application,  the tax is levied on the supply of goods and services at each stage of a given supply chain, from the supplier to the retail stage of distribution. 

Even though GST is added on each part of the supply chain, the tax element does not become part of the cost of the product because GST paid on business inputs is claimable. Hence, no matter how many stages a good is through the supply chain, the input tax incurred at the previous stage is always deducted by the businesses at the next stop in the supply chain.

GST is to become a broad based consumption tax covering all the sectors of the economy. The basic fundamental of GST is its self-policing features which allow businesses to claim their input tax credit by automatic deduction in their accounting system.

Registration

Companies operating within Malaysia will be required to register for GST with the customs department. A business is not liable to be registered if its annual turnover of taxable supplies does not reach the prescribed threshold. In the event that registration is not completed or required, such businesses cannot charge and collect GST on the supply of goods and services made to their customers. Nevertheless, businesses can apply to be registered voluntarily.

The Scope & Change

GST is levied and charged at a proposed rate of 6 percent on the value of supply. These taxes can be levied and charged only if the business is registered under GST. The following aspects of the GST system should be noted for all companies registering for the new system.

Types of GST in Malaysia

1. Standard Rate – charged only on the taxable supply of goods and services by businesses in Malaysia. GST is also charged on imported goods and services and applied at the standard rate unless there is a provision which states that it can be treated differently. There are some reliefs and exemption for certain goods and services, and for small businesses.
2. Exempt –no GST is charged on the supply. This does not mean that you are GST-free. It means there is no entitlement to recover GST. If a wholly exempt supply is made, then you will not be able to register for GST. Therefore, GST would become an added cost to the business. Examples include private healthcare, private education and certain financial services.
3. Out of scope – these supplies are outside of the GST system. Therefore, no GST is payable or recoverable. Examples include transfer of going concerns and supplies made by the government, such as issuance of passports and licenses, except some supplies of services prescribed by the Minister of Finance.

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GST v. Previous Sales Tax 

The following aspects and benefits of GST should be noted in their contrast to the previous system of sales based taxation that was employed in Malaysia:

1. Lower business cost – with the previous system, some businesses paid multiple taxes and higher levels of tax-on-tax (cascading tax). With GST, businesses can benefit from recovering input tax on raw materials and incurred expenses, thus reducing costs.
2. Increase global competitiveness – Prices of Malaysia exports will become more competitive on the global stage as no GST is imposed on exported goods and services.
3. Enhance Compliance –  The previous system of taxation had many weaknesses making administration difficult. The GST system has a built in mechanism to abolish the tax administration system so that businesses can automatically offset GST on inputs in their returns.
4. Reduces red tape – under the previous sales based taxation system, businesses were required to apply for approval to get tax-free materials and also for special exemptions for capital goods. Under GST, the system is abolished as businesses can offset automatically the GST on inputs in their returns.
5. Equity – GST taxes are levied fairly among all business involved, whether they are in the manufacturing, wholesaling, retailing or service sectors.
6. Fair pricing to consumers – GST eliminates double taxation. Consumers will pay fairer prices for most goods and services compared to the previous tax system.
7. Greater transparency – unlike the sales tax, consumers would benefit under GST as they will know exactly whether the goods they consume are subject to tax and the amount they paid.

Outlook

As investors consider doing business in Malaysia, it is imperative that they understand GST to ensure compliance with tax authorities. The recent introduction of the tax makes amendments and official clarifications a distinct possibility . To prepare for this eventuality, it will be of critical importance for investors at all stages of the investment process to stay abreast of these developments and factor them into models for investment and operations. The associates at Dezan Shira & Associates will be closely following these changes and updating our clientele to ensure they have a successful business in Malaysia and the rest of ASEAN. For more information, please contact our tax specialists at asean@dezshira.com or visit us online at www.dezshria.com

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