Saturday, January 16, 2010

What you should know about GST

Because the new tax is complex and broad-based, we have a lot to learn ahead of its introduction. As a start, StarBizWeek has asked some experts to each highlight five key points.

Pauline Lum

Director, BDO Tax Services Sdn Bhd

·GST is a consumption tax on imported goods, and on supplies of goods and services in Malaysia other than those exempted or zero-rated. It is mainly borne by the end-user/consumer, and therefore, is not intended to add cost to businesses.

·GST is applied at each level of the value chain. This tax will be applicable whenever value is added to goods or a service.

·Businesses are required to register for GST if their annual turnover exceeds RM500,000. They can claim the input taxes paid on purchases of intermediate goods or services, against the GST charged on the final goods or services that they sell.

·Preparations can include the setting up of a GST committee, staff training for all departments, and manuals/systems to ensure compliance. Businesses that do not have internal expertise should consider engaging external advisors.

l As co-head of the tax authority of France, Maurice Laure created the GST system in 1954, when he introduced the TVA (the French abbreviation for value added tax).

Dr Veerinderjeet Singh

President, Chartered Tax Institute of Malaysia

·GST is not a new tax for Malaysia. It is intended to replace the existing sales tax and service tax.

·It has built-in control mechanisms that help minimise tax evasion by traders.

·GST requires good and proper record-keeping by businesses that need to be registered. This can lead to improvements in the maintenance of proper accounts and financial records.

·The tax will not lead to inflationary pressures, that is, a persistent increase in prices.

·Once GST is effectively implemented for some time, there is the possibility of decreases in corporate and personal tax rates.

Ronnie Lim

Country tax leader, Deloitte Malaysia

·Exemption is bad for GST. Businesses should not ask for their output to be exempted as this will create more costs for them, arising from restricted input tax credit. Instead – and perhaps strangely – one should seek to be a taxable person with either zero-rated or standard-rated output.

·GST implementation is not as easy as merely activating an accounting software’s GST module. That system has to be tailored to the profile of the business and the Malaysian GST law.

·Most companies leave tax implications to the tax, accounting or finance departments. GST should be viewed differently as it has enterprise-wide effects.

The sales department has to revise selling prices exclusive of GST. The procurement unit must re-negotiate purchase prices. The legal team need to review long-term contracts. Therefore, the whole company must understand this tax.

·Much more administrative and documentation requirements arise from the introduction of GST. Compliance costs are bound to increase. Often, adverse situations arise when documentation is inadequate.

·GST can potentially reduce tax leakages, such as smuggling, as there could be checks before unusual credit claims are processed. Leakages will be further minimised if the Customs and the Inland Revenue Board are unified to create a powerhouse, as seen in Britain.

Dr Arjunan Subramaniam

Adjunct professor, Universiti Utara Malaysia

·GST is due when a person makes a taxable supply in the course of business. As a taxable person, you must charge GST to your customer when you supply to the customer. This supply is output and your charge to the customer is output tax.

·GST charged to you for your business purchases is called input tax.

·You must pay to the Customs the amount of your output tax minus your input tax. If the input tax is greater than the output tax, the difference is claimed from the department. So keep accurate records of all your sales and purchases.

·GST is a consumption tax. It is your customer who bears the burden of tax.

·Imports are subject to GST, while exports are exempt.

Khoo Chuan Keat

Tax leader and senior executive director, PricewaterhouseCoopers Taxation Services Sdn Bhd

·GST is a fiscal policy feature in over 140 countries. Many developing and emerging economies have been transforming their tax revenue bases by progressively moving from direct taxation to consumption taxes such as GST in recent years. Malaysia is in the minority segment.

·GST affects all functional areas of a business and is not just a finance issue. The GST implementation is not only about reconfiguring the computer system in order to charge output tax. In fact, businesses should re-assess their entire business processes, including supply chains, so as to optimise input tax recoveries. Otherwise, they may suffer input tax leakages, thus hurting their competitiveness and profitability.

·Consumers can expect to see a drop in prices of certain goods and services. Without realising it, the consumers are already paying sales tax and service tax embedded in the supply chain. Anti-profiteering measures should be implemented and strictly enforced to deter traders from taking advantage of GST to raise prices and increase profits.

