Thursday, 17 December 2009

Bracing for sea-change in taxation

Bracing for sea-change in taxation

Tags: Chew Theam Hock | CIMB | Deloitte Malaysia | Dewan Rakyat | goods and services tax | GST | GST Bill 2009 | Income Tax Act 1967 | Khoo Chin Guan | KPMG Tax Services Sdn Bhd | Lee Heng Guie | OSK Research | Tan Eng Yew | Tan Theng Hooi

Written by Ellina Badri & Isabelle Francis
Wednesday, 16 December 2009 22:46

KUALA LUMPUR: Professional consultancies have cautioned about "grey areas" in the implementation of the government's proposed 4% goods and services tax (GST), while other corresponding measures, such as lowering of income tax, may need to be taken.

They also said companies must prepare for the new tax regime early to estimate its potential impact on their businesses and how they could manage it.

Deloitte Malaysia country managing partner Tan Theng Hooi said GST would help the government address the drop in tax revenue in line with lower revenue from petroleum as well as broadening the tax base.

"However, there must be sufficient time given for businesses and the general public to get ready for the system rollout," Tan told The Edge Financial Daily today.

"The level of acceptance by businesses and the public on the implementation of the GST will be higher if there is a corresponding decrease in the income tax rates."

The government tabled the GST Bill 2009 for the first reading in the Dewan Rakyat today, projecting implementation in mid-2011. Though not specified in the bill, the government has said the rate would be fixed at 4%.

Based on the bill, the tax would be charged and levied on any supply of goods or services made in Malaysia, including anything treated as a supply under the act, and any importation of goods into Malaysia.

Businesses that are taxable include any trade, commerce, profession, vocation, or any other similar activity, whether or not it is for a pecuniary profit.

Businesses to be taxed under the GST were liable to register at the end of any month, and those who failed to register would be liable to a fine not exceeding RM50,000 or to an imprisonment for a term not exceeding three years, or both.

Tan said while there would be price increases in some items, there could also be lower prices for others, where savings from taxes on intermediate inputs would be passed by producers to the consumers.

He said under the GST, the tax would be collected at value-added points from production to the final point of sales, as opposed to the current system where the sales tax was only collected at the point of import, or when the local manufacturer sold the goods for the first time, while the service tax was only imposed on taxable services.

"The tax imposes additional compliance costs for businesses. These come in the form of additional work to account for the tax, tracking of input taxes paid, undertaking reconciliations and filings of GST returns.

"There is also a need to review and change the IT systems to accommodate the implementation of the GST," Tan said.

In a statement, KPMG Tax Services Sdn Bhd executive director Khoo Chin Guan said businesses would need to be pro-active in ensuring their transition to the new system was smooth and successful.

"The GST rate is lower than the existing service tax rate (5%) and significantly lower than the existing sales tax rate (10%). However, the impact on the revenue collection of the government of the drop in rates should be offset by the wider footprint of GST as well as its collection along the supply chain as opposed to only at the manufacturing or importation stage," Khoo said.

Chew Theam Hock, also an ED at KPMG, said the GST Bill followed the approach of tax rates adopted by a number of other countries, although overseas experience had shown there could be grounds for dispute where the provision of combined services fell in a "grey area", whether it was zero-rated, exempt, standard rated or a combination of those rates.

He said with the revenue floor at RM500,000, a number of small businesses would be outside the scope of the GST, although those businesses could voluntarily register for it to claim input tax credits, and they could also be compelled to be licensed by their business customers who wanted to ensure input credits along the supply chain were fully reclaimed.

KPMG's other ED Tan Eng Yew said businesses had to start reviewing their operations at a strategic and functional level so decisions could be made, while additional obligations imposed by law could be dealt with in order for the business to be GST-compliant.

"Although there is expected to be an 18 month-window before the GST becomes chargeable, businesses must address the additional challenges imposed by GST now.

"For example, where businesses make both taxable and non-taxable supplies (also known as mixed supplies), this is an opportune time to identify potential GST costs and how the supply chain should be structured in the light of the GST Bill," he said.

Khoo added that with the GST viewed internationally as a self-policing tax system, given the claim for input tax credits required registration and compliance through the submission of GST returns, the registration and compliance requirements could in turn lead to increased compliance with obligations under the Income Tax Act 1967.

As for the impact of the GST on consumers, CIMB chief economist Lee Heng Guie had in a recent note said the proposed rate of 4%, which was lower than the current SST of between 5% and 10%, was deemed appropriate to avoid dampening consumer spending and its impact on inflation.

"There will never be a good time to implement a new tax reform. When the economic environment is more conducive with stable revenue growth, we can have a virtually neutral and relatively low-rate GST introduction. More critically, there must be a strong political will to implement the unpopular consumption-based tax," he said.

He said it could result in higher private consumption expenditure initially, as households brought forward consumption expenditure prior to the tax's implementation, although this would be followed by a significant unwinding immediately following its rollout.

He added the resulting increase in inflation would likely be small in the medium term, causing a one-time price "blip".

"Businesses can expect GST implications for each transaction they make, regardless of the profits or losses. However, a better management of GST processes can improve cashflow of businesses, which in turn can translate to cost savings," he said.

He also said a comprehensive tax reform must be accompanied by lower personal and corporate income taxes, a stronger household safety net and other targeted assistance programmes for the need groups.

"Stated simply, create a simpler, fairer and more efficient tax system to facilitate greater private sector initiatives as well as drive higher economic growth and foreign investments," he said.

Meanwhile, OSK Research wrote recently that while some essential items and services were GST-exempt and despite the rate being lower than those in other Asia, it believed the tax would dampen consumer purchasing power to a certain extent.

It said based on its simple calculations from the Household Expenditure Survey 2005 data, the most affected group of consumers comprised the hardcore poor with monthly income of below RM430, poor households with monthly income below RM720 and the vulnerable poor with monthly income below RM1,500 in Peninsular Malaysia.

It added these groups could see a significant increase in their cost of living should the government impose the tax in the usage of utilities, basic communication consumption and clothing and footwear, given the possibility of inefficient delivery of new subsidy schemes for those groups.

Today's tabling of the tax bill showed that its exemptions included paddy, vegetables, rice, sugar, flour, cooking oil and meats.

"Apart from consumers, businessmen and retailers may also encounter some difficulties in the short-term, considering that these groups will act as tax collectors of the new tax on behalf of the government.

"Needless to say, the businesses would need to revamp their accounting systems accordingly and submit the collection to the related government agencies on time," OSK also said. It added those still using traditional accounting or payment systems would be forced to upgrade and attend training.

"Nonetheless, retailers of luxury goods, such as luxury cars and jewellery, or privileged services would probably be hardest hit in the short-term as the 4% GST would result in a price increase for the end-user," it said.

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