GST in Malaysia: An Overview

Seep Gupta

17 Mar, 2023

GST, or Goods and Services Tax, was a consumption tax that was implemented in 2015 by the Malaysian government. The Malaysian government introduced it to reduce the Sales and Services (SST) Tax system. However, in 2018, the Malaysian government abolished the Goods and Services Tax Act and replaced it with the SST (Sales and Services Tax) Act^[1]. This article will deal with an overview of the Goods and Services Tax Act in Malaysia, the reasons behind its abolishment, and what were the pros and cons of the GST in Malaysia.

Legal Provisions Related to GST in Malaysia

The Goods and Services Tax is a type of multi-stage consumption tax where each point of the supply chain is taxable up to the retail stage of distribution. The GST Act in Malaysia was introduced by the then Prime Minister Datuk Seri Najib in 2015. It replaced the then-SST (Sales and Services Tax Act) in April 2015. The Malaysian government implemented the Goods and Services Act with the aim of broadening the tax base, increasing revenue for the government and reducing Malaysia’s reliance on oil revenues. The main feature of GST in Malaysia was its automatic self-policing feature which was used to deduct input tax credits from the accounting system of businesses.

The introduction of the GST was part of the Government’s tax reform program. The GST rate in Malaysia was 6 per cent for three types of supply, including standard-rated supply, zero-rated supplies and exempted supplies. Exempted supplies are those goods which incur a 0 per cent rate of GST. Businesses were required to register for Goods and Services tax if their annual turnover exceeded a certain threshold. Many domestically used daily consumed goods such as fresh foods, water and electricity were zero-rated, while some supplies such as education and health services were GST exempted.

One of the unique features of the GST in Malaysia was its Input Tax Credit. The ITC system was designed in such a way as to reduce the cascading effect of tax, where tax needed to be paid mandatorily at every stage of production, distribution and final end of the supply chain leading to an overall increase in the final price of goods and services. Under the Goods and Services Tax Act, businesses were required mandatorily to keep proper records and documentation of their transactions and submit those GST returns to the Customs Department of Malaysia. GST returns had to be filed monthly or quarterly, depending on the business’s annual turnover.

The implementation of the Goods and Services Tax Act in Malaysia posed many challenges, such as the impact of GST on consumers, especially people from the lower-income bracket who were burdened by the increased cost of goods and services. The compliance cost of Goods and Services Tax was also a tricky challenge and an inconvenience for small and medium-sized enterprises (SMEs) who struggled to keep a proper GST record and in filling GST returns.

Because of these reasons, complaints and inconveniences, the Malaysian government, in May 2018, abolished the Goods and Services Tax Act in Malaysia. It was further replaced by the Sales and Services Tax Act (SST Act) system, which the Malaysian Government introduced on the 1st of September 2018. There were many reasons behind the abolishment of the Goods and Services Tax System in Malaysia, including the potential for fraud and abuse under this system.

Pros and Cons of GST in Malaysia

There were several advantages and disadvantages of the Goods and Services Tax system in Malaysia. These advantages and disadvantages are described in great detail below:-

Pros

Given below are the pros that were associated with the Goods and Services Tax System in Malaysia. These are mentioned below:-

• GST broadened and widened the tax base by including taxation at all stages of production and distribution, thereby increasing the government’s revenue collection. This helped in reducing Malaysia’s reliance on oil revenues and thus helped in creating a more sustainable and more effective taxation system.
• Goods and Services Tax introduced a unique Input Tax Credit stem which allowed businesses to claim a credit for the GST paid on their inputs, for example, the purchase of goods and services etc. This helped in the reduction of cascading effects of the tax system, which was a major problem in the previous Sales and Services Tax Act (SST).
• GST in Malaysia ensured full transparency and accountability and was an efficient tax system that was easy to administer and collect. It also helped in reducing tax evasion as all the GST transactions were supposed to be recorded and reported to the Customs Duty Department of Malaysia.
• GST was one of the most simplified tax systems. It replaced multiple taxes with a single tax system regime. This made it easier for the businesses to comply with all the necessary tax requirements and compliances and also reduced the administrative burden on the Malaysian government.

Cons

• The introduction of the Goods and Services Tax Act in Malaysia further increased the costs of goods and services, and this created an inconvenience for people falling into the lower-income brackets. This led to public dissatisfaction, conflicts and protests which ultimately led to its abolishment in 2018.
• The goods and Services tax system was a regressive tax system means, which impacted low-income earners more than high-income earners. It was disproportionate and unbiased in nature. This was a major reason behind its abolishment because low-income earners felt that this system unfairly burdens them to pay more taxes.
• GST in Malaysia was a complex system that required businesses to understand all the major compliances and provinces related to it. Adherence to compliance became tricky, especially for SME industries without any resort to professional legal and tax consultant advice.
• The initial implementation costs of GST required significant resources and investment in the IT systems, training and education regarding the new tax regime. The government spent major chunks of money on this, and this led to the huge expenditure of the government’s money.

Conclusion

In conclusion, the GST in Malaysia has both advantages and disadvantages. The decision to abolish the Goods and Services Tax system was made by the Malaysian government keeping in mind both the pros and cons. It was made in response because of the general dissatisfaction shown by the public and concerns over the high cost of compliance and the potential for fraud and abuse under the Goods and Services Tax system.

Also Read:
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