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A seemingly great piece of news to many, just slightly a week after seating in governance for the popularly dubbed “Malaysia Baru”, Prime Minister Tun Mahathir Mohamad, has announced that the unpopular Goods and Services Tax (GST) would be down-rated from 6 percent to 0 percent effective beginning June 1, 2018. Taking its place would be the reintroduction of Sales and Services Tax (SST) which was abolished on April 1, 2015.

At the same time, many have expressed concerns and are sceptical on how the Malaysian economy is going to be sustained, now that it is saddled with approximately RM1 trillion (USD 252 billion) national debt. There is no doubt that the decision to abolish GST would face new challenges but before we probe further, let’s find out more on what GST actually is and how its abolishment will bring significant impacts to the country.



A Brief Intro on GST

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First introduced by the previous Barisan Nasional-led government, the Goods and Services Tax (GST) is a value-added tax in Malaysia. Effective since April 1, 2015, the tax is implemented on most business transactions in the production process but is refunded to all parties (with exception) in the chain production not including the final consumers.

The standard rate of 6 percent GST applies to products such as household items, processed food items, clothes and apparel, electronic gadgets, alcoholic drinks and tobacco, and services such as entertainment fees, banking fees, and business transactions. Meanwhile, exempted from GST are goods including agricultural produce, essential foods, exported goods and services, healthcare and medical services.

Despite the unpopular public reception, GST, or the same tax-based model also known as Value-Added Tax (VAT), is implemented in another 160 countries. With the news of the upcoming replacement of GST back to SST, Malaysia, Brunei and Myanmar would be the only three countries in ASEAN without GST.



Transitioning from GST to SST

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GST is the second biggest contributor for the federal government income source, after corporate tax, where it has contributed a revenue of RM44 billion (USD11 billion), roughly 18 percent from the country’s total revenue in 2017. Following the economic growth slowing down to 5.4 percent in Q1 2018 along with the debt reaching a trillion, the removal of GST should be properly executed with carefully planned measures in order to ensure that there will not be a wide gap in fiscal deficit.

Hoping to curb the shortfall from the zero-rate GST with the reintroduction of SST, the government can only expect a revenue generated at a modest RM30 billion or about two thirds of the GST revenue. Compensating at only partial relief, the government has to find other alternatives to generate revenue, strategies that include government expenditure reduction by observing leakage and wastage. Mega developments and projects costing hundred of millions are also currently being under review in order to ensure its cost feasibility.

The Ministry of Finance recently released a statement announcing that the future fiscal gap would be cushioned by specific revenue and expenditure measures that will be announced later. “The fiscal reform initiative is already underway. The SST will be reintroduced. Expenditure reduction will begin with rationalisation, efficiency measures and reduction in wastage,” as mentioned in the statement.

Economic analysts maintain a positive perspective, going by the theory that the zero-rate GST will spur consumer spending and control inflation. Looking into account how household consumption makes up almost 60 percent of the nation’s GDP, the move to scrap GST might lead to an eventual growth boost to the nation’s revenue. Additionally, these measures coupled with higher crude oil prices could help offset the losses as analysed by Ambank Group chief economist, Anthony Dass.



The Economic Effects

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The Malaysian economy’s strongest contributor would be the revenue from domestic spending, and is expected to gain a temporary boost, based on the research by BMI Research. There will also be a period of “tax holiday”, the period between the effective removal of GST and the reimplementation of the SST which will motivate a short term purchasing spree by Malaysian consumers.

“BMI already holds a positive outlook on the consumer in Malaysia, due to improving consumer sentiment and low unemployment and inflation, but with the removal of GST, we have further revised up our real consumer spending forecast to 8.2 percent in 2018, up from 6.5 percent forecast previously.” BMI Research stated.

The increase in consumer spending would largely benefit companies dealing with products involving food and drinks, alcoholic drinks and tobacco, fashion retail, household goods, and personal care among many others. Ahead of the official date of zero-rate GST, many auto-mobile companies have taken proactive steps by cutting down their prices or giving back cash rebates in an attempt to bring multiplied revenue from the improving consumer sentiment.

Luxury car brand Renault, distributed by TR Euro Cars, has announced discounts and rebates up to RM40,000, with the biggest drop for the Fluence model from RM119,999 down to RM79,999. Meanwhile, Proton Holdings Berhad (PROTON) holds the same offer for all purchases between its campaign period of May 16 to May 31, 2018. The same goes with Perusahaan Otomobil Kedua Sdn Bhd (PERODUA) where they will fully reimburse the GST amount for purchase of its vehicles and parts from May 18 to May 31, 2018.



Zero-rate GST in Property Market

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The property market might experience a slower transition between the pre- and post-zero-rate GST for its pricing in comparison to other sectors. The National House Buyers Association (HBA) secretary general Chan Kim Loong has reminded property buyers not to expect an immediate reduction in property pricing as the federal government’s decision to eliminate GST has placed developers in a dilemma.

This is especially the case for properties that have already been completed, or are under construction since the cost for materials, construction, and professional fees bear the cost paid with GST. “If developers bring their prices down by 6 percent they will be lowering their profit margin.” Chan added.

Agreeing with Chan, Chartered Property Surveryor Ernest Cheong predicts that the property market will take two years to recover and stabilise in pricing from the tax shift, adding that the main beneficiaries would be for those looking for affordable properties with price ranges between RM300,000 and below. Despite that, there is no mention on how new projects with impending launches will take course in term of pricing.

“Increased savings with the abolition of GST and highway tolls will not immediately drive people towards buying houses. They would more likely focus on other priorities first such as household needs and settling debts, and will look at investing in property after they start to see their savings grow.” Cheong further explained.



Conclusion

In short, the news of zero-rate GST being replaced with SST has presented mixed reactions from various parties. The majority of consumers and local businesses are more than happy with the news, while economists and experts are divided between expressing concern or support for the government’s new tax legislation. Uncertainties are inevitable, but proper planning and counter-measure actions are well underway and what is left for us is to wait and see while we spend our money with an exciting, fresh, sentiment.

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(Written by: Aisyah Shukor, 31st May 2018)

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No GST is a good thing for consumers, but the accounts dept for businesses become kelam kabut, busy issuing credit notes, amend quotations and such.

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@Zara 

Accounts department should also brace for another round of change in the future. Who knows there will be another government policy change? Haha

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Thats norm... As long as policy change for the whole nation especially touching any sales taxes and transaction, account side will get the impact... but also is an opportunity because everybody will be pretty blur especially in new implementation, so it is also time for accountant to perform their specialties..

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@px_jerome 

“The Only Thing That Is Constant Is Change -”

Heraclitus

Such is life, we cannot be hoping that nothing ever changes. For better or for worst.