UUM COLLEGE OF LAW, GOVERNMENT AND

INTERNATIONAL STUDIES

SECOND SEMESTER 2020/2021 (FA202)

GMGF 5014
PUBLIC FINANCIAL MANAGEMENT

COURSEWORK:
GROUP

PREPARED BY:
DAYANG HAFIZAH BINTI MOHD SHU’IB / 827391
JADYN ANAK NICHOLAS NINGKAN / 827393
CAHRIS YONG KIEW HEE / 827390
NOR AZURA BINTI DRAHMAN / 827397

LECTURER IN CHARGE:
ASSOC. PROF. DR. SAMIHAH BINTI KHALIL @ HALIM

SUBMISSION DATE:
21st March 2021
1.0 Introduction of Malaysian Tax

There are two types of taxes implemented in Malaysia, namely direct and indirect taxes.
Direct taxes are taxes collected directly from the taxpayer by such tax authorities as income
tax for individuals and companies, property gains tax, petroleum income tax and stamp duty.
This tax is managed by Inland Revenue Malaysia Board. Indirect taxes are taxes paid by
consumers to a business and subsequently businesses will channel payments to the
government like sales tax, service tax, goods and services tax and excise duty. Good and
Service Tax (GST) is a broad -based consumption tax that covers all sectors of the economy
imposed on all goods and services made in Malaysia including imports except in specific
goods and services. The basic concept for this tax is simply value added for goods and
services should be taxed and these taxes are designed to be borne by the end user goods and
services (Rev & May, 2016). This type of tax is managed by the Royal Malaysian Customs
Department (RMCD).

Since there are two types of taxes in Malaysia, the level of contribution from both types of
taxes are important to the country. Direct taxes have the most significant relationship with
government spending, thus contributing the most to National development. Instead, the
government became less dependent indirect taxes as a source of government revenue. The
concern is changing sales and service tax to goods and services tax as part of a strategy to
improve the economy country in the future.

Malaysia reduces irrelevant government spending and strengthen the government revenue to
avoid twin deficits, as is the case in emerging countries, such as India and Indonesia. Indeed,
Malaysia has stuck in a budget deficit for more than 15 years an average of -2.93 percent of
GDP; and decreases current account surplus to RM2.6b in the second quarter of 2013. The
deficit experienced in 2013 was the highest in Asia after Japan and India. Malaysian tax
revenue has been dependent on direct taxes since 1982, but not directly taxes will probably be
a major contributor to countries with the introduction of GST in 2015, but in September 2019
the SST been reintroduce. The reasons because indirect taxes offer a broader purpose because
covering the entire population is not like direct taxes which only focuses on the fixed income
group, especially for countries challenged by population aging which the dependency ratio is
increasing. Then, indirect taxes can be widening the base while covering most of the level
production.
A consumption tax is a tax on the purchase of a good or service. Consumption taxes can take
the form of sales taxes, tariffs, excise, and other taxes on consumed goods and services. A
consumption tax can also refer to a taxing system as a whole in which people are taxed based
on how much they consume rather than how much they add to the economy (income tax).
Examples of consumption taxes include good and services tax, retail sales taxes, excise taxes,
value-added taxes, use taxes, taxes on gross business receipts, and import duties. These taxes
are borne by consumers who pay a higher retail price for the good or service. The higher price
includes the consumption tax, which is collected by the vendor and remitted to the appropriate
federal, state, or local government. Consumption taxes are often levied at different rates on
different commodities according to perceptions of whether a commodity is considered a
necessity (such as food) or a luxury (such as jewellery).

2.0 What are the advantages of taxing consumption?

A commonly cited economic benefit of a consumption tax over an income tax is that a
consumption tax does not penalize a taxpayer who earns and saves in early years and then
consumes in later years, relative to a taxpayer who does not postpone consumption. A
consumption tax would treat taxpayers with either consumption pattern similarly. The
unequal treatment of these taxpayers under an income tax stems from the fact that the early
saver will pay tax on earnings from savings. Stated another way, the early consumer will have
less income over his lifetime (less earnings from savings), which would impact lifetime
income taxes, but not lifetime consumption taxes. Thus, the perceived benefit of a
consumption tax relative to an income tax is that it will increase savings and investment.
Below are the further elaboration for the advantages of consumption tax.

