2 things are definite in this world: Tax and Death. Even after you die, if you owe the government tax payable, you would still need to pay it, without a doubt. After all, taxes are what funds the low-cost medical services (tooth extraction in government dental clinic is RM1.00 by the way), building of roads and highways, provision of public transport and as well as means to mitigate income inequality.
There are various types of taxes: Personal Income Tax, Corporate Tax, Goods and Service Tax, Real Property Gain Tax and Road Tax. Loosely speaking, tax could be divided into two categories: progressive tax and regressive tax. Progressive tax is a tax that takes a larger percentage of a larger income and a smaller percentage of a smaller income. ie Income Tax and Corporate Tax whereas Regressive Tax is a tax that takes a larger percentage from low income-earners and less from high income-earners i.e. Goods and Service Tax.
Here are some facts about Malaysia’s Tax that you probably may or may not know!
Fun fact 0.5: Malaysia is the first country in the world to be repealing an indirect tax act! (albeit being replaced by another soon in September 2018).
1. Who is taxed?
The straightforward answer is everyone. When you purchase a car, you pay consumption tax; when you sell a house, you pay capital gains tax; when you renew your car license, you pay road tax. However, not everyone pays income tax.
According to NST, Malaysia with a population of 32 million people, shockingly only 2.3 million people contribute to income taxes. Presently, employees who earn RM 3,100 or more each month, their employer will deduct an amount of income tax from the monthly salary.
For the larger proportion of the population whose income is not accounted for, correctly reported or under the threshold, GST and SST is a way to gain some income for the government from them as it would be very onerous if 2 million people had to shoulder most of the tax income from the 32 million population.
2. Amount of tax revenue
In the year 2017, the Inland Revenue Board (IRB) was able to collect a total of RM123.33bil, an 8.2% or RM9bil increase compared to the same period in 2016. This means that tax accounts for 56% of the nations’ RM220.406bil revenue.
From the RM123.33bil tax revenue, the-soon-to-be-repealed-GST contributed RM44bil (35%). In comparison, the SST fared quite behind at only RM20bil historically.
3. Malaysia doesn’t have a “Netflix tax” regime yet.
Presently, most countries are looking into the implementation and design of a new tax regime called “Netflix tax” aka digital tax. The rise in internet users and the simplicity of using the internet for various entertainment and services has made it much easier for any entrepreneur to sell their goods and services across the globe. However, on the topic of tax, they are mostly subjected to the tax of the country they’re in rather than the country they’re selling to, many of which go unreported. Corporations which might be affected by this include Netflix, Uber, Grab, Amazon to name a few. According to the government, this untapped segment is worth “billions of ringgit.”
According to section 9 of the GST act (will update accordingly once the SST Act has come back into force), “A tax known as goods and service tax, shall be charged and levied on
- Any supply of goods and services made in Malaysia, including anything treated as a supply under this Act; and
- Any importation of goods into Malaysia
As above, services are only taxed where they are made in Malaysia and this requires a place of business in Malaysia. However, if the place of supply is outside Malaysia, they won’t be taxed. The prime example is Netflix. Netflix, unlike Astro, exists on the internet and in an intangible sphere beyond the reach of current regulations. There is a fixed membership fee to pay to enjoy their streaming services but they do not charge any GST if you bought a membership in Malaysia.
In fact, the government has been looking into taxing the digital economy for a while now but due to the change in government, we’ll wait and see what happens. Countries which has successfully implemented the regime includes Australia, Japan, Korea and the UK.
4. What to expect for the transition from GST to SST
I think the number one concern when the government announced that all corporations must reduce their prices pending repealing the GST is whether there will be enforcement and how effective enforcement will be. Larger corporations had been reducing prices post-GST (which led to abnormally weird price figures i.e. RM4.67 for a sandwich) but it’s the SMEs which will be reluctant to reduce prices.
Under the Section 14 Anti-Profiteering Act, “any person who, in the course of trade or business, profiteers in selling or offering to sell or supplying or offering to supply any goods and services commits an offence” where ‘profiteer” means “making profit unreasonably high”. Now, what means unreasonably high is not in the Act but in the regulations. During the transition specifically, it is an offence to profiteer where your profit margin is higher on 1st June than they were before 1st June. If your cost is RM5 whereas the selling price of the product is RM10, your profit margin is 50%. If you did not reduce your price but the cost goes down to RM4.30, your profit margin is now (5.7/10) 57%. Therefore, you profiteered. However, the mathematical equation and economic analysis and taking inflation into consideration allow for some leeway. (The equation is >50 pages long but just know it’s not very straightforward)
Consumers are always welcome to report any case of suspected profiteering to the Domestic Trade, Cooperatives and Consumerism Ministry.
Tax regimes are necessary to provide resources for the government to carry out various projects i.e. MRT 2 and LRT 3 but also an economic tool to prevent too much economic disparity between citizens. Personally, I prefer the GST regime instead of SST because the latter has many loopholes which were solved by the implementation of the GST. Example: Under the SST regime, fraudulent claims and forged cheques are common occurrences and the GST dispelled all of these. GST is also more straightforward in its implementation and enforcement with only one threshold across all industries whereas SST has various threshold across different ones.
Furthermore, the Anti-Profiteering & Price Control Act 2011 may require some amendments and diligent enforcement to have any positive impact on the economy. The problem also lies in the penalty provided in the act which states:
In a hypothetical situation where such person is a body corporate, and he commits and is convicted for an offence under the Act but makes a profit of RM10mil, he is only liable to pay RM0.5mil on the first offence and RM1mil on any subsequent offence. To the body corporate, he might as well happily pay the penalty and continue to profiteer and just sign a cheque to the court for each offence. There isn’t a deterrent element such as if such person were NOT a body corporate i.e. imprisonment to prevent any rampant behaviour of a body corporate under this Act.
Rumours have it that the SST to abolish the GST will be tabled next Monday so stay tuned!