The implementation and management of Sales and Service Tax (SST) is crucial for governments to generate revenue. However, its efficiency, equity, and consequences for businesses and consumers differ widely, leading to continuous discussions and examination within fiscal policy.
The Introduction of SST
A tax is a mandatory payment imposed by the government to generate funds and support its operational activities. Taxes typically account for approximately 80% of the government’s total revenue. After the 2018 national elections, the newly established Pakatan Harapan government substituted the Goods and Services Tax (GST) with the Sales and Services Tax (SST), effective from September 1, 2018. The goal behind the decision to eliminate GST and reintroduce SST was to reduce living expenses, especially for individuals in the middle and lower income brackets. The reintroduction of SST also served as a strategy to enhance the efficiency of the taxation system in Malaysia. The SST comprises two different taxes that work separately. The first one is the sales tax, which applies to specific taxable products when they are imported or made locally, and the rates vary based on the types of products. The second is the service tax, which only applies to certain services like professional services, telecommunications, and insurance. So, if your business doesn’t fall into these categories, then you don’t have to deal with the SST at all.
Looking at the Budget 2024, the decision to raise the Service Tax rate from 6% to 8% aroused much debate among Malaysians. While it makes sense to maintain the Service Tax rate for commonly used items, such as food, drinks, and telecommunications. On the flip side, it does mean that certain business services might see an uptick in costs. Also, if they include taxes on logistics services, it could make everything more costly, and businesses might raise their prices, passing those extra costs to consumers.
Significance of the SST in Comparison to GST:
SST is unique in that it is a single-staged tax. This means that it is only levied once on consumers across the entire supply chain, either by registered manufacturers upon acquiring taxable goods or by customs when importing taxable goods into Malaysia. Consequently, the tax is not imposed at every value-added stage of the production process, leading to potential reductions in the prices of goods and services. With regards to service tax, on the other hand, it is imposed on prescribed providers offering services to customers. While this approach might reduce the overall cost of goods and services by not taxing every value-added stage in production, there are concerns regarding the cascading or compounding effects it could have on taxpayers. This is because the tax element may be embedded into the cost by the wholesalers and retailers at each successive stage in the supply chain before reaching consumers (Bernama, 2023). As a result, the tax may build up across the distribution chain, contributing to the tax factor and raising the overall prices of the goods and services sold. This domino effect is particularly noticeable in the case of service tax (Lee, 2023).
Under the SST system, there are more exemptions as compared to GST. In Malaysia, services that are exported are exempt from service tax, and goods manufactured for export are exempt from sales tax (Fatt, 2022). As of 2021, SST covers 38% of goods in the Consumer Price Index (CPI) basket*, with the number of goods exempted under SST being ten times greater than those exempted under GST. Services like tailoring, jewellery making, optician services, and engravings are also exempt from SST, which is excellent news for small and medium-sized enterprises engaged in such activities. Due to its smaller tax base unlike GST, SST is adjusted to minimize its impact on lower-income groups (Business Setup Consulting Worldwide, 2019). However, it is worth noting that SST thus contributes far less to government revenues as compared to GST.
| *CPI is an economic indicator that measures price fluctuations over time for a basket of goods and services. This is important as taxes often interact with inflation and economic conditions. |
SST implementation is significantly influenced by income levels, allowing for rate and exemption adjustments to suit various income groups, unlike GST which remains unaffected by income levels. For instance, some countries like Singapore and Thailand impose the same 7% GST rate despite Singapore’s GDP per capita being nearly 9 times that of Thailand, highlighting the disparity. Similarly, Bangladesh imposes a relatively high tax rate compared to Singapore, even though Singapore’s GDP per capita is 33 times higher than that of Bangladesh (Lim, 2019). Hence, GST is considered regressive because it imposes a flat tax rate on every item, regardless of income level. Consequently, this increases the cost of living for the low-income group and results in a tax burden that is disproportionate to their disposable income (Morni Hayati Jaafar Sidik, 2019), causing them to be most severely affected by price inflation (Shamsinar Rahman, 2018).
