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As India struggles to meet the April 1, 2016, deadline to roll out the goods and services tax (GST), its biggest tax reform in decades, Malaysia introduced the value-added tax in April this year.
The roll-out of the Malaysian GST over the last two months has, however, been anything but smooth. There could be a few lessons for Indian tax authorities as they go about setting up the GST edifice in the country.
Over the last two months there have been anti-GST street protests in Kuala Lumpur; consumers have alleged overcharging by merchants; merchants were stumped by the complicated process of computing their value-added; and there have been a couple of suicides by elderly shopkeepers, with their families, blaming the GST for their deaths.
Opposition to the GST by some political parties, including former Malaysian Prime Minister Mahathir Mohamad, added to the government’s woes. There have even been stray calls for a rollback, something that has not happened in the 140-odd countries that have introduced the value-added tax.
Faced with growing political resentment to the GST, Prime Minister Najib Razak has taken to blog posts on his website defending the decision to introduce the tax. He went on to explain why Malaysia needed to widen its tax base, with only one in 10 Malaysians paying income tax. With the recent fall in the global oil price, the Malaysian government needs to look for other sources of revenue. Oil and gas accounts for 23 per cent of the government’s revenue. “Malaysia cannot sustain its growth and development based on this revenue stream alone,” Razak said in a recent blog post.
Malaysia’s ministry of domestic trade, cooperatives and consumerism, in charge of monitoring misuse of the GST, has gone to the extent of using undercover customs officers to check whether the new tax is being imposed correctly by suppliers and merchants. A government official was recently quoted as saying that around 200 fraud cases involving the GST would be brought to the courts.
“The Malaysian government in general and customs in particular have made great efforts to communicate the message on the GST. Customs have been very open to consultation and tireless in their responses to my clients and the requests they have made,” notes Singapore-based Robert Tsang, partner, Asia-Pacific indirect tax leader, Deloitte & Touche LLP.
Tax experts point out that many of Malaysia’s woes in implementing the GST stem from the complex structure of the tax. Even though the full GST rate in Malaysia is six per cent, among the lowest in the world, many “essential” products were exempted from the tax for social reasons. Some others were assigned a zero rate of GST, which essentially means the government may in future tax these items.
“Undoubtedly, more exemptions and zero or reduced rates complicate the GST. They make it harder for business to get GST right,” says Tsang. Malaysia requires all businesses with revenue of more than 500,000 ringgit to register for the GST. Businesses selling multiple products which fall under different tax slabs found the going complicated. Prasenjit K Basu, head of ASEAN (Association of Southeast Asian Nations) Economics and Malaysia research at Macquarie Capital Securities, notes there were six months of intensive preparations and customer education before the rollout of the GST in Malaysia. Malaysia announced in October last year that the country would adopt the GST from April this year.
“Businesses were provided training through pamphlets and websites with information about how to deduct input costs and charge customers for the value-added component of what they were paying for,” says Basu.
However, most tax experts feel the benefits of the GST could have been better communicated to the man on the street. Basu agrees the benefits of the GST have not been effectively communicated, even though Malaysia has a large package of income transfers to poor households to offset a consumption tax like the GST, which is charged on everyone and not just the rich.
Experts point out that the other issue which needed more careful handling was an anti-profiteering law. “This is essential to ensure that the final consumer benefits from the credit mechanism in a GST,” says Tsang. Otherwise, businesses have no incentive to charge the GST on prices and costs that properly reflect credits for taxes paid on inputs. “This is more about having the right carrots and sticks to drive the right behaviour,” says Tsang.
According to Satya Poddar, tax partner, policy advisory services, Ernst & Young, having an anti-profiteering law is very important from the public perception point of view that the introduction of the tax will not result in a broad inflationary impact. In Malaysia, price control on account of the GST does not fall under the purview of the GST authorities but the ministry of domestic trade and consumer affairs.
Tax experts note that the GST will be inflationary, especially if the effective tax rate is higher than what prevailed before. For instance, Singapore saw a spike in inflation in 1994 when it introduced the GST, observes Basu. That makes it all the more important for administrators to keep tabs on how prices move after imposition of the tax.
Another key lesson from Malaysia for businesses is to start the implementation process to be GST-ready early by understanding the impact on the business. “There need not be 100 per cent clarity on the rules as the main framework is in place. By assessing the impact early they can better prepare for an implementation project taking into account the impact on their IT (information technology) systems, processes and the people requirements,” says Poddar.
Most tax experts feel that businesses need 9-12 months to be GST-ready. Malaysia’s experience in handling the rollout of the GST could come in handy both for Indian administrators and businesses.