a) Improved Standard of Living towards Building the Nation

Taxation is a very important element and a major source of revenue for the economic
development and growth. For most countries, the revenue is generated through taxation,
that comprises of direct and indirect tax. The contribution to national fiscal revenue
through the implementation of VAT by the developing countries, such as China, is much
more than the developed countries (Xing & Whalley, 2014) and VAT has become the
major source of tax revenue for China (Liu & Lu, 2015). In Malaysia, the implementation
of GST, one of the consumption tax is aimed to improve the revenue collection and
reduce the nation’s growing budget deficit, which ultimately could increase the standard
 of living among Malaysians as a whole. From 1960s to 1970s, only a few countries
adopted GST and most of them still relied on the direct taxes such as corporate tax and
personal income tax. A very high tax rate was set in the early 1970s, such as United
Kingdom with 75 percent, South Korea with 70 percent, and Taiwan with 60 percent
(Low & Carol, 1994). As a consequence, high corporate taxes tend to discourage
initiatives of foreign investors to conduct international trade with those countries.
According to Low & Carol (1994), one of the advantages for the implementation of GST
in Singapore is its help in raising the national income. On the other hand, among the
reasons for the implementation is to sustain the lower corporate tax rate in the country.
Therefore, this shall inculcate the spirit of entrepreneurship among Singaporeans, which
in turn will add values to its business environment and further attract foreign investors.
Besides that, the implementation of GST could reduce the reliance on direct taxation as a
main source of revenue. GST clearly could be a more stable source of revenue, enabling
the government to channel back the benefits to the people. Therefore, the tax reform
program adopted by the Malaysian government intends to earn a more stable income and
improve standard of living among Malaysians. It is indeed a good economic development
strategy in moving towards a high-income nation by the year 2020.

b) Enhanced Compliance
Since the Malaysian government introduced GST to replace SST, it has created an
integrated system that would enhance the level of conformity among the taxpayers. In the
2005 budget speech, the former Prime Minister, Tun Abdullah bin Haji Ahmad Badawi,
mentioned that GST could improve tax compliance. Previously, there were two separate
acts in governing the sales and service tax, which were both handled by the Royal
Malaysian Custom Department. Therefore, it indicated a complex system of laws and
regulations that caused a decrease of compliance among the taxpayers. Initially,
Malaysians showed a resistance towards GST implementation as the businesses needed to
adapt with the changes in administration works that consequently incurred high cost.
However, the government has taken significant steps to enhance the tax compliance by
ensuring that all businesses between the thresholds have registered as GST registrants and
accordingly update their accounting systems, providing the necessary trainings to those
companies to assure a thorough understanding of GST key element that include the
concepts, scopes, charges, and mechanisms, as well as offering advices and close
monitoring on the treatment of transitional issues upon the implementation (malaysia-
 gst.my). Hence, it is a good effort of the Malaysian government to implement GST under
the tax reform program as it enhances tax compliance and reduce tax avoidance
nationwide.

c) Fair Pricing to Consumers

The supply chain network for business transactions would usually consist of
manufacturers, suppliers, warehouses, distribution centres, dealers, and more (Zhang &
Huang, 2014). According to Xing & Whalley (2014), the government will levy the VAT
to the value added at each of the chain in order to avoid double taxation. Therefore, the
net tax payable would represent the one on the value-added goods processed and
distributed or services rendered (Carvalho & Lian, 2010). The implementation of GST in
Malaysia is also designed to eliminate double taxation under the previous indirect tax
charges of SST so that consumers will pay fairer prices for most goods and services. After
the implementation of GST, 22 products which were previously subject to SST have been
exempted from the GST. While 273 products which were earlier imposed with SST of 10
percent are now subjected to the GST of 6 percent. Nevertheless, the main problem to be
resolved is the traders’ manipulation of the prices (The Star Online, May 2015). GST
would no longer be an issue to the consumers once the prices of all consumers’ products
could be controlled and stabilised.

