All eyes are now on the new Sales and Services Tax (SST) system or SST 2.0 given the improvements made to its predecessor, which will officially be implemented nationwide effective September 1, 2018.

Earlier this week, the Sales Tax Bill 2018, Service Tax Bill 2018, Goods and Services Tax (Repeal) Bill 2018, Customs (Amendment) Bill 2018 and Free Zones (Amendment) Bill 2018 had all been successfully passed at the Dewan Negara, – confirming the return of SST.

To recap, the Goods and Services Tax (GST) was zero-rated starting June 1 to be replaced by SST, as what had been promised in the Pakatan Harapan government’s 100-day election manifesto.

However, it has not been a smooth journey for the new government as it pushed to reinstate SST. Along the way, there were criticisms on this move as there are many still unsure as to whether this new tax system will really ease the people’s financial burdens when compared to GST.

Finance Minister Lim Guan Eng has been adamant from the beginning that that the financial impact from SST on the people will be less than GST given that the expected collection from SST is estimated to be at RM21 billion for a full year, while the GST had expected to collect RM44 billion in 2018.

“SST is a single-stage tax, a sales and services tax imposed on manufacturers and not on end customers,” Lim explained in a press release in July.

“While, GST is a multi-stage tax where tax is payable by all parties in the supply chain.”

Furthermore, Lim said that the implementation of the SST would increase the purchasing power of consumers as the quantity of goods and services taxed under the tax regime would be significantly lower than those under the GST.

“The SST accounts for only 38 per cent of the basket of goods and services of the Consumer Price Index (CPI).

“This is much lower than the total CPI of goods and services imposed under the GST, which is 60 per cent.”

That said, he clarified that there was no guarantee that the prices of goods would drop after the implementation of SST on September 1 due to several factors including oil prices which led to the increase in cost of goods.

“I never said that SST would make the prices of goods come down. I said if the prices of the goods went up, the impact would be lighter than the GST, because tax collection is only RM21 billion compared to RM44 billion for GST.”

The transition from GST to SST

As businesses transition from GST to SST, experts observed that challenges lie ahead amid all the adjustments with the new tax system in such a short period of time.

According to KPMG Tax Services Sdn Bhd’s Tax Practice executive director Regina Lau, many businesses are still trying to adjust themselves out of the GST system and mentality.

Lau noted that although the consumption tax was shortlived, it greatly impacted businesses as many had spent much time, effort and resources to be GST-ready.

“Even with the SST briefings and resources made available by the authorities, many businesses still find things at a standstill and are unsure how to proceed with the change.

Although essentially the new SST is an improved version of the old SST, many businesses who are GST registrants were not SST registrants before.

“For those who have been automatically registered for SST, they need to assess if in fact, they should be registered. Some are anxious about de-registration while those who need to register find that they cannot do so until the system comes online on September 1, 2018,” Lau said.

As of time of writing, there are 77,451 companies around the country that have registered under the SST – 32,577 are registered for sales tax and 44,874 are registered for service tax. This is a far cry from the GST which has over 400,000 companies that were registered.

Lau further noted that at this initial stage, there is somewhat a sense of anxiety in the business community in getting their systems to be SST-ready.

“Re-training staff to learn and deal with SST, reviewing existing contracts, assessing pricing policy, renegotiating with customers and suppliers.

“These are all issues facing businesses and they have to get it right in this short transition period to ensure that there are no adverse business impacts and that there is proper compliance with the laws.”

Less time to prepare

RAM Ratings’ head of Research Kristina Fong pointed out that there had been much more lead time in the implementation of GST than for SST 2.0.

Fong said that although not as complicated as its multi-layer tax predecessor, SST 2.0 is still a change for business operations and in some cases, change may not be so seamless.

“We do acknowledge a period of adjustment for firms in the transition period between the two systems and final closure audits and accounting system upgrades may require some additional expenditure at the start of the new regime.

“There may be a lag effect in assessing the full impact of the new tax regime on the economy as not all eligible businesses may be registered in time,” she added.

Ernst & Young Tax Consultants Sdn Bhd partner Aaron Bromley also highlighted on the fact that businesses face a very short implementation period to be ready for the SST.

“Costs, pricing, systems, processes and people will all be impacted to varying degrees. The ability to effect all of these changes, particularly with regard to IT systems and accounting for the SST, will be crucial in determining how ready a business will be to meet its obligations and not incur unnecessary costs,” Bromley said.

“In the immediate transition to SST, businesses will face challenges in ensuring they account for SST correctly on sales which span the start date. Orders and payments prior to September 1 may still attract SST for goods and services provided after that date.

“This may generate controversy with customers who believe that by ‘getting in early’, they will enjoy the last days of the zero per cent GST and therefore avoid the SST. Contractual terms may allow the charging of SST or they may not, the latter impacting profit margins.

“Hence, it is advisable for businesses to assess the impact on their contracts with both customers and suppliers as part of the overall effort to manage costs and revenue effectively.”