·The GST input tax incurred by businesses is claimable as a credit if they make taxable supplies. This avoids the cascading tax effect of the current single-stage sales tax and service tax regime, which results in higher prices.

·Recognising the wide-ranging impact of GST, the Government has proposed an initial low rate of 4%, coupled with zero-rating and exemption of essential goods and services. Anti-profiteering legislation and other measures for qualifying persons in the lower-income groups may be introduced to alleviate the adverse impact of GST on consumers.

Dr Jeyapalan Kasipillai

Professor, Monash University Sunway campus

·GST is a multi-stage tax but is a cost only to the final consumer.

·The GST system is transparent, with a built-in mechanism to track down defaulters.

·The new tax will give the Government an opportunity to reduce corporate and individual tax rates.

·It will also enable the Government to subsidise essential controlled items for the poor and to improve healthcare for taxpayers.

·GST can be a good source of government revenue and will help shrink the deficit.

Nicholas Crist

Executive director, KPMG Tax Services Sdn Bhd

·GST and value added tax (VAT) are the same conceptually. Over 100 countries have GST/VAT as part of their tax systems.

·Malaysia’s proposed GST rate of 4% is among the lowest rates in the world. The highest rate currently is 25%.

·Basic necessities, such as food, are proposed to be zero-rated (0%). However, processed food, such as canned food, will be charged at the standard rate. Classification can lead to interpretational issues. For example, in Britain, the courts had to determine whether a Jaffa Cake, a biscuit-like cake, was a biscuit (standard-rated) or a cake (zero-rated).

·GST/VAT can be used as a tool to manage the economy. For example, Britain reduced its VAT standard rate from 17.5% to 15% in December 2008 to boost consumer demand during the financial crisis.

·The Government has indicated that the GST would provide an opportunity to reduce income tax rates. This has happened in other countries, such as Singapore.

Chas Roy-Chowdhury

Head of tax, Association of Chartered Certified Accountants

·In Europe, GST is known as VAT. Most of the rest of the world uses the term GST.

·GST rates may start off low, but in the global context, they have always risen. In the European Union (EU), the rates have increased considerably from the introduction of the tax. The rate in Britain, for instance, was once 10%. It is 17.5% today.

·When Britain introduced VAT in 1973 as a prerequisite to joining the EU, it was seen as a simple tax. Now, it is one of the most complex of taxes. Therefore, serious effort is needed to stop complexity from creeping into the system.

·Because most intra-EU goods are not subject to VAT, there is an opportunity for various types of tax fraud. It is thought that the amount involved could be as high as 100 billion euros.

·There is a debate in the United States over whether to introduce VAT, mainly as a way to address the country’s huge budget deficit.

Bhupinder Singh

Partner, Ernst & Young Tax Consultants Sdn Bhd

·GST will not burden the rakyat. For those currently consuming goods and services that are subject to sales/service tax, the impact of GST should be neutral if the rate is 4%. In fact, consumers should benefit if the suppliers pass on the savings from their ability to claim back input tax on their purchases.

Consumers should also be better off because some essential goods will be zero-rated, while certain items are exempted from GST.

·A business can claim an input tax credit on purchases irrespective of whether it has paid the suppliers, as long as the suppliers have issued tax invoices to the business.

There should be no adverse GST impact on a business that makes taxable supplies. In the long run, the cost of doing business will go down because the business will have the ability to claim input tax on the purchase of goods and services, which they cannot do under the sales/service tax regime.

·Businesses will experience a cash flow impact. They have to charge GST on sales and if the customers are late in paying, the businesses will have to pay the tax first.

·It is important to educate businesses, especially the small players, on the cost savings and potential cash flow savings aspects of GST. It is equally important to educate consumers so that they understand that the goods and services they buy may not necessarily be subject to a price increase because of GST.

·GST works on the affordability concept. As a consumer, you decide which goods and services to buy, and if these are subject to GST, you then have to pay it. This is no different under the current sales/service tax regime except that these taxes are embedded in the price of the goods and services, and the consumer may not realise that they, in fact, bear the taxes.

Source: The Star

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