d) Greater Transparency
GST is designed to benefit consumers unlike the previous SST whereby they will exactly
know whether the goods and services are subject to tax and the prices stated conform to
the specified rates. Accordingly, it would reveal the hidden tax by the manufacturers
(Whalley & Fretz, 1990), which ultimately could increase on the competitiveness among
the businesses. According to Keen & Lockwood (2010), VAT has been introduced as part
of a program that modernises tax administration. It develops self-assessment method,
which would reduce the difficulty in administration and compliance. Therefore,
businesses become the tax collectors of GST until the final remittance to the RMCD after
setting off the correct amount of input tax credit. A strict adherence is required relating to
timing and remittance as well as invoicing requirements (Beh & Ng, 2013). This is
essential to reach the necessary level of transparency in order to overcome the previous
tax system that was vulnerable to evasion and avoidance. In Malaysia, a notice is
displayed at all supermarkets to help customers identify the goods with 6 percent GST,
 those with zero-rate, and items that have been exempted from GST. This will help
customers to plan their spending, thus avoiding unnecessary payment on indirect tax. In
addition, each of the transactions made by the customers will be accompanied by the
simplified tax invoice as reference. Under the previous tax regime of SST, the final
consumers would not know the amount of indirect tax they had to pay as the charges had
been included in the final prices of goods and services, with no detail stated on the receipt
of purchase (Malaysia Kini, 2015). The disclosure of indirect tax is essential for
customers to realise that GST is a compulsory consumption tax, and they have no choice
but to pay as per what they consume (The Star Online, April 2015)

e) Flat Tax
While a flat rate structure does create some simplification, the main advantage of a flat rate
is that the economic disincentive effects of the current tax system would be reduced. The
second misconception is that the flat tax is just a simpler version of the current income tax.
In fact, the flat tax is a consumption-based tax, although it is collected like the income tax
from both individuals and businesses. Indeed, it is the consumption base of the flat tax that
is the key to its simplification benefits. To see why the flat tax is a consumption-based tax,
note that only wages and pension benefits would be taxed at the individual level. At the
business level, firms would deduct wages, pension payments, and purchases from other
businesses, including capital purchases. The flat tax to an equivalent structure where there
is no individual-level tax and businesses are denied deductions for wages and pensions.
The resulting tax would be a ‘subtraction method’ value-added tax (VAT). VATs have the
same tax base as retail sales taxes. Hence, the flat tax has essentially the same tax base as a
retail sales tax.

f) Individual and Business Tax Simplified

The basic difference between an income tax and a consumption tax is the treatment of
saving and investment. For individuals, saving is initially deducted, and then later
withdrawals are included in the tax base. Apart from that, no deduction is given for saving
initially, but returns are not taxed. Under the flat tax, dividends, interest, and capital gains
are not taxed at the individual level. This would greatly ease paperwork headaches for
taxpayers, especially in comparison with complying with the current complicated rules for
tax favoured saving vehicles. For businesses, the flat tax would vastly simplify some of the
most complex areas of the tax code, including accounting for capital purchases and
 inventories. This would occur because consumption-based taxes use cash flow accounting
in place of accrual accounting, which is generally used under the current income tax.
Accrual accounting requires that firms accurately match revenues and expenses each year
to measure net income and to capitalize expenses that create future benefits. Such timing
of income and expense recognition under the income tax is a key source of complexity.
Because consumption taxes do not measure broad-based income, they do not require the
complexities of accrual accounting. Instead, under cash-flow accounting businesses would
simply deduct materials, inventories, equipment, and structures immediately upon
purchase.

g) Complexity Eliminated
While a consumption base is a much simpler starting point for a tax system, some areas of
complexity would remain. And no doubt, under a new tax system various loopholes would
arise that would need to be plugged with additional rules. However, many of the areas in
which a consumption tax would need special rules are already problem areas under the
income tax. Under a consumption tax, as under an income tax, there are problems of
accurately defining taxable “consumption” versus deductible “investment.” A good
example is the purchase of a computer for home use. If it is mainly used for playing games
it should be taxable as consumption, but if it is used for a home business it should be
deductible as investment (or depreciable under the income tax). Another example is
expenditures for education, which may be viewed as either consumption or investment.
Fringe benefit issues would continue to pose challenges as they do under the income tax.
Today, many fringe benefits are tax-free, and efforts are expended to engineer employee
compensation to fit into this tax-free window. Under the flat tax, fringes would be taxed at
the business level by denying a deduction. But problems may arise regarding the valuation
of fringe benefits and separating them from normal business expenses. For example, a
company tennis court might be considered a taxable fringe benefit and denied a business
deduction, or it might be treated as a deductible business expense. Defining financial flows
under a flat tax would require special rules. Financial flows, which are generally not in the
tax base, would need to be separated from non-financial flows.

3.0 What is value-added in sales tax?

A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a
type of tax that is assessed incrementally. It is levied on the price of a product or service at
each stage of production, distribution, or sale to the end consumer. If the ultimate consumer is
a business that collects and pays to the government VAT on its products or services, it can
reclaim the tax paid. It is similar to, and is often compared with, a sales tax.