Bromley noted that for manufacturers and/or importers, they are required to have the relevant tariff code in order to determine whether a particular good is exempted from sales tax.

He explained that this poses a formidable challenge to businesses as tariff codes for products are not easily available, particularly for businesses that are not involved in import/export.

As for service providers, Bromley said that their challenge is to determine whether their services are “taxable” as prescribed.

“Only once these matters are addressed can a business determine whether it should be registered for SST, what goods and/or services (purchases and sales) are affected and therefore, the impact on pricing.”

Challenges in changing prices

Bromley further noted that communicating price changes will also be challenging as confirmation of exempted and taxable goods, the Sales Tax rates applicable, as well as the services subject to Service Tax, have only been confirmed recently, or clarification is still required.

He opined that businesses may well be able to enhance their IT and point-of-sale systems in time, but for those with a large number of outlets making sales to end-consumers, they will be pressed for time to update all pricing.

As such, he remarked that it is hoped that the Royal Malaysian Customs Department (RMCD) will be flexible in allowing time for these changes to happen, as was the case when the GST was reduced from six per cent to zero per cent.

“Overall, businesses will find their costs increasing for purchases subject to SST. Unlike GST, SST incurred on inputs is not able to be offset against SST charged and collected.”

Bromley also pointed out that while managing the introduction of SST, businesses will also have to manage the final reporting for GST.

“Under the GST (Repeal) Bill 2018, GST registrants are given a period of 120 days for the filing of the final GST return.”

“GST registrants are required to report all supplies made up to August 31, 2018, as well as claim any GST input tax credits incurred on their purchases (if they have not done so previously) in this final GST return.

“In order to do so, GST registrants are to ascertain the actual value of supplies made up to August 31, 2018, as well as quantify the GST input tax to be claimed in the final GST return.”

In view of this, he thus advised businesses to begin communicating with external parties such as customers and suppliers, for billings to be issued and obtaining tax invoices for GST input tax claiming purposes, as well as with internal parties to ensure all tax invoices received from suppliers are processed in time.

Lau believed that the real test of whether businesses have got SST right or not may only be evident after they have filed the first SST return, and the authorities have conducted checks thereon.

“Any wrong compliance could have adverse impacts on end consumers vis-à-vis pricing. Ultimately, the level of good and correct compliance by businesses will determine the impact on end consumers – strong enforcement by the authorities will help to keep these in check.”

Industries most affected by SST 2.0

On this, Bromley opined that for commodity-intensive industries such as timber and oil palm plantations, most of the customers of their final products such as logs, plywood, fresh fruit bunches, crude palm oil and others, are businesses.

“Hence, the GST levied was offset against GST collected, in most cases (and thus not a business cost); while exports were zero-rated under the GST. Under the upcoming SST regime, most of these products will be exempted from Sales Tax, whether or not they are exported.

SOURCE: MIDF Research

“Under the GST regime, input tax incurred on purchases such as machineries and fertilizers could be claimed back against output tax. Going forward, SST incurred is not recoverable and is therefore a cost to business, to be absorbed or passed on to customers. This is outside of any exemption facilities that certain manufacturers may be entitled to.”

As for the property industry, the Finance Minister had mentioned in a media release on August 12 that the federal government hoped that construction costs will be lowered with the SST exemption on main building materials and construction services. Examples of building materials which will not be subject to SST are cement, sand and iron.

Bromley noted that contrary to the six per cent GST previously levied on construction materials and construction services, the exemption of most construction materials and construction services from SST is expected to bring down property prices, especially for residential properties.

“GST incurred for the construction of residential properties was not claimable as input tax under the GST regime, and thus formed part of the cost base for developers.”

Lau said that generally, there is optimism that prices of properties will come down especially since the main building materials will be exempt from sales tax.

“However, the industry players have downplayed the optimism, citing other non-tax factors for costs increases. As most commodities are in the proposed exempt list, impact will generally be dependent on the impact of SST on the input costs of production.”

Meanwhile, Bromley also highlighted that local service providers that provide taxable services will be impacted by the SST compared to competitors from outside Malaysia.

He recapped that under the GST regime, imported services are subject to the reverse charge mechanism, meaning businesses who are engaging the services of foreign providers (that are not subject to Malaysian GST) are required to pay GST to the RMCD on the imported services (and claim back GST input tax, if applicable).

“Under such a mechanism, the local service providers are on a level playing field with foreign providers,” he said.

“SST, however, does not yet have an equivalent to the reverse charge and so acquiring taxable services from overseas, such as online, would theoretically be cheaper, at least by the amount of Service Tax applicable, locally.

“The same would apply to individuals choosing to acquire taxable services from overseas, rather than from a supplier in Malaysia charging SST.”

Although RMCD will be publishing SST guidelines for different industries, which will offer clearer guidance to businesses in terms of compliance, Bromley noted that for now, businesses will be left with little choice but to start making preparations for the SST era with the available information, however limited.

A check by BizHive Weekly on RMCD’s Malaysia Sales & Service Tax (SST) official website revealed that there were now more than 10 service tax industry guides available for download as of August 23.

