Today, the Sales and Service Tax (SST) makes a comeback on our tax radar screen to replace the three years and two months old Goods and Services Tax (GST), which was implemented on April 1, 2015.
The abolition of the GST and replaced with SST is an election promise of the Pakatan Harapan manifesto.
It has been claimed that the GST is a regressive broad-based consumption tax that has burdened the low- and middle-income households amid the rising cost of living. The multi-stage tax levied on supply chains also caused cascading cost and price effects on goods and services. That said, the Finance Minister has acknowledged that the GST is an efficient and transparent tax.
Following the implementation of the SST, the Government will come to terms that the budget spending will have to be rationalised and realigned with the lower revenue collection from the SST to keep the lower budget deficit target on track.
The expected revenue collection from SST is RM21bil compared to an average of RM42.7bil per year in 2016-17 from GST.
During the period 2010-2014, the revenue collection from the SST, averaging RM14.8bil per year (the largest amount collected on record was RM17.2bil in 2014), of which 64% was contributed by the sales tax rate of 10% while the balance 36% from the service tax of 6%.
Faced with the revenue shortfall, the Government expects cost-savings, plugging of leakages, weeding out of corruption as well as the containment of the costs of projects would help to balance the financing gap between revenue and spending.
The sales tax rate (0%, 10% and 5% as well as a specific rate for petroleum) and service tax of 6% is imposed on consumers who use certain prescribed services. The taxable threshold for SST is set at annual revenue of RM500,000, the same threshold as GST, with the exception for eateries and restaurants at RM1.5mil.
As SST is levied only at a single stage of the supply chain, that is at the manufacturers or importers level and NOT at wholesalers, retailers and final consumers, it has cut off the number of registered tax persons and establishments from 476,023 companies under GST as of 15 July to an estimated 100,405 under SST.
The smaller number of registered establishments means no more compliance cost to about 85% of traders.
The distributive traders (wholesalers and retailers) will be hassle-free from cash flow problems, as they are no longer required to submit GST output tax while waiting to claim back the GST input tax. During GST, many traders imputed refunds into their pricing because of the delay in GST refunds. This was partly blamed for the cascading cost pass-through and price increases onto consumers.
For SST, 38% of the goods and services in the Consumer Price Index (CPI) basket are taxable compared to 60% under the GST.
It is estimated that up to RM70bil will be freed up to allow consumers to spend more.
The proposed service tax regime has a narrower base (43.5% of services is taxable) compared to the GST (64.8% of services is taxable).
Medical insurance for individuals, service charges from hotel, clubs and restaurants as well as household’s electricity usage between 300kWh and 600kWh are not taxable. However, the scope of the new SST has been expanded compared to the previous SST. Among them are gaming, domestic flights (excluding rural air services), IT services, insurance and takaful for individuals, more telecommunication services and preparation of food and beverage services as well as electricity supply (household usage above 600kWh).
For hospitality services, the proposed service tax lowered the registration threshold of general restaurants (not attached with hotel) from an annual revenue of RM3mil under old service tax regime to RM1.5mil, resulting in expanded coverage of more restaurants.
Private hospital services will be excluded under the new SST regime.
How does SST affect consumers?
Technically speaking, the revenue shortfall of RM23bil between SST and GST is a form of “income transfer” from the Government to households and businesses. This is equivalent to tax cuts to support consumer spending.
Will it lead to higher consumer prices?
The contentious issue is will the SST burden households more than that of the GST? It must be noted that the cost of living not only encompasses prices paid for goods and services but also housing, transportation, medical and other living expenses.
The degree of sales tax impact would depend on the cost and margin (mark-up) of businesses along the supply chain before reaching end-consumers.
The coverage and scope of tax imposed also matter.
As the price paid by consumers is embedded in the selling price, this gives rise to psychology effect that sales tax is somewhat better off than GST.
The good news to consumers is that 38% of the goods and services in the Consumer Price Index (CPI) basket are taxable compared to the 60% under the GST.
Technically speaking, monthly headline inflation, as measured by the Consumer Price Index, is likely to show a flat growth or even declines in the months ahead.
It must be noted that consumers should compare prices before GST versus the three-month tax holiday (June-August).
Generally, consumers perceived that prices should either come down or remained unchanged as the sales tax is levied on manufacturers.
On average, some items (electrical appliances and big ticket items such as cars) would be costlier when compared to GST and some may come down (new items exempted from SST).
Nevertheless, we caution that consumers may experience some price increases, as prices generally did not come as much following the removal of GST in June.
There are concerns that prices may still go up in September when the new SST kicks in as irresponsible traders may take advantage to increase prices further.
Household consumption, which got a big boost during the three-month tax holiday in June-August, could see some normalisation in spending.
The smooth implementation of the new SST, accompanied by strict enforcement of price checks and the curbing of profiteering, especially for essentials goods and services consumed by B40 income households, are crucial to keep the level of general prices stable.
Strong consumer activism with the support of The Federation of Malaysian Consumers Association and the Consumers Association Penang as well as the media must work together to help in price surveillance and protect consumers’ interest.
Credit to Lee Heng Guie – comment