VAT essentially compensates for the shared service and infrastructure provided in a certain
locality by a state and funded by its taxpayers that were used in the provision of that product
or service. Not all localities require VAT to be charged, and exports are often exempt. VAT is
usually implemented as a destination-based tax, where the tax rate is based on the location of
the consumer and applied to the sales price. The terms VAT, GST, and the more general
consumption tax are sometimes used interchangeably. VAT raises about a fifth of total tax
revenues both worldwide and among the members of the Organisation for Economic Co-
operation and Development (OECD). As of 2018, 166 of the 193 countries with full UN
membership employ a VAT, including all OECD members except the United States, where
many states use a sales tax system instead.

There are two main methods of calculating VAT: the credit-invoice or invoice-based method,
and the subtraction or accounts-based method. Using the credit-invoice method, sales
transactions are taxed, with the customer informed of the VAT on the transaction, and
businesses may receive a credit for VAT paid on input materials and services. The credit-
invoice method is the most widely employed method, used by all national VATs except for
Japan. Using the subtraction method, at the end of a reporting period, a business calculates the
value of all taxable sales then subtracts the sum of all taxable purchases and the VAT rate is
applied to the difference. The subtraction method VAT is currently only used by Japan,
although subtraction method VATs, often using the name "flat tax," have been part of many
recent tax reform proposals by US politicians. With both methods, there are exceptions in the
calculation method for certain goods and transactions, created for either pragmatic collection
reasons or to counter tax fraud and evasion.

VAT in Malaysia, known as Sales and Service Tax (SST), was introduced on September 1,
2018 in order to replace GST (Goods and Services Tax). The fixed rate is 6% and some types
of goods and services can be exempt from this tax, while others are taxed at different rates.
Any business with a yearly turnover in excess of MYR 500,000 is required to register for
VAT in this country. VAT registration in Malaysia is a process that includes several steps,
starting with determining if the company exceeds the applicable threshold and following the
standard application process with the Customs Office.

The Malaysian VAT/SST system is largely modeled on the UK VAT. Primarily, the
VAT/SST is a consumption tax on goods and services. The main concept of VAT in Malaysia
is that only the value added to goods or services is going to be taxed. The VAT system is
projected to make sure that the VAT price is ultimately paid by the final consumer and that it
is not an additional burden for companies in the value chain. Mandatory and voluntary
registrations are available, and the latter applies in case of taxable goods that are below the
threshold or in case of persons who were exempt from registration but choose to undergo this
step. The turnover for the 12-month period can be calculated based on the past value of the
taxable goods or according to a future projection.

4.0 Which tax rate is efficient?

4.1 Comparison between GST & SST

4.1.1 Good And Services Tax (GST)

The goods and services tax (GST) is a value-added tax levied on most goods and
services sold for domestic consumption. The GST is paid by consumers, but it is
remitted to the government by the businesses selling the goods and services.

GST has drawn quite a bit of flak over the years and public opinion is generally that
GST has caused prices of goods and services in Malaysia to go up without the country
seeing significant benefits to the additional tax revenue collected. For businesses, GST
claim back on tax has been difficult, can be declined, and requires a minimum
RM500,000 in annual sales before being claimable. There are also middle men who
take advantage of GST to raise prices and use the tax as a convenient reason to make
more money.

GST is essentially a form of consumption tax that is levied incrementally at the

different levels of the production and distribution process until the product or service
reaches the customer. The assessment of the tax is based on the increase in the market
value of the product or service at each stage of its production or distribution process,
such that only the added value at each stage would be taxed. In other words, the tax
would be on the difference between these two amounts. For example, a 6% tax rate is
imposed on the value added by the suppliers at each stage. The 6% GST rate at the
Manufacturer stage is on the value of the product that the manufacturer has
manufactured, which is RM100. In the second stage, the Distributor adds RM 50 to the
value of the product, thus the 6% would be on the added amount. The same goes for the
retailer stage where RM50 was added to the value of the product, thus the 6% is on the
added RM50. Another salient characteristic of GST is the input tax credit, something
which is not available in the SST system (Deloitte, 2018).

