To spend or not to spend

WITH the implementation of Goods and Services Tax (GST) at 6% on April 1, 2015, many of us are concerned on how this new tax will affect us especially in relation to our costs of living and prices in general.

The Royal Malaysian Customs refers to GST as a “game changer” for businesses, but the true impact of this “consumption” tax is going to be felt mainly by the rakyat.

While much has been debated and discussed about this impending tax, the man on the street simply wants to know if he should spend on certain items now or wait till after GST is introduced as he often hears that some things are going to be cheaper and some are going to cost more. Such expected impact on prices is largely based on the proposed rate of GST of 6%, the draft orders relating to exempted and zero-rated goods and services and the repeal of the sales tax and service tax legislation.

The major items affecting the man on the street include residential properties, passenger vehicles, education, healthcare, food, utilities and public transport. According to the draft Exempt Order, sales of residential properties will be exempted from GST. However, because of this exemption, a developer will not be able to claim the GST input tax incurred on its purchases and other costs including the GST of 6% charged by its contractor on the whole contract sum.

Even though the contractor’s costs may reduce from April 1, 2015 as sales tax currently paid on certain building materials (being a cost to the contractor) will be replaced by GST which can be claimed by him, this reduction will be much less than the 6% GST charged on the whole contract sum which includes labour cost and the contractor’s profit in addition to the cost of materials.

As a result, the cost to the developer of residential properties will increase which is likely to be passed on to the purchasers of the developed properties. Some developers have estimated that an increase of between 2% and 3% for such residential properties will occur but whether there is an increase or the extent of that increase will, of course, also depend on market demand and other market conditions which are more difficult to predict.

Passenger vehicles will be subject to GST at 6% under the GST regime while the sales tax imposed on imported cars and parts at present is 10% generally. When the sales tax is replaced by GST on April 1, 2015, the cost to the car assembler, distributor or dealer will be reduced not only because of the lower rate of tax but also because they can then claim the GST incurred as an input tax credit (i.e. the tax will no longer be a cost to them). Industry sources have estimated there will be a general reduction in price of between 1% and 2% arising from the introduction of GST assuming that the lower cost is passed on to the buyer.

This will also apply to businesses which currently pay sales tax on their purchases especially designer coffee chains which are already charging service tax on their sales of coffee. In other words, their selling prices will remain, as the 6% service tax will be replaced by the 6% GST, but these businesses will be able to claim back the GST incurred on their purchases.

Other exempt services proposed include private education, private healthcare and public passenger transport such as buses, taxis, trains and ships but excluding flights. As noted earlier, because these will be exempt services, the providers of such exempt services will not be able to claim the GST input tax incurred on their purchases and other costs such as medical and educational supplies, consultancy fees, utilities, rentals, repairs and maintenance, other overheads and perhaps fuel (in respect of which is still uncertain whether GST at 6% will be charged).

Accordingly, the operational costs of these providers will increase which will likely be passed on to the consumers rather than be borne by the providers themselves. This will similarly apply to toll road concessionaires where toll is exempt and these concessionaires will likely seek adjustments to the toll rates from the Government in order to cover the increased costs.

As for utilities, supply of treated water to domestic consumers will be zero-rated i.e. no GST will be charged whereas for supply of electricity to a domestic household, only the first 300 units will be zero-rated for a minimum period of 28 days. The cost of electricity will, therefore, be likely to increase for many domestic households.

Many basic food items are zero-rated which means that no GST is payable on the supply of such items. These include live animals, poultry and fish, fresh chilled or frozen meat and fish, potatoes, vegetables, rice, wheat, salt and sugar. Being zero-rated items, the providers of these food items will be able to claim back the GST input tax incurred on its purchases and other costs. Accordingly, there should not be any additional operational costs to be passed on to the consumers and therefore there should not be any impact on existing prices which can be attributed to GST. However, all canned, packaged and processed food items will be subject to GST and will likely increase in price.

The implementation of GST may also lead to a rally in the local bourse based on the stock markets of Australia, Singapore and Thailand when GST was introduced. This was probably due to an increased level of sales prior to GST implementation as many consumers perceived (correctly or incorrectly) that prices of most goods and services would increase post GST.

The government and its agencies have published on various websites the expected prices of certain goods and services post-GST and their studies show that the prices of clothing, footwear, communication, furnishing, restaurants, hotels, transportation and utilities will reduce. However, it should be noted that these views on expected price reductions are all based on the assumption that businesses will fully pass on the savings from the repeal of sales tax and service tax to end consumers.

By way of comparison, Australia introduced GST at a rate of 10% on July 1, 2000 replacing the existing multi-rate sales tax system. The Government undertook 320,000 price comparisons in 10,000 outlets between May 2000 and May 2001 and recorded an average price increase of 2.6%. Basic food items which were sales tax exempt and were zero-rated for GST included flour, eggs, fresh fish and chicken and such items recorded price changes of +1.6%, -0.5%, +1.9% and +1.4% respectively. Books and clothing were sales tax exempt but became subject to GST at 10% with price increases of 9.6% and 2.8% respectively. On the other hand, soft drinks and potato chips which were subject to sales tax at 20% had price decreases of 1.0% and 0.3% respectively. The price of new cars and audio visual equipment also decreased.

Based on the Australian experience, there should be an average price increase but the exact nature of any increase is impacted by existing sales tax treatment and future GST treatment.

In conclusion, with the implementation of GST, the prices of certain goods and services are likely to increase such as residential properties, private education and private healthcare while others may reduce such as passenger cars and designer coffee. There should be no GST impact on the cost of supply of treated water to domestic consumers and on supply of basic foodstuff items which are zero-rated. The actual effect will only be known when GST is implemented.

The Government will have to monitor price increases post-GST to ensure that no one “profiteers” i.e. making unreasonably high profit and enforce the Price Control and Anti-Profiteering Act 2011 if necessary.

Mok Chew Yin is BDO Malaysia’s executive director Advisory & GST