Sunday, 27 October 2013

GST Unraveled! Find Out How GST Really Works!

Since Budget 2014 was announced on Friday, There's been a slew of new articles being printed/posted/shared/circulated, explaining how GST works. As a financial planning blog, I too feel the obligation to post an article about GST based on my understanding and research so far.

What is GST?
  • Stands for Goods and Service Tax
  • Also known as Value Added Tax (VAT) in other countries
  • Levied on the supply of goods and services at each stage of the supply chain from the supplier up to the retail stage of the distribution
  • Is a broad based consumption tax covering all sectors of the economy i.e all goods and services made in Malaysia including imports.
  • Will effectively replace two existing taxes (Sales Tax and Service Tax) by 1st April 2015

How GST replaces Existing Sales Tax?
Definition of Existing Sales Tax
Basically Sales Tax is an indirect tax imposed upon certain imported and locally manufactured goods. It is levied only once (single stage). Simply put goods which are manufactured for local use and goods that are imported for local consumption are subjected to Sales Tax.

Sales Tax Range
Generally, the rate is 10% under Sales Tax (Rates of Tax No.1) Order 2008) except for the following:
  • Goods under Schedule 1 Sales Tax (Rates of Tax No.2) Order 2008 – subject to rate of 5%
  • Goods under Schedule 2 Sales Tax (Rates of Tax No.2) Order 2008 – subject to rate of 20%
  • Goods under Schedule 3 (Sales Tax (Rates of Tax No.2) Order 2008 – specific rate applicable

Sample Illustration on How Existing Sales Tax apply

Supply Chain with existing Sales Tax

E.g : By buying an imported Coach handbag you are already paying Sales Tax except that it does not appear on your receipt. The cost of the Sales Tax is already embedded into the selling price of the handbag.

E.g. 2 : By purchasing a locally made BATA sports shoe, you are already indirectly subjected to Sales Tax which have been embedded into the selling price of the shoe.

In other words, as Consumers, we do not really feel the effects of existing Sales Tax as we have been paying the embedded sales tax all along.

How GST replaces Sales Tax?
Remember the previous illustration for existing Sales Tax? You can see that a one time Sales Tax (10%) was levied at the Manufacturer's Level only.

When GST comes in, this is how the system would look like:

Supply Chain with GST

Notice the existence of a "Claim Back GST" box for each level of except for Consumer? This is a give and take system whereby each level of the supply chain (except the Consumer) has a so called "Input Tax" and "Output Tax".

Sample Calculation of GST's Input Tax and Output Tax:

Wholesaler is taking a locally manufacturer product by the name of Brand A from the Manufacturer and the cost of manufacturing Product A is RM50.00

The Manufacturer has to pay the Government 6% GST for Brand A : 
6% x RM50.00 = RM3.00

Wholesaler then sells Brand A to Retailer at a price of RM80.00. 

For the Wholesaler, the RM3.00 worth of GST paid by the Manufacturer is called Input Tax. The Output Tax for the Wholesaler is calculated as:
6% x RM80.00 = RM4.80

Amount of GST payable by the Wholesaler would be:
= Output Tax - Input Tax
= RM4.80 - RM3.00
= RM1.80

*In the event that the Input Tax is Higher then the Output Tax, the Wholesaler can claim the difference back from the Government. 


To further illustrate the entire Input and Output Tax for GST, see table below:

Click to Enlarge

Will we be paying MORE when GST replaces Sales Tax?
I believe this is the question that has been on everyone's mind even before GST was officially announced. In order to determined whether we are paying more or paying less, let's make some sample calculation.

Key assumptions for the calculation
1. We assume that the profit margin for each level of the supply chain remains the same. This is only logical considering that manufacturers, wholesalers and retailers would want their profit margin to remain the same.
2. We assume that manufacturers, wholesalers and retailers would take into account the input and output tax before selling the items to the next in line. If the manufacturers, wholesalers and retailers do not take into account of the input tax for their calculation of total sales price, the price of goods when they reach the consumer stage would be very much higher!

Calculated Table of Comparison between Sales Tax and GST:

Level of Supply
Sales Price
(Service Tax - 10%)
Sales Price
(GST - 6%)
Sales Price = RM100.00
Service Tax (10%) =
Total Sales Price = RM110.00
Sales Price = RM100.00
GST  (6%) =
Total Sales Price = RM106.00
Profit Margin for both scenarios at RM100.00
Sales Price = RM130.00
No Service Tax
Total Sales Price = RM130.00
Sales Price = RM125.00
GST  (6%) =
Deduct Input Tax =
Total Sales Price = RM126.50

Profit Margin for both scenarios at RM19.00
Sales Price = RM153.5
No Service Tax
Total Sales Price = RM153.50
Sales Price = RM150.00
GST  (6%) =
Deduct Input Tax =
Total Sales Price = RM151.50

Profit Margin for both scenarios at RM23.50
Sales Price = RM153.5
No Service Tax
Need to Pay =
Sales Price = RM151.50
GST (6%) = RM9.09
Need to Pay =

Based on the calculation above, the introduction of GST will likely lead to a rise in prices of goods.  Consumers would definitely have to PAY MORE if the calculations I made are accurate. However, since the calculations are made based on my own understanding of how GST is calculated, I would like to subject this for further debate if you feel that I am wrong.