To understand input tax credit, emphasis should also be given to output tax. Output tax
is the GST collected on any taxable supply of goods or services made by a taxable
person (a registered business as a GST collector on the supply of goods and services he
makes) in the course or furtherance of his business in Malaysia (GST Act 2014, section
2). As for input tax, it refers to the GST incurred by the taxable person when
purchasing goods and services which he can claim back from the Customs department
as the input tax credit. This is because, as said earlier, GST is not a liability on
businesses, but on consumers.

4.1.2 Understanding the Goods and Services Tax (GST)

The goods and services tax (GST) is an indirect federal sales tax that is applied to the
cost of certain goods and services. The business adds the GST to the price of the
product, and a customer who buys the product pays the sales price inclusive of the
GST. The GST portion is collected by the business or seller and forwarded to the
government. It is also referred to as Value-Added Tax (VAT) in some countries.

4.1.3 How the Goods and Services Tax (GST) System Works
Most countries with a GST have a single unified GST system, which means that a
single tax rate is applied throughout the country. A country with a unified GST
platform merges central taxes (e.g., sales tax, excise duty tax, and service tax) with
state-level taxes (e.g., entertainment tax, entry tax, transfer tax, sin tax, and luxury tax)
and collects them as one single tax. These countries tax virtually everything at a single
rate.

4.2.1 Sales and Services Tax (SST)

SST will cause the government a tax revenue drop, estimated at RM25 billion, SST is
seen as a less progressive form of tax and many countries have moved on to GST.
Experts have said that prices should come down but there could be a mixed impact
from the reintroduction. The sales tax is based on the manufacturing cost or import
cost, while the service tax could cover a wider range of services, therefore a higher
price or charges for services rendered on the whole.

One major element that characterizes the SST is its single-stage levy nature. This is to
say, if a manufacturer in Malaysia manufactures an item or an importer imports items
into Malaysia, he or she is the only one to add SST and remit to the government. The
wholesaler cannot add another tax nor does the retailer. So, the consumer will only be
paying taxes that are embedded in the sale price instead of the accumulated value-added
tax. The service tax is only levied on service rendered in Malaysia at 6 % by a business
that meets the threshold (Royal Malaysian Customs Department, 2018; Service Tax
Regulations, 2018, p. 106).

According to Chong (2018), SST is an enhanced version of the earlier Sales Tax Act
1972 and Service Tax Act 1975, which governed Malaysia’s indirect tax arena for more
than four decades before GST was implemented on 1 April 2015. The new SST
comprises two legislative acts: the first one is the Sales Tax Act 2018, and the second
one is the Service Tax Act 2018. Effective from 1 September 2018, the Sales Tax Act
2018 and the Service Tax Act 2018 replaced the Goods and Service (GST) Act 2014.
Sales tax administered in Malaysia is a single stage tax imposed on the finished goods
manufactured in Malaysia and goods imported into Malaysia. The rate of tax is 5
percent or 10 percent or a specified rate depending on the category of goods. Sales tax
is a single-tiered tax that is typically imposed only once in a supply chain. Service tax
that is a tax charged and levied on taxable services provided by any taxable person in
Malaysia in the course and furtherance of business. The rate of tax is 6 percent ad
volerum for all taxable services except for the provision of charge or credit card
services.
The table of comparison of the tax as follow:
Table 1: The tax rate chargers

Table 2: Comparison between GST & SST

To conclude, both tax systems have their own advantages and disadvantages. The government
should learn from the past experiences to ensure that the new SST will be a better tax system.
According to the Organisation for Economic Co-operation and Development (OECD), an
effective tax policy is supposed to help in raising the revenue to finance public expenditure on
transfers, health and education that tend to favour low-income households as well as on
growth-enabling infrastructure that can also increase social equity. Thus, it is hoped that the
implementation of SST will much better to match with the Malaysian environment. This is
because as noted by Chong (2018), SST is much more tax friendly for both the business
entities and the people of Malaysia as compared to GST. After all, citizen in Malaysia are
willing to pay taxes as long as they get the benefits in return especially in term of facilities
which helps to reduce their cost of living.

5.0 History and Implementation of Malaysian Sales and Service Tax

Malaysia has adopted the sales tax and service tax since 29 February 1972 and on 1st March
1975, respectively. Sales tax is a one -tier consumption tax imposed on local’s goods and
services produced as well as imports. As of October 2014, the standard rate imposed is 10%,
then a 5% reduction rate for non -essential food and building materials and special prices for
petroleum products. This tax was imposed on certain services provided by taxable persons in
Malaysia. As of October 2014, the flat the rate is 6%. There is a special price for credit cards
of RM50.00 starting 1st January 2010. Previously, the service tax rate was 5% but increased
to 6% in January 2011.

