GST in Malaysia by 2015?

The government has been talking about implementing GST in Malaysia for the longest time. However, it’s looking more likely that it will be announced in the coming Budget 2014 to be tabled on Friday. Why is the government so adamant on GST? How will GST affect us? Will everything become more expensive?

The Rationale for GST
Although Malaysia has a population of 29 million people, less than 2 million people pay income tax. Some have legitimate reasons not to pay, like falling below the minimum tax bracket, but most individuals and companies evade tax. This can range from claiming relief for books they never bought (individuals) to under-declaring the income (sole proprietors) to transferring revenue as cost to another country with lower tax rates (companies).

Instead of just taxing based on income, the government can now tax based on consumption with GST. Because while a person or company can evade tax, they still need to consume like buying a luxury car or eating out at restaurants. And the more money you make, they more you’ll spend so it makes sense that those who consume more, gets taxed more.

Therefore, the GST is a lot more efficient and also helps the government broaden the tax net.

Will GST Increase Our Cost of Living?
Yes and no. Once the government implements GST, it will abolish the current sales and service tax system. Take for example a bottle of Coca Cola, which for simplification, let’s assume the cost to be RM10. Under the current system:

The cost of the Coca Cola at the supermarket is RM10 + 10% sales tax = RM11.00

And if served in a hotel, it becomes RM11 + 6% service tax = RM11.66

Assuming our GST is set at 6%, under the new GST system:

That same bottle of Coca Cola served at the hotel is RM10 + 6% GST = RM10.60

There will also be GST exemption on essential goods like unprocessed meat, rice and sugar, and also services in sectors like education and healthcare in Malaysia. All in all, the costs for some sectors will go up and some will go down. Below is an illustration by the Tax Review Panel on how GST will impact the costs for various sectors of goods and services in the country:

GST Impact on Costs in Malaysia
Source: Real Impact of GST on Cost of Living, The Star Online (21st Oct, 2013)

It is also hoped that with the implementation of GST, the government will eventually lower our tax rates closer to our neighbour Singapore – the maximum income tax rate there is 20% versus Malaysia’s 26%.

When Will the GST be Implemented?
Believe it or not, the first time I heard about GST in Malaysia was way back in 2005. However, the talk of implementation has been getting louder and louder these last 2 years, and it’s looking quite likely that Prime Minister Najib Razak will announce it during Budget 2014. However, the Head of Pemandu Datuk Idris Jala foresees that even if it is announced this year, he expects GST to only be implemented in 2015 earliest.

For more information on GST, refer to the Malaysian Customs’ official GST website here.