A fear of the unknown

Majella Gomes reports on Malaysia Inc’s general lack of enthusiasm towards the Goods and Services Tax

For something that was first mooted in 1989, and was gaining momentum in the past two years, the Goods and Services Tax (GST) looked like a sure bet for implementation in 2007. In fact, observers were of the opinion that the fact that it had not been mentioned in the 2006 Budget was an indication that it was indeed “all systems go” for GST. So why the 23 February announcement?

The fact of the matter is that the country is not ready for it. The GST, regardless of how it will eventually boost the economy - making Malaysia more competitive on the global playing field or bringing it into the League of GST Nations - is still a tax, and, with the current business climate in Malaysia, that’s enough for people to dig their heels in.

Raymond Liew, director of Parker Randall International (UK), cites several issues that will make implementation difficult. “GST implementation scheme parameters are not completely known at this time,” he says. “Generally, there is a lack of understanding about it, and with this comes fear of the unknown. The move to implement the GST has not been legislated yet.”

Besides this lack of awareness, there is no denying that the GST itself is a complicated business. Many aspects need to be thoroughly understood by manufacturers, retailers and service providers before the GST can be expected to run smoothly.

Liew adds that the 1 January 2007 implementation date may not allow enough time for documentation requirements, the registration of businesses for the GST or adequate staff training to handle administrative matters.

The complicated nature of the GST, which benefits countries in the long run, may be its biggest barrier to implementation. Because the GST is a consumption tax, paid by the final consumer at the end of the supply chain, the major issue is that goods and services will cost more as soon as it is implemented.

Many consultants have recommended that a standard 5% tax be levied, but whether or not this will be sufficient is a moot point. One tax consultancy estimates that companies looking to be GST-compliant may need to fork out as much as seven figures.

Growing burden

Companies may see their administrative burdens growing as the need for technical support, pricing, systems revamp and documentation increases. Perhaps they already realise this, hence the reluctance to get on the GST bandwagon despite the tax refund carrot.

A more immediate worry for the business community, according to Dr Choong Kwai Fatt, associate professor with the Faculty of Business and Accountancy, University of Malaya, is that the tax will result in lower demand for goods and services. “There has been no assurance that implementation will not cause inflation,” he points out.

The headache worsens when one considers that over 90% of companies in Malaysia are small and medium-sized enterprises (SMEs). Allowing for the increased administrative burden, they will not be able to implement the GST without raising their prices, which in turn will adversely affect the demand for their goods and services.

The raison d’etre of GST - that countries should absorb more taxes in order to strengthen the global economy - is too abstract to make any impression on them.

Even non-SMEs which may be able to absorb the cost of implementation are worried. Initial surveys have shown that staff workloads increase as businesses allocate more resources to deal with the changes that are inevitable with the GST. The fact that they can claim back the GST, which is something they cannot do under the current tax regime, is not a strong enough motivating factor at this time.

While some companies have proactively sought information and advice on the implementation of the GST, and are making efforts to comply, the majority of businesses have adopted a wait-and-see attitude, says Liew. “In the light of the Government’s recent announcement, these businesses may be prodded into more action,” he says. “The postponement will give them more time to prepare themselves. They will also realise that the implementation of the GST is inevitable.”

The Government has acknowledged as much, as seen by the tight implementation time-frame. A statement by the Ministry of International Trade, following the announcement of the postponement, quotes industry feedback that there should be at least 12 months between the time legislation is passed and when implementation begins.

Postponement will also give everyone a chance to understand the GST better, and reduce resistance to its implementation. Businesses and the public in general will be more accommodating if they can see its long-term benefits. As the GST is levied only on consumption, it encourages people to save, not spend.

The perception of the GST as another tax that will burden businesses and the public can be recast in the light of other countries which have taken the route. About 150 countries globally have already instituted the GST, some since the 1970s.

“Other countries which have implemented the GST have worked out the bugs; surely we can do the same,” says Liew. “With more money in Government coffers, more business incentives can be offered to spur economic and commercial growth.”

Being optimistic about the unknown is a positive thing but, in the meantime, more effort is needed to raise public awareness of the purpose and advantages of the GST, if its implementation is to go smoothly in two years’ time. Experts generally concur that the thorniest of GST issues can be effectively addressed through information, information and more information.

Says Choong: “The Government was late in introducing the framework for the GST and related laws. It should now expedite the gazetting of the laws, and carry out public consultation with businesses and organisations that are directly concerned.”

In addition, it should also release the parameters of the GST scheme so that all businesses will know what to expect, and be able to better prepare themselves for it. “A firm date should be set for implementation,” says Liew, “and businesses should be informed of developments at all times. It will help too if the practical experiences of other countries in implementing the GST could be shared. Understanding their weaknesses and shortcomings will help us overcome ours.”

Integration

A major portion of the administrative burden also concerns the smooth integration of the accounting mechanisms of the tax and the current systems which staff are accustomed to. Retraining may be necessary in some cases. Liew says accounting software should also be reviewed, and GST-compliant software pilot-tested ahead of the implementation date.

Meanwhile, the accounting community is stepping up efforts to get businesses up to speed. Cognisant of the fact that awareness of the GST and the myriad issues surrounding it is low, many of them have started organising talks, seminars and training sessions to educate their clients on the issues and what to expect when the GST kicks in.

“Once the law is out,” Choong adds, “seminars will be conducted by the accounting community, and articles will be written in local publications to further educate the public.”

Despite its late start, the Government has been fairly active, postponing the implementation date being an example. It has also been giving presentations on the issues and has set up a trial run of the GST to gauge its effectiveness. Choong further recommends a six-month period to field-test the GST before full implementation, to identify major problems and other hiccups.

Chas Roy-Chowdhury, ACCA’s head of taxation, who was in Kuala Lumpur in December 2005 to attend the organisation’s business conference on the GST, says his impression of the situation is one of pragmatism on the part of the Government. Like Liew, he believes Malaysia has a golden opportunity to learn from Europe’s mistakes where the GST is concerned.

“A simple tax system should be introduced from day one, and should be kept simple,” he says, pointing out that one of the main complications in European VAT is the proliferation of different rates, exemptions, zero rates and blocks on businesses in recovering input tax. “Malaysia should operate a broad-based GST with a low rate - no more than 5%,” he recommends.

But it will be easier said than done.

Majella Gomes is a business writer with a background in corporate communications and IT.