SST is a one-tier ad valorem tax levied based on the scope of the respective charges which are
accountable to the Royal Malaysian Customs Department (RMCD). Sales tax is levied on
locally made goods and / or taxable imported goods. It is considered as a consumption tax,
and therefore, the liability is by the manufacturer to charge and collect taxes from their
customers. Sales tax rates are varying from 0 percent, 5 percent, and 10 percent to 20 percent,
depending on the category of goods subject to sales tax. Certain goods like food and fruits are
0 percent, food and fruits for expensive lifestyle, as well as beer and wine are subject to a
sales tax of 5 percent tax, while other goods are taxable standard rate of 10 percent. Certain
sales tax rates are also levied on certain classes of petroleum such as refined petroleum, diesel
fuel, gas oil, and liquefied natural gas.
According to Mr Lim Guan Eng on the rebranding of SST effective1st September 2018,
recorded a total of 5, 443 items are exempted meanwhile there 545 consumer goods were
exempted under the previous GST regime will charge of 6% tax. Among the relief items from
SST include the use of daily food such as dairy products, agricultural food and daily
necessities such as meat, rice, beverages, sugar, palm and coconut oil. However, Malaysians
are being expected to pay between 5 to 10% sales tax on these imported goods including food
products such as olives cooking oil, sunflower and peanut oil, butter and ready mixed drinks.
Services provided by hotels, insurance companies, Telco’s and professionals such as lawyers
and accountants are subject to a 6%service tax. However, it only has to be paid if the business
has annual income in excess of RM500,000. Sale / lease / rental of land / residential property,
domestic public transport, toll highways, land for agricultural purposes and land for general
use (government buildings and cemeteries), private health care and specific education and
financial services will also be exempt from SST from 2019.

Previously, there were 472 thousand registered companies that were asked to pay GST
whereby under rebranded SST, only about 100 thousand companies are required to pay SST,
which greatly eased the burden of 372 thousand SME businesses. Preliminary investigation
by Ministry of Domestic Trade and Consumer Affairs, nearly 70% inspected goods and
services was found to have a price in September 2018 when compared to the price of the GST
tax regime. According to Director General of the RMCD, there are a number of businesses
that are subject to service tax is 43% compared to 66% previously charged with GST.
Furthermore, there are 472,000 businesses registered with GST, therefore only around 80,000
businesses are eligible to pay SST.

As for food and beverage shops, only those with an annual income of more than RM1.5
million have to pay service tax. A separate annual service tax of RM25 for each credit card
will also be charged to card users. Items that will be subject to 10 percent sales tax include
shellfish, canned beverages, household electrical appliances, toilet paper, tissues, and
cosmetics. Cars and motorcycles over 200cc will also be taxed. There is no sales tax levied on
medicines and pharmacies product; as well as personal hygiene products such as diapers and
bandages. Taxable transport is charged on all vehicles including bicycles, motorcycles under
250cc and forklift. Petrol and diesel will not be charged.
6.0 Issues and problems in implementation of consumption tax in Malaysia

a) Less of awareness about GST

The major issue, challenge and drawback for the nation’s authority to place in extra effort to
ensure Malaysian have a clear understanding and cultivate a positive awareness towards GST,
resulting on the acceptance. Good understanding among Malaysians is important to fostering
a constructive perception towards the GST/SST taxation policy. The understanding and
awareness level on GST among Malaysia relatively low. In fact, the most important reason
contributed to the GST failure was the negative observation, information lacking on the
products and services exempted from GST and price inflation impact perceived by majority
Malaysian.

In other developing counting, GST or VAT operation works well with minimum problem rise
but contrary to Malaysia. After GST announcement, media had reported radically increased
costs for consumers’ products. The low-class mentality for this phenomenon due to the
businesspeople greediness, from conglomerate entrepreneur then to hawkers and stall owners
became piggishness capitalist. Similarly, various complaints were recorded over seven days
of implementation whereby the Domestic Trade, Cooperatives, and Consumerism Minister
had received about 2,833 grievances on price upsurge within the market. In but a year of
execution, the GST tax structure received overwhelmed feedback and complaints from the
general public particularly on the value of goods and services purchased.

