Under our current capitalistic modern era, our society is increasingly reliant on consumption as a driver for the economy. This spurred the increased emphasis on consumption tax within the last decade to put a heavier emphasis on indirect taxes as governments’ income source. Malaysia is no exception as the government increases the scope of indirect taxes slowly to cover more business sectors.
However, there was a time when the consumption tax income of the government was at its highest, as the consumption tax collection rate was at its most efficient. This period is from April 2015 to June 2018, when the Goods & Services Tax (GST) was the consumption tax of Malaysia. Its introduction came with a better consumption tax collection system, but it was also more complicated and daunting at that point in time.
To smoothen the transition, the government introduced Transitional Provisions to provide guidance on how the relatively simple sales tax & service tax (SST) will be taken over by GST. Now, anticipating a possible return of GST, it is a good time to explore these provisions.
Service tax & GST interactions depend on the timing of the service being provided. If the service was provided before 1 April 2015, service tax was charged, not GST (regardless of the time of billing). If service was provided on or after the effective date, then any billing before 1 April 2015 will be deemed GST inclusive (GST=price*6/106, using GST rate of 6%). Continuous services not yet paid would have service tax levied on the portion before the effective date, and GST levied on the remainder.
For long contracts with no opportunity to review, they can be treated as zero-rated to ease compliance. This requires both parties to be GST registered, the supply to be taxable (standard/zero rated) & the recipient to be making wholly taxable supply. If conditions are met, neither party don’t need to collect/pay any additional money. Otherwise, the pricing must be reviewed & GST would be charged (if the supply was taxable) either as an additional amount, or the current pricing would be GST inclusive.
The government implemented a mandatory deadline for businesses whose taxable supply will exceed RM500,000 in the taxable year of April 2015 to March 2016. These businesses were required to register before 31 December 2015 to allow RMC enough time to process all the registrations.
To prevent profiteering, the government has also introduced price guidance for consumers. While this was by no means a strict guide to prices, consumers could complain to the Ministry of Domestic Trade and Consumer Affairs if the price is vastly higher than the guidance’s suggested price.
Finally, the government also eased businesses into the system with a reduction in tax rates to cover the increased compliance cost of GST.
The transition from SST to GST was given much consideration with many provisions to smoothen the change. Knowing how the transition provisions worked will prepare you for the future if GST is ever reimplemented. Of course, the information here can only be for reference, as it is uncertain whether GST will be reimplemented & how it will be done. For now, it is only a window into the past & an interesting case study of how a new tax was integrated into an established economy.
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GST: Richard T., Thenesh K. (2014), Malaysia Master GST Guide 2014, CCH.