The list included guides for hire passenger vehicles services, domestic flight, credit card and charge card, customs agent services, paid television broadcasting services, telecommunication,
courier services, and food and beverages.

A list of proposed taxable services and a guide on proposed sales tax rates for various goods can also be viewed on the website.

In Fong’s view, for some manufacturers, SST will be an additional cost to them and hence, the relative significance of this in the cost structure, as well as the level of competitiveness of the industry as a whole, will determine the tax cascading down the supply chain.

“Some smaller firms may have to pass down the costs irrespective of the competition just to manage cashflows and profitability,” she said.

Will SST really increase consumers’ purchasing power?

Much has been debated on whether SST will increase consumers’ purchasing power, when compared to the GST-period, with most opinions leaning towards the more positive outlook.

For instance, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) believed that re-implementation of SST will not deter domestic consumption in Malaysia.

“As compared to GST, SST does not affect consumers directly, but via manufacturer and service provider,” MIDF Research said.

“Solid economic fundamentals in the Malaysian economy particularly stable labor market, moderating inflationary pressure and upbeat industrial activity will continue supporting the domestic demand to stay robust.”

In fact, for the second half of 2018 (2H18), the research arm projected domestic demand, especially household expenditure, to pick-up strongly amid the tax holiday period and optimistic consumer sentiment.

“We project private consumption to expand firmly by 6.5 per cent in 2018.”

Meanwhile, Fong revealed that RAM Ratings’ initial assessment of SST and its potential inflationary impact does not seem to be destabilising to prices nor consumption for the current period, given its lower share of products in the CPI basket and the fact that the incidence of sales tax falls on manufacturers rather than directly on the end-consumer.

“Enhanced cashflow management by firms and less restrictive administrative costs of compliance should reduce the need to compound the tax along the supply chain.”

Lau pointed out that GST was repealed and substituted by SST for the main reason of alleviating the consumption tax burden on end consumers, the people at large.

“While GST was charged on the value add in each stage of the supply chain, SST is a single stage tax. Theoretically and practically however, SST may not necessarily result in lower prices compared to GST,” she said.

“However, there will be facilities available for manufacturers to claim for sales tax exemption on their raw materials or inputs – their input costs should therefore theoretically not be higher than during the GST era. Things have to start on the right footing at the beginning of the supply chain so that costs do not cascade down to the end consumer unnecessarily.

“It is important for the authorities to engage with businesses on the exemption facilities available and for businesses to keep themselves abreast of the developments in this short window of time to get themselves ready, work on correct costing and reasonable pricing.

“Enforcement should be strong in the area of anti-profiteering checks and the public needs to play an active role in helping the enforcers to keep anti-profiteering in check. If we all play our role in getting the entire system right, there should be positive impacts on our purchasing power.”

On the other hand, ACCA’s Bromley opined that the impact on purchasing power from the reintroduction of SST is likely to be mixed, compared to the GST.

“Many goods and services will indeed be cheaper, but also, many items will see no real price impact difference from GST,” he said.

“All of this will be unclear in the change from six per cent to zero per cent GST and now back to Sales and Service Taxes (where applicable).”

According to Bromley, for basic necessity items such as rice, cooking oil and sugar, the impact of SST on these items’ selling prices should be neutral from a GST-SST perspective, as these were previously subject to zero-rate GST (even prior to June 1, 2018) and will be exempted from the Sales Tax.

That said, he noted that manufacturers may face slightly higher cost pressures due to Sales and Service Tax incurred on their inputs, where no special exemptions apply.

“Overall, it is believed that the prices of retail goods will decrease as SST is only charged at a single stage, thus contributing to the expected increase in disposal income for the Malaysian people.”

As for services, Bromley highlighted that many services originally subject to GST will have seen that eliminated on June 1, 2018, only to have the same rate (six per cent) reapplied from September 1.

He further highlighted that while many will remain without additional tax, cost pressures for service providers may see prices increase regardless.

“A notable mention is to be made of the supply of electricity to domestic users, which was not under the ambit of the previous SST regime, but has now been proposed as a taxable service for Service Tax.

“Nevertheless, the tax is only levied for power consumption exceeding 600 kilowatt hours (kwh) (for billing cycles of at least 28 days), compared to the previous zero-rate GST on the first 300 kwh of power consumption.

“Should the electricity tariffs remain unchanged, domestic users will enjoy lower electricity charges overall, where they typically exceed 300 kwh of power consumption.”

Bromley also addressed the issue of profiteering practices in Malaysia, projecting that during the first few initial months of the reinstatement of SST, there will be cases of non-compliance and profiteering.

“In order to counter these practices and to realise the new government’s aim to increase people’s disposal income, enforcement agencies such as the Ministry of Domestic Trade and Consumer Affairs will have to play their roles in effectively enforcing the Price Control and Anti-Profiteering (Mechanism to Determine Unreasonably High Profit) Regulations 2018 to curb profiteering by businesses.

“Overall, this change from GST back to SST promises to be an interesting one, for businesses and consumers alike.”