b) Regressivity Concerns
The implementation of GST on macro level, perceived negatively by the Malaysian mainly to
the difficulty of regressivity concerns. Regressively for tax compliance costs mean the cost is
a relatively small burden for large but very high companies burdening small companies.
Large companies are generally found to have a greater total compliance cost than smaller
counterparts. However, as a percentage of annual sales turnover, compliance costs are greater
for smaller than larger companies.
The flat rate which been imposed on most goods and services, it's certainly regressivity on the
poor income households, a possible rise rate of the GST in future because of the leakages,
wasteful resources, irresponsible government spending and corruption. corruption had
significant correlation with the taxation. In other words, the fair balance between directs taxes
should be much more progressive and indirect taxes should be less regressive. Corruption
should be stop because when is come across with the revenue. In the case of the officer in
charge of fiscal revenue collection being corrupt, the extent of corruption features a direct
impact on its low level of assembling and within the case of corruption reducing the assets or
reducing the amount of economy activity, the ultimate result's reduction of budgetary
revenues.

c) The complexity of GST

The complexity of GST fairness taxation contributes a very damaging insight by the average
SME taxpayer, thus committing snowball non-compliance, in line with the underlying
assumptions of the TRA or the Theory of Reasoned Action. A number of SME businesses
have been closed, most of which are small vendors or convenience stores in villages and
small towns. Retailer sales did not even reach the MYR500,000 thresholds but had to register
with GST for the life of the business. In fact, the head of SME Malaysia explained, Sales and
Services Tax is the preferred tax structure by the majority SMEs, given the fact that the tax
levied only applies to manufacturer/producers, unlike the Goods and Services Tax, which is
levied at every level from manufacturers to wholesalers, retailers and users.

The complexity of GST administration, the need for comprehensive documentation related to
its procedures, specific information and guidelines, contribute to the issues and challenges of
GST administration due to lack of understanding of GST practices. On the other hand, strict
enforcement policies, such as penalties or prosecutions to enforce compliance, cause
psychological costs such as anxiety and resentment among earnest taxpayers. According to
the income disparity, about 30% of the income earned by households with a monthly salary of
RM1,000 and below is spent on food, beverages and daily necessities compared to 5% of the
expenditure with households earning RM10,000 per month. Research shows 70.4% of
household income is spent on food consumption alone. Therefore, the GST paid to each food
stall for eating would be a burden to 60% of Malaysian households.

d) GST as a Burden
The government initiative to help Malaysians through BR1M or known as Bantuan Rakyat
Satu Malaysia as a tool to help the low -income group is a short-term subsidy. The ongoing
BR1M inevitably encourages a subsidy mentality and laziness. Instead of BR1M, there must
be a precise package plan to increase public productivity then ruin this group with BR1M.
Middle-income households suffered the worst on GST and did not benefit from BR1M. At
least 60% of households prefer to adjust their daily consumption by switching to goods and
services at low prices because their wages remain constant, yet the inflation rate rises.

Malaysian households, especially the millennial group, are more sensitive to market price
shocks as they spend most of their income on consumption with minimal or zero savings.
With the relatively high cost of living especially in metropolitan cities such as Kuala Lumpur,
Kota Kinabalu, Penang and Johor Bahru, a significant price increase due to GST is certainly a
big suffering for the middle- and low-income groups. Due of GST many of them chose to
reduce their household spending. In addition, for public and private sector employees, taxes
in Malaysia are quite high and very burdensome for them.

On top of the GST / SST Malaysians have to pay, home ownership tax known as gate tax,
road tax, income tax, service tax, departure tax, internet tax, land tax, foreign labour tax and
the list goes on. Actually, this kind of perceptions of the tax system, the complexity in tax law
contributed to the negative perceptions of the system that drive refusal to comply. Similarly,
taxpayers who identify themselves as sufferers of tax injustice increase their misconduct
activities while their morale improves when they are treated with respect by tax officials.

e) GST Tax Return

In 2018, Finance Ministry has filed a huge lawsuit over the previous government on issues of
failure to return a total of RM16.046 billion in excess income tax and property gains tax to
taxpayers. The previous government was also indebted to this repayment for the last six years.
The minister's statement issued on 22nd August 2018, recorded tax returns of RM3.09 billion
for organizations, RM1.50 billion for individuals, communities, and foundations and
RM6.125 billion, has not been returned to taxpayers for more than six years. In short, there
are 1,653,786 taxpayers who have not received their tax returns more than six years ago. Then
the accusation of are not fully utilized because GST input tax refund of up to two years due to
zero allocation in Government Trust Funds or trust accounts. Instead, the money is put into a
consolidated fund and treated as income.

