GST Comparison to SST in Malaysia

Updated: Nov 11

The heart of an economy comes from consumption, it is the force that moves money from one person to another, so of course the government will want a piece of that juicy pie! Last we explored the workings of GST and how its suppose to function, along with the implications of such a system.





However, things don’t exist in a vacuum, so the question becomes: How does GST compare to our current SST, and how was such a system implemented and later abolished in Malaysia? Is GST 2.0 just around the corner, or is it just nonsensical hearsay?


Manufacturers and service providers are required collect these taxes from their customers if their taxable supply exceeds a certain threshold. There are exemptions to avoid tax pyramiding effect (where same goods/services gets taxed multiple times). However, in absence of such exemptions, businesses that suffer SST have no recourse other than passing along the cost to its customers.


So how do these systems compare? Here are the comparisons of key characteristics of the 2 taxes:


As of writing, SST is a multi-decade old system with many fine-tuned rates, thresholds, and exemptions to suit specific businesses and certain transactions; GST on the other hand had fewer exemptions and one standard rate and threshold. While this may make GST simpler & more attractive in the short-term, it is likely a symptom of being new. VAT legislation in other countries (such as UK) are much more nuanced as they have been in use for longer, and therefore complexity of the finer details in both GST and SST should not be a point of comparison.


From the comparisons, GST does provide tangible advantages over SST as a consumption tax legislation at the price of more work by the merchants. So why then did GST survive in Malaysia for merely 3 years and 1 month? Let us look at the history of GST to see the history of its implementation.


GST vs History

GST (or VAT in most countries) have been around for a long time, with the oldest implementation being nearly 60 years old as of now. However, the idea of GST has never been proposed officially in Malaysia until the 2005 Budget Speech (10 September 2004) by YAB Dato’ Seri Abdullah Bin Ahmad Badawi, the then Prime Minister (PM) cum. Minister of Finance (MoF), when GST was indicated to be implemented but was indefinitely deferred in 2006.


This wouldn’t last too long however, as GST was soon to be synonymous with YAB Dato’ Sri Mohd Najib Tun Abdul Razak, who announced its implementation is in the final stages of research in the 2010 Budget Speech (23 October 2009).


The GST Bill’s First Reading was held in December the same year, but subsequent readings were deferred. Amendments were proposed in 2012 by the Ministry of Finance, but it wasn’t until 2014 Budget Speech (25 October 2013) that GST was once again announced to be implemented, effective 1 April 2015. The amended GST Bill was tabled in April 2014, passed all 3 readings, and finally gazetted as the Goods and Services Tax Act 2014 in June.


GST was implemented as a single rate system in Malaysia, at 4% when 1st proposed but changed to 6% upon implementation. It brought many previously exempt supplies of the SST system into the tax system through the introduction of zero-rated supply (such as essentials and exports), taxed at 0% GST but allowing input tax on the supply to be recoverable, effectively removing the tax component out of those items entirely for consumers; Some exempt supplies still remained however, absorbing the now higher consumption tax rate, and passing the cost to its customers.


This system likely led to more accurate tax collection, as total revenue in Budget 2015 was expected to grow from 2014 by 1%, much of the growth attributed to indirect taxes. This showed the government’s confidence in the system. However, implementation was not as smooth as it seems.


GST vs Animosity

The wide scope of GST brought many small traders in to the system through mandatory registration, most of which scrabbled to register before the effective date 1 April 2015 or face steep penalties. Education on the subject was also lacking, leading to many non-mandatory registration traders that would have benefited from GST not knowing of it.


On the flip side, consumers were facing high inflation rates at the time, and with GST’s increased transparency, they were now acutely aware of how much consumption tax they were paying. To most consumers, it looked like a sudden 6% increase to their living expenses, a prospect most thought unbearable. The tolerance of GST was low, which did not couple well with scandals being unearthed relating to GST’s de facto figurehead, Najib.


2018 was the year of GE-14, and parts of the opposition’s political campaigns aimed to get rid of GST, which later came true on 10 May 2018, when YB Tun Dr. Mahathir Bin Mohamad became PM, and soon after, announced GST rate to be 0% effective 1 June 2018, which it stays till today.


The news was met with celebration, even as SST was reintroduced, effective 1 November 2018. The lack of much resistance from the people was likely due to the decreased rates compared to pre-GST, and the overall sigh of relief for small businesses who no longer have to keep separate records on GST.


Fast forward to present day, GST has been repeatedly denied of reconsideration during Mahathir’s time in office despite expert opinions stating GST would be beneficial to the government. Covid-19 struck in 2020 and took away all the spotlight in the news, further reducing chances of GST being reintroduced during a time of economic crisis.


GST vs the Future

Will GST come back? According to ex-PM YAB Datuk Seri Ismail Sabri Yaakob, it is being considered once more, as the benefits of GST over SST are very attractive. However, it is also recognised that GST will lead to higher overall tax rate, which if introduced now may be too much for the recovering economy of post pandemic Malaysia.


GST still also has the stigma of Najib attached, but as much time has passed, more people have been exposed to how GST works. GST’s reintroduction should be likely, mainly as a means for governments to control inflation of the current post-pandemic economic crisis, but also to align with anti-corruption agendas as GST is much more transparent.


Summary


GST has had a colourful history in Malaysia, in fact probably the most convoluted introduction of GST/VAT out of any country. Even if GST never gets reimplemented, it will serve as a good comparison point for our current SST, and also an intriguing story to tell future generations.


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The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.


Reference

Reintroduction of GST: https://www.thestar.com.my/business/business-news/2022/06/15/reintroducing-gst


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