Understanding GST: The Analysis I

Most of us have known by now that on 25th October, Prime Minister has announced Goods & Services Tax (GST) shall be fully implemented on April 1, 2015. This is not surprising actually, although many people are still in the dark about what's this all about. Besides sharing on my last post, I've linked a site which provide great, brief knowledge about what's GST all about.

Can't talk about all but I will focus more on the certain exempted supplies & zero-rated supplies by analyzing the framework against the current Malaysian environment. I'm no John Maynard Keynes nor Paul Krugman, not an economic graduate either, but just sharing on my thoughts on what could affect the daily lives of ordinary people like you and me. Do feel free to comment, if I was wrong or sharing your thoughts. A brief overview of the confirmed GST model given below. Sorry but the only source which is truly reliable, which clearly indicated what's being tabled on October 25th has only the Bahasa Malaysia version which indicate what it's tax u, what didn't & what is exempted

1) Tax rate: 6% rate, effective from April 1, 2015.
2) Exempted from GST:
- Basic food items such as rice, sugar, salt, flour, cooking oil, lentils, herbs and spices, salted fish, cincalok, budu & belacan
- Piped water supply
- First 200 units of electricity per month for domestic consumers
- Services provided by Government such as issuance of passports, licenses, health services and school education
- Sales, purchase & rental of residential properties
- Selected financial services such as all matters leading to issuance of letter of credits (LC), all financial matters (including purchase of marine insurance) related to goods to be exported, purchase of travel insurance, all personal banking-related matters, all personal insurance-related matters
- Transportation services such as bus, train, LRT, taxi, ferry, boat & highway toll
- All medical related services (government & private) including supplies & consultancies
- All service related to human remains, including funeral, cremation & consultancies

My initial prediction of tax rate to be imposed is minimum 4% to maximum 5%. Can't deny GST is a good way of tackling the government budget deficit but my honest opinion is that this could have been done way before this in the 90s. Even though there's regional economic crisis in 1997, Inflation is still at the low level & our GDP per capita was steadily increasing. Indonesia started implementing GST ( termed VAT in some countries) in 1984, Thailand in 1992, Singapore did it in 1994, Philippines in 1998. The fact that this GST bill has only be proposed to the Parliament in 2008 clearly made us pondered on how do we managed our macro-economy & micro-economy all this while. It's the question about implementing at the right time. True, 6% rate is still among the lowest in the region but this comes back-to-back with the reduction & abolishment of the subsidies for fuels, sugar & other items, which will cause chain reaction of price increase of all goods & services provided domestically. A basic economic model states inflation comes together with rising GDP & standard of living but if it's increasing above the manageable level, u know something is wrong about the implementation of the micro-economic policies.

One look of a model transaction with GST rate of 6%, it seems that the consumers only need to pay extra 6% on top of the current selling price. That is assuming there wont be any increase of the current selling price at the top level of the supply chain. Some claimed market price could also go down too. Based on explanation in my last post & this guide on process of getting GST refund by industries, there's bound to have many hidden costs incurred, starting at manufacturer's level. Getting consultancy services to implement GST, upgrading of the current accounting software or possibly purchase of new software, additional paperwork, hiring & training of staffs to handle all accounting matters & other additional responsibilities, depending which industries u are referring to. About the issue whether there will be price increase or not, throwing back the question, if u are the GST registered supplier/manufacturer/wholesaler & all above are additional costs incurred after the GST implementation, what will u do?

Took days to look thru all attached docs & in come many more questions. Law documents being law documents, it did not clearly indicate what u want to know about the exempted & zero rated supplies but it's the "unseen binding words" in the bill that caught u. To take some examples of our day-to-day transactions at retailing level for exempted items,:-

1) Medical related supplies
The whole tax flow for the whole supply chain is not clearly defined. Supplies of all medical-related goods is zero-rated. In reality, we buy medicines & pharmaceutical goods from Guardian, Watsons etc rather than clinics/hospitals. Are these companies classified as pharmacies which sells only pharmaceutical goods (which can be GST exempted) or rather, retailers (which is GST-taxable)? When we buy other items too, does this means we are to segregate the taxable supplied goods (toiletries, cosmetics etc) & exempted supplied goods (medicines, pharmaceutical goods) at cashier counters? What guideline is given to these companies which provide taxable supplies, zero-rated supplies & exempted supplies, all at the same time to the consumers? What will be practical operational procedure for these companies to tax the consumers?

2) Basic food items
Basic foods items listed above are also exempted but the whole tax flow for the whole supply chain is not clearly defined. Tell me which consumers buy these basic food items direct from manufacturers? Are we, the consumers getting sugar supplies from Prai Sugar or Central Sugar? Are we getting flour supplies from Baba's or Kuantan Flour Mill? We got all of these from retailers of big time hypermarkets & sundry shops. Sundry shops will be GST free but what can u say about Tesco, Giant etc, which clearly have more than the annual sales turnover threshold of MYR 500,000?  What guideline is given to these companies which provide taxable supplies, zero-rated supplies & exempted supplies, all at the same time to the consumers?

2) Government-supplied services
All government-supplied services is exempted. However, it is well known that government has privatized many of its supplies & the status of government linked companies (GLCs) supplied goods/services is not been clearly indicated. Importation of goods supplied to all full government bodies are duties & tax free as indicated under Provision 3, Customs Act 1967. Based on my experiences of dealings with Customs/Ministry of Finance (MOF), GLCs are not classified as government bodies & not eligible for exemption. Thus, it is safe to say GLCs' supplied goods & services such as Telekom M'sia telephone bills, Tenaga Nasional electricity bills are GST taxable. Getting same services from different source can be confusing for some too. For example, renewing your road tax from Road Transport Department is GST free but renewing the road tax from MYEG online web portal is GST taxable.

Please tell me if I was wrong in picturing the whole flow & I seriously hope, I was wrong too. And we can brainstorm/share together. That's all for now & not wanting to prolong this post, my next post shall focus on the affected industries related to our day-to-day tasks, explaining if its taxable supplies to us or not.