The implementation of SST is cost-efficient and user-friendly compared to the GST that preceded it. Its single-stage nature makes it more straightforward to implement, eliminating the need for businesses to invest in additional accounting infrastructure and advanced systems to administer the SST, thus reducing their administrative costs. This stands in stark contrast to GST, which is more complex and often requires businesses to hire tax agents and experts to navigate its procedures and practices, including the use of new accounting software for GST calculations (Morni Hayati Jaafar Sidik, 2019). This complexity was due to the lack of exposure and guidelines for businesses when GST was first introduced on April 1, 2015. Furthermore, SST is also associated with fewer refund issues.
Awareness on SST from SMEs perspective
Upon the introduction of GST, there was widespread concern, particularly from SMEs, about rising prices for goods and services attributed to the new tax system. To address this, the government invested in public education through social media and TV ads; these efforts have continued even after GST’s abolishment. To access tax information, the public can visit the MySST portal, while businesses can digitally register on the website.
According to a study titled “The Perception of SMEs on SST Implementation” by Kasmira Gupta, the majority of respondents were from private limited companies. Of the 116 respondents, the average awareness was positive. They suggested that the government should offer more training to companies before implementing the SST tax system to enhance awareness.
SST Thresholds and Exemptions
In Malaysia, not all goods and services are subject to the SST. There are specific thresholds for both, with businesses becoming liable for sales tax if their total sales of taxable goods exceed RM 500,000 in the past 12 months. Similarly, for services, different thresholds apply, such as cafes and restaurants needing to earn over RM 1.5 million in the past 12 months to be subject to service tax.
Certain categories of goods and services are exempt from SST. This includes imported or exported services, as well as goods manufactured for export. Other exempted items cover a wide range, from bicycles and related accessories to books, newspapers, magazines, journals, live animals, meat, seafood, eggs, insecticides, disinfectants, and more. There are 5,443 items excluded from SST, and important services like those offered by private doctors, banking institutions, and construction services also fall under this exemption.
Manufacturers of non-taxable goods, as well as specific government bodies and educational institutions, are also exempt from SST. These exemptions are categorized into three groups: Schedule A, which lists persons exempt from tax under specified conditions, often involving government officials or bodies; Schedule B, which pertains to manufacturers of non-taxable goods; and Schedule C, which deals with registered manufacturers of taxable goods.
Businesses have the option to apply for exemption certificates through the MySST portal. It’s important to note that tax evasion can lead to severe consequences, so seeking advice from tax professionals is advisable to determine if your business qualifies for these tax exemptions.
The Rationale for the 8% Increase in the SST in the 2024 budget:
During the budgetary session on 13th October 2024, the Prime Minister revealed that Malaysia’s tax revenue at 11.8% of the GDP, lags behind that of other ASEAN countries such as Singapore (12.6%) and Thailand (16.4%) as of 2021. As such, the government intends to boost tax collection by introducing more tax measures that involve the revision of the SST rate, introducing Capital Gains Tax from next year onwards, and implementing e-invoicing from August 1, 2024, specifically to enhance the efficiency of Malaysia’s tax administration management. The government has taken the initiative to broaden its revenue base to enhance the quality of services provided to the people while striving not to overburden its citizens. According to Ernst & Young’s (2024) key takeaways on the newly introduced budget proposals for 2024, the tax proposals include measures aimed at increasing government tax revenues and incentivizing new investments and reinvestments. The budget’s theme, “Economic Reforms, Empowering the Rakyat“, is centred on enhancing the well-being of Malaysians, especially the lower-income group.
The proposed tax measures aim to increase revenue for the government whilst taking into account the livelihood of the people. One such measure involves increasing the service tax rate from 6% to 8%. Notably, this tax hike excludes sectors with a strong focus on the well-being of the people, such as F&B and telecommunications. This arguably demonstrates the effort that the government has put in to ensure that the tax base increases are not too burdensome for taxpayers, especially during the current global economic downturn. The Secretary General of Treasury, Ministry of Finance, Datuk Johan Mahmood Merican also pointed out that the SST hike is projected to bring in an extra revenue of approximately RM3 billion for the government.
