GST in Malaysia - How it works?

How does GST work in Malaysia?

In the current tax regime, the 10% Sales Tax (on manufacturing and imports) and 6% Service Tax (on the F&B and professional services industry) is collected by one party (usually the seller) and passed on to the tax authorities.

For example, in the previous 6% Service Tax regime, when you buy a cup of coffee from Starbucks that says RM15 on the menu, you pay RM15.90 (including the current Service Tax of 6%). Starbucks will keep RM15 and pass on RM0.90 to the tax authorities.

In a GST regime (6% GST in this calculation), the following happens:

1. Starbucks buys the coffee beans from the wholesaler to make your cup of coffee for RM10 (RM10+ 6% GST). The Wholesaler keeps RM10 and passes on RM0.60 from Starbucks to the tax authorities.

2. You buy that cup of coffee from Starbucks which the beans were used to make, and pay RM15.90 (RM15 + 6% GST). Starbucks now keeps RM15 and passes on RM0.30 to the tax authorities (RM0.90 - RM0.60). The reason why Starbucks only passes RM0.30 to the tax authorities is because they have effectively already 'paid' RM0.60 in tax earlier on the first RM10, and only RM0.30 tax is left to be paid on the RM5 "value-add".

Why replace Sales Tax and Service Tax (SST) with GST?
The government’s intention has always been to replace the sales and service tax regime with GST and to do so at a GST rate that is revenue-neutral. This means that (when it gets introduced anyway) they don't expect to collect any more or less taxes than they did before. Why would they bother then?

Well, the GST unit of the Royal Malaysian Customs Department gives us the following reason ‘method of collecting taxes which works better than others’ to explain the need for GST. Economists, meanwhile, believe the government has very rightly approached the GST as a new source of income with a broad tax base as a means to begin to diversify tax revenue sources.

So if the 10% Sales Tax and 6% Service Tax is abolished, does this mean GST will be introduced at a rate of 16% to make this a revenue-neutral exercise?
It might seem like simple arithmetic, but as mentioned before, not all items are subject to 10% Sales Taxes (some 5% and some 0%), and likewise with the 6% Service Tax (and rarely are 2 items subject to both Sales and Service Tax, as one targets the manufacturing and import industry, and the other the service industry). As such, a 16% GST rate (with no exemptions) will definitely result in higher prices across the board!

As a result of this, to make the introduction of GST a revenue-neutral exercise for the federal government, an initial rate of 4-7% had been proposed, with some essential items given a zero-rate mooted as well.

The final rate that was announced on 25 October 2013 was 6% GST, with the following items 0% rated (and thus exempt):

- Essential items such as: Rice, sugar, salt, flour, cooking oil among others
- Public transport (LRT, KTM, Buses)
- Sale and Rental of property
- Electricity consumption up to 200kwH (about RM50), presumably per month