f) Price Increase
The increase in GST towards the increase in housing prices, of course, varies from the
affordability of the community, especially to the middle-income group who are always left
behind from the government's allocation or plan in helping them towards home ownership. As
the country now pays attention to housing price issues, Malaysians are aware of the fact that
they have to pay more for such purchases. Thus, this can be seen by most of the greedy
developers to leverage profit margins in response to the implementation of GST. Hence the
lack of readiness of Business taxpayers is among the failure factors. The investigation among
the business shows that the sector is less ready for the implementation of GST. Among the
service affected by the GST era is the eco-tourism business resulting in sales of tourism
packages declining by almost 20%.

It is clearly stated, about business entities, capitalism and greedy mentality, which continue to
increase the prices of goods and services and refuse to issue sales and services taxes, and at
the same time loosen customers with GST. Currently, this is the real fact that is happening in
Malaysia. Past experience shows that Malaysian capitalist retailers are reluctant to lower
prices even though the Government has ordered to lower prices, surely the price of food &
market goods will increase by at least 4 percent. Moreover, will the government impose 4%
GST while the cost of collecting GST itself is expected to be only 3% - resulting in only 1%
net tax collection for the government. GST / SST / VAT will be highly disliked by almost
every segment of society. However, responsible politicians whether from Perikatan Nasional,
Pakatan Harapan or Barisan Nasional or those in power should leverage and carry out a
holistic approach to make the tax regime better taking into account the issues, challenges and
shortcomings shown in above. The main rejection of the tax structure is due to unbalanced
suffering exceeding modest and low -income households. GST is a tax on consumption, and
consumption as the percentage of income is generally greater for the poor than for the rich.
Around the world, the problem is usually addressed by excluding the zero-rating requirement.
For reasons of simplicity and efficiency, Tax experts strongly prefer the use of a refundable
income tax credit to offset a burden consumption tax.

7.0 Conclusion

According to the Economic Report 2017/2018, GST collection seems to be increasing from
year to year. In 2015, GST collection was at RM27 billion, in 2016 at a price of RM41.2
billion and in 2017, GST has contributed a total of RM44 billion. This shows that GST has
increased in terms of broadening the tax base, increasing transparency and taxation
compliance. For this reason, the implementation of GST has proven that it is a fiscal measure
to increase the efficiency of the Malaysian tax system. After the introduction of GST in 2015,
prices in the oil sector have declined and this has reduced the government results. At this
point, GST collection has protected the financial position of the Malaysian government to
ensure it sustainable growth. Yet as discussed above, there are some weaknesses in the
implementation of GST. The main argument that what has been circulating around GST is
that the cost of goods increases and as a result, it becomes a burden to the public when they
have to pay higher prices for goods and services. This in turn makes their cost of living higher
good and does not match their disposable income. In addition, GST has also increased
operating costs for business operators, especially SMEs. The businesses have to incur
additional costs in member recruitment and at the same time have to spend in new accounting
software that can perform GST calculations. Therefore, GST is believed to burden not only
the low -income group in Malaysia but also SMEs. In addition, GST is also seen as a failure
from a political point of view.

As promised during their election campaign to abolish GST, after winning the general
election, the new government has immediately announced that the GST rate becomes reduced
from 6 percent to 0 percent from June 1 to August 31, 2019. In conclusion, both tax systems
have their respective advantages and disadvantages. The government must learn from past
experience to ensure that the new SST will be a better tax system. According to the Economic
Organization Cooperation and Development (OECD), an effective tax policy should be able
to help increase income to finance public spending on evacuation, health and education tends
to benefit low -income households as well infrastructure that enables growth that can also
increase social equity. Therefore, the implementation of SST is expected would be better to
match the Malaysian environment. SST is indeed a lot more tax friendly for both business
entities and Malaysians than GST. After all, the citizens Malaysia is willing to pay taxes as
long as they get benefits in return especially in terms of helpful facilities to reduce their cost
of living.

8.0 References

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Bank Negara Malaysia (2011). Bank Negara Malaysia Annual Report 2011.
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Mahadi Ahmad, S. R. (2019). Shariah View on Consumption Tax: Malaysian GST and SST.
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Morni Hayati Jaafar Sidik, N. J. (2019). Goods and Services Tax and Sales and Services Tax
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