By Chan Quan Min
The implementation of goods and services tax (GST) will place a compliance burden on businesses. Individuals need not lift a finger, the tax is collected on their behalf by businesses. Today’s issue will look into some GST issues affecting businesses.
______________________________________________________________________
Individuals will bear the full financial burden of the goods and services tax (GST) once the broad-based consumption tax comes into force. But intimately, it is businesses that will carry the full weight of compliance.
Once GST is in force, businesses will be saddled with the responsibility to calculate and collect GST on behalf of the authorities. Individuals do not need to file tax returns or maintain records, because GST is an indirect tax – collected on their behalf.
Businesses will have to gear up for the introduction of the GST, which is highly likely to be introduced during Prime Minister Najib Abdul Razak’s 2014 Budget announcement on Oct 25 but implemented only after 2015. Tax experts say the implementation of GST requires a familiarisation period of 14 months at the very least.
Under the GST system proposed in draft documents released by the GST unit of the Royal Malaysian Customs in 2009, registered businesses with an annual turnover above the RM500,000 threshold will be obliged to file regular GST returns.
This will entail maintaining detailed payment and invoicing records for the purposes of input tax claims. Businesses are entitled to claim back the GST they pay on their inputs (cost of production) against the GST they charge on their sales. But only if the paper trail is complete.
Preparation to overhaul accounting and IT systems at businesses big and small alike have already began in earnest, judging from the various well-attended GST seminars for finance professionals.
Often, economists cite the broad reach of GST as cause in calling for its implementation.
Malaysia has a low income tax penetration rate of only 14% of the entire workforce at last count. While this is typical for emerging markets, the country’s development aspirations require a broader tax structure.
GST fits the bill. The controversial tax is known for its economic pervasiveness. It taxes consumption, or in layman’s terms, spending. In this day and age, close to everyone qualifies as a consumer.
But the strongest case for the GST could be one that is not quite as often discussed. According to economists, GST can give tax authorities greater data surveillance powers leading to the regularisation of the informal economy.
No more hiding from the taxman
In 1951, the island state of Taiwan began an ambitious plan to persuade vendors to issue official receipts for every transaction. The goal was to improve tax revenue by eliminating unrecorded cash transactions.
More than 60 years on the scheme has been hailed as a success. What made Taiwan’s achievements all the more stunning was the way the desired outcome was achieved: through incentives and not harsh penalties as is often the case with tax authorities the world over.
How did Taiwan get its citizens to go out of their way to demand a receipt for even the smallest cash transaction?
The government made every receipt a lottery ticket. This was done by printing an eight-digit number on the back of every official receipt. Every two months the state lottery agency drew numbers, selecting several winners.
Officially called the Uniform Invoice Scheme, the receipt lottery was devised by the presiding finance minister Jen Hsien-Qun. In the first year of operation the government saw a 75% increase in tax revenue, according to the Wikipedia page for the scheme quoting a 2010 Straits Times (Singapore) article.
The Uniform Invoice Scheme has been credited with regularising the informal economy. Tax authorities in one fell swoop gained unprecedented access to reams of information on business earnings.
Almost instantly, the receipt lottery scheme made it increasingly difficult for vendors, however small to under-declare sales. The wider use of official receipts had now resulted in almost complete documentation of every cash transaction.
The Taiwan story is very relevant to Malaysia today. Malaysia is certainly not going to introduce a receipt lottery programme like Taiwan’s but looks set to implement a consumption tax system that could have the same effect on the economy.
Once GST is in place, economists envisage businesses in Malaysia will go out of their way to demand complete and accurate payment documentation or receipts from their suppliers.
Through the use of lottery receipts in Taiwan, individuals were incentivised to demand receipts. Similarly, the GST system incentivises businesses to demand receipts from their suppliers for the purposes of input tax claims.
Recall from yesterday’s issue GST is levied solely upon the value-added amount of a good or service to prevent compounding taxation. To facilitate this, businesses with complete records can claim back the GST paid on their inputs.
Logically, it can be assumed that all rational business owners will seek to minimise their GST bill as much as possible by collecting receipts related to their business inputs so as to ease the processing of their input tax claims.
A multi-stage tax
Recall also how GST is a tax on the value-added amount on every stage of the supply chain. Compared to the sales and service tax system, which is single-stage only, the multi-stage GST lends itself naturally to self-enforcement.
Tan Eng Yew
Tan Eng Yew, Country GST Leader at Deloitte Malaysia explained to KiniBiz how tax evaders typically circumvent paying sales and service tax:
“Currently, sales and service taxes are generally collected at one point in the supply chain. For imports, sales tax is collected by Customs at customs clearance. For locally manufactured goods, sales tax is charged when taxable products are sold, and later remitted to Customs. Service tax is charged on certain prescribed taxable businesses.
“After all that the taxes become embedded in the cost of goods and services further down the supply chain… if the (sales and service tax) is not collected at those particular points, the tax revenue is as good as gone.”
Tan a proponent of GST because it is more efficient than the current sales and service tax cited two instances where sales and service tax could escape enforcement:
“Where you have manufacturers and service providers who should be licensed but do not do so, the tax revenue is effectively not collected, unless of course they were found out.”
“Smuggling is another example where if sales taxes are not collected at the customs checkpoint, then it is effectively lost,” he added.
On the other hand, GST, which economists consider to be a more elegant broad-based tax system, is far more difficult for tax evaders to get past.
“With GST, it is imposed at every level of the supply chain, i.e. a multi-stage tax. If one party in the chain fails to charge GST, then the tax is imposed at the next level in the chain,” Tan explained.
Business to business transactions incur no cost
Perhaps the best news to come for businesses, especially small and medium enterprises is that business-to-business transactions incur no GST cost.
Deloitte’s GST expert, Tan said while business collect and charge GST, they are also privileged to claim back GST on their inputs. So long as the business is not at the end of a supply chain, GST will be passed on down the chain until it reaches the end consumer.
“Each business may claim as a credit the GST they pay on their inputs, against the GST they charge on their sales.
“For the business then, GST is effectively just passed on to the next person in the supply chain. It is not suffered by the business,” Tan wrote in an email response to questions by KiniBiz.
“The claim of credit stops when the purchase is an individual who does not get to claim any (input tax credits).”
There are however some exemptions. Businesses providing goods and services deemed GST exempt would end up footing a GST bill.
An exempt supply is a good or service outside of the GST system. This is not the same as zero-rated supply which is simply rated at 0% GST. Vendors of zero-rated supply cannot charge GST on their sales but can claim input tax credits.
Exempt supply vendors do not have the benefit of claiming input tax credits and they must not charge GST on sales either. This is quite similar to the position of individual consumers.
Tomorrow’s issue will discuss the GST in terms of broader tax reforms. Is the GST the panacea to the country’s fiscal ailments the government considers it to be?
Yesterday: Nine things you must know about the GST
Tomorrow: GST for today, tomorrow and beyond
You must be logged in to post a comment.