Malaysia: Goods and Services Tax (GST) – Finally here!

Introduction of GST 

In his 2005 Budget the then Prime Minister YAB Dato’ Seri Abdullah bin Ahmad Badawi stated: 

“… The government proposes to replace both these taxes (sales tax and service tax) with a single consumption tax, based on the value-added concept. The new tax, known as the Goods and Services Tax (GST), will be comprehensive, efficient, transparent and effective, thereby enhancing tax compliance…”

The idea of introducing GST in Malaysia was first announced in 2005 Budget. However, in February 2006, Malaysian Government announced that GST would be deferred with the intention to engage in further public consultation and to accord businesses more time to prepare for its implementation.

Finally, on 25 October 2013, the incumbent Prime Minister cum Finance Minister YAB Dato’ Sri Mohd Najib bin Tun Abdul Razak announced in Budget 2014 the implementation of GST to replace sales and service tax with effect from 1 April 2015 at the rate of 6%. The Goods and Services Tax Act 2014 was gazetted on 19 June 2014. 

Why GST? 

The introduction of GST is part of the Government’s tax reform program to enhance the efficiency and effectiveness of the existing taxation system. GST is proven to be a better tax system as it is more effective, efficient, transparent and business friendly and could spur economic growth as well as increase competitiveness in the global market. 

GST will replace the current consumption tax, i.e. the sales tax and service tax (SST). It is important to replace the existing SST in order to eliminate its inherent weaknesses such as cascading and compounding effects, transfer pricing and value shifting, no complete relief on goods exported, discourage vertical integration, administrative bureaucratic red tape, classification issues and etc. 

In addition, GST is capable of generating a more stable source of revenue to Malaysia because it is less susceptible to economic fluctuations. 

Understanding GST 

GST in Malaysia will operate along the lines of other GST and VAT regimes globally. Being broad based tax, GST could be practically charged on all supplies of goods and services except some supplies being designated zero-rated or exempt where GST will not be charged. 

Generally, essential items such as basic food stuffs, agriculture products, livestocks, poultry and eggs, seafood, piped water supply for domestic consumers, the first 300 units of electricity consumption for domestic consumers, various medicine brands for 30 types of diseases, reading materials and newspapers are zero-rated; and, critical services such as healthcare, public transportation, education, residential property and financial services are exempt supplies. 

In Malaysia, GST can only be levied and charged if the business is registered under GST. Businesses making taxable supplies have to be registered under GST if their annual sales turnover has exceeded the prescribed threshold of RM500,000. Nevertheless, businesses can apply to be registered voluntarily. 

Challenges of New Tax Regime 

The biggest challenge that Malaysia faces is public perception that GST will bring about general rise in the prices of goods and services. To alleviate inflationary concerns, the Price Control and Anti-Profiteering Act was enacted in 2011 to curb opportunistic price increases.

Government Initiative 

With the implementation of GST, the Government will be able to reduce the tax burden on people as follows: 

1. Individuals income tax rates will be reduced by 1% to 3% across all chargeable income bands with effect from year of assessment 2015; and 

2. Corporate income tax rate will also be reduced by 1% to 2% with effect from year of assessment 2016. 

To assist businesses, the following assistance will be provided: 

1. Training grant of RM100 million provided to businesses for their employees to attend GST courses; 

2. Financial assistance amounting to RM150 million provided to Small and Medium Enterprises for the purchase of accounting software; 

3. Accelerated Capital Allowance on purchase of information and communication technology (ICT) equipment and software; and 

4. Expenses incurred for training in accounting and ICT relating to GST will be given additional tax deduction.

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