How GST replaces Existing Service Tax?
Now that we have Sales Tax out of the way, we proceed next to explain how GST will replace Service Tax.

Definition of Existing Service Tax
Service Tax in Malaysia is a form of indirect tax imposed on specified services called “taxable services”. Service tax cannot be levied on any service which is not included in the list of taxable service.

A service tax applies to certain prescribed goods and services in Malaysia including foods, drinks and tobacco. The tax also applies to professional and consultancy services provided by the professional firms or persons such as accountants, lawyers, engineers, architect, insurance companies, etc.

Generally, the imposition of service tax is subject to a specific threshold based on an annual turnover ranging from RM150,000 to RM3,000,000.

How Much is existing Service Tax
Service Tax is fixed at 6% all across the board since January 2011. Previously it was 5%.

For example if you dine in a restaurant that has an annual sales turnover of RM3,000,000, the price you pay for your meal would be subjected to Service Tax of 6%. 

Shown below is an example of a receipt with Service Tax:

Click to Enlarge
Some receipts tend to print only the word "GST" which actually stands for "Government Service Tax". Therefore, do not confuse the current "Government Service Tax" (GST) printed on these receipts with the yet to be implement "Goods and Service Tax" (also GST).

You might also notice the term "Service Charge (10%)" appearing on some of your receipts. This Service Charge has got nothing to do with Service Tax or Sales Tax. A Service Charge is similar to a tip. In foreign countries, you decide whether to tip or not as well as the tip amount. In Malaysia, the 10% of the total bill tip is forced upon us by certain restaurants regardless of the quality of service rendered. 

Sample Illustration on How Existing Service Tax apply

How GST replaces Service Tax?
When it comes to replacing service tax, the implementation and calculation is exactly the same as existing Service Tax. Since GST is also at 6%, Consumers would only notice the changes in terms of naming.

The difference that we might notice in the future is the range or so called threshold annual turnover for those required to implement GST. For example the threshold annual turnover of GST might be lowered for restaurants from RM3,000,000 to RM1,000,000. 

If the Government decides to lower the threshold amount and widen the number of businesses and service providers required to implement GST, the cost of GST woud then be passed down to the Consumer, and that's us! Bad news indeed!

In my honest opinion, implementing Goods and Service Tax (GST) does not favor us as consumers. Looking at the larger picture, some might see GST as good for the economy. To me, the implementation of GST is just going to add on to the cost of living for Malaysians in general. Don't forget we will also be facing price increase once the sugar subsidy removal kicks in next year!

Cheers and Happy Investing!

P.s : Would like to correct me if I have misinterpreted the explanation and calculation for GST? Do leave your comment below.

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  1. Hi, in your comparison table for Sales Tax and GST, you are using the same concept in sales tax which the GST has been captured as a cost to the wholesaler/retailer. I think it should not be that way as the GST (input GST) paid by wholesaler/retailer will be claimable against its output GST. Since it is claimable, thus, theoretically it should not be captured as a cost to the wholesaler/retailer. If my understanding is correct, the consumer will end up pay lesser as compared to the Sales Tax. Please do let me know if my understanding is correct. Thanks.

  2. sugar subsidy removal already start on 26 Oct 2014 and not next year

    1. Hiu, 26 Oct "2014" IS next year. Did you mean this year 2013? I hope it's a typo because your statement confused me.

  3. Apologies for my mistake on the sugar subsidy removal date. Thanks for the heads up Hiu!.

  4. GST? Govt need more money? Why? Where did the money go? Whose pockets will it fill?
    Just you need to pay GST on corrupt money?

  5. If I apply your RM153.50 to a restaurant that actually charging 6% Government Service Tax now, the total payable will be RM153.50 + RM9.21 = RM162.71. That would be more costly than RM160.59.

    Hence, I believe some goods may be more expensive while others may be lower after GST implementation. Anyway, GST is to pump up Government Revenue and someone out there got to pay it. It just depend who going to pay it more or less.

  6. For goods..the existing sales tax already incurred and embedded into the selling price of the good. hence if gst is introduced, the price of goods would be recalculated hence producing rm160.59. Sales Tax does not apply if you are eating at a rstaurant, only Service Tax of 6%. What it means if a person is engaging a service or eating at restaurant,the taxation system for GST is the same as existing Service Tax.

  7. Your calculation is wrong,
    the next buyer shouldnt include GST (input) as one of their cost, as simple as the below calculation.

    RM 100 (Cost)
    RM 6 (Manufacturer GST)

    if wholesaler wants to achieve RM 20 profits, they just simply add RM 100 + RM 20 = RM 120 as their selling price, but apply another 6% GST.

    RM 120 (Cost)
    RM 7.20 (Wholesaler GST)

    This is because the wholesaler can claim back RM 6 from the input tax. So the RM 6 that paid to manufacturer shouldn't be calculated as cost.

    When goes to retailer, retailer buy at RM 127.20, if they want to achieve RM 40 profits,

    RM 120 + RM 40 = RM 160 (Cost)
    RM 9.60 (Retailer GST)

    so the final price would be RM 169.60 which is the selling price to consumer.

    if base on this profit, current 10% service charge 10% would incurred even more cost.

    RM 100 + RM 10 + RM 20 (wholesaler profit) + RM 40 (Retailer profit)
    = RM 170