Niaz Asadullah, Professor of Economics from Monash University supports the motion to increase the SST rate to 8%, emphasizing that it will create a more equitable and sustainable economy. This selective increase in SST and the expansion of its coverage are considered necessary adjustments within the government’s ongoing tax reform agenda and as part of a long-term strategy to gradually broaden the tax base. These changes are expected to bolster the national economy following the significant decline caused by the Covid-19 pandemic. Additionally, the government aims to promote social justice and fiscal discipline while adjusting the tax system to generate higher revenue growth and alleviate the burden on lower-income groups (Sivanisvarry Morhan, 2023). However, some concerns have been raised by tax experts about this tax increment, including potentially higher costs in logistics for businesses and consumers. This, in turn, could push businesses to raise their prices, especially in retail. As a result, everyday goods might become more expensive, potentially causing inflation. Tax experts believe that as these changes take effect, both businesses and individuals will need to adjust to the new tax system and its economic effects.
The question of why the SST continues to be part of the budget, as opposed to its replacement with the GST, arises from a strategic approach. In an interview with BFM Radio, Datuk Johan Mahmood Merican said “to implement both subsidy reforms and GST simultaneously is not advisable”. Prime Minister Dato’ Seri Anwar Ibrahim has emphasized that the primary focus of the Ministry of Finance for the year 2024 will be on improving subsidy allocation and targeting. The objective is to address leakage and inefficiencies by reducing subsidies to the affluent before considering the imposition of the GST (Datuk Johan Mahmood Merican, 2023). During a recent interview at the Milken Institute 10th Annual Asia Summit in Singapore on September 13, the Prime Minister did not deny that GST is a more efficient and transparent taxation system. However, he expressed concern that introducing a regressive, wide-ranging tax like GST could place a burden on the populace, especially considering the prevalence of poverty in the country. He believes that a more progressive tax policy, such as SST, is currently more suitable (Bernama, 2023). Prime Minister Anwar persisted that Malaysia is not ready for GST, given the presence of 130,000 households* registered under the hardcore poor category (Teh Athira Yusof, 2023), earning less than RM1,198 a month (Samsuddin, 2023). He argued that strengthening revenue collection by enforcing tax compliance and other fiscal management such as the Capital Gains Tax and Luxury Goods Tax would be a viable alternative to implementing GST at this moment (Martin Carvalho, 2023).
| *Currently there are 102,888 households based on the data from eKasih as of Oct, 31 (Free Malaysia Today, 2023) |
Deputy Prime Minister Steven Sim Chee Keong also supported the retention of SST, especially in the face of economic instability and high inflation, both in Malaysia and globally. Research indicates that the previous implementation of GST led to higher prices for goods and services, adversely affecting the cost of living, particularly for lower-income groups. Since GST has a broader tax base with fewer exemptions, it does not cater to the needs of the majority, especially since 80% of the Malaysian population cumulatively falls under the B40 and M40 income groups. Consequently, GST faced significant opposition from people with lower incomes during its initial implementation back in 2015 (Rizq Afzareen Afdlin Rozaidi, 2018).
As of 2022, revenue collected from SST administration amounted to RM31.4 billion (Ministry of Finance Malaysia, 2023) whereas the projections for 2024 suggest that SST revenue is expected to reach RM34.2 billion. Within this context, Sales Tax accounts for RM17.6 billion, while Services Tax contributes RM16.6 billion to the total SST revenue collected by the government (Ministry of Finance Malaysia, 2024).
Since SST currently covers 38% of goods in the CPI basket, one of the strategies that the government can take to improve the tax base under SST is to extend the coverage of SST to 50% of goods in the basket. This figure is close to the GST coverage which is between 52% to 60% of goods in the CPI basket that was being taxed. By enforcing this, the government can potentially enhance tax collection by 0.9% of the GDP which is close to the level of GST coverage, ranging from 52% to 60%. (Deloitte, 2021).
To conclude, the fundamental principles of effective tax administration encompass several key insights. First and foremost, a well-structured tax system should uphold the concept of vertical equity. This means that taxes should be proportionate to the taxpayers’ ability to pay, ensuring fairness. Secondly, the tax system should be designed for easy collection, promoting economic activity, and fostering broad social acceptance. (Deloitte, 2021) The current administration of the Sales and Services Tax appears to align with these principles, as it successfully incorporates these key elements.
References
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