Choice between SST, GST hinges on nation's economic goals - MOF

KUALA LUMPUR: The choice between sales and service tax (SST) and the goods and services tax (GST) hinges on Malaysia's economic goals, administrative capabilities, and the need to achieve an optimal balance between revenue generation and the promotion of fairness and equity among the rakyat, said the Finance Ministry (MoF).

It said the SST, characterised by its narrower scope that concentrates on specific goods and services, serves as a subtle strategy in consumption tax.

"The GST model broadens the tax base, enhances compliance and transparency, improves efficiency and business-friendliness, and mobilises efficient revenue collection," the MoF said in its 2024 Fiscal Outlook and Federal Government Revenue Estimates report released today.

The MoF noted that the GST can potentially generate more revenue because of its broad base feature and is more transparent to consumers as it is explicitly shown in the final price.

"Additionally, the GST has the capacity to reduce the size of the shadow economy, hence benefiting the economy," the report said comparing the two tax systems.

In contrast, the SST might generate less revenue due to its narrow tax base. It is also less transparent to consumers as the tax may be embedded in the price of goods and services.

According to the ministry, the GST has no cascading effect as the tax levied on input is recoverable and not embedded in the cost, while there is "a cascading effect" in the SST because the tax element is embedded into the cost at each successive stage in the supply chain.

"At the same time, the overlapping of the two separate tax systems causes a cascading effect where an item may be taxed twice," it said.

With the GST, all exports are zero-rated, which enables hidden consumption tax to be identified because there is a rebate for it.

In the case of the SST, although exports are not taxed, the embedding of the tax element at each successive stage may increase the cost of exports, the report said.

On consumer impact, the MoF said the cost to business owners can be reduced because they can claim input credits from the government under the GST. Hence, the final price may be lower because there is no "cascading effect".

Under the SST structure, the sales tax is only charged at the manufacturers' level, which is indirectly compounded along the distribution chain and added to the tax element and the cost of products sold, the report said.

On tax evasion and compliance, the MoF said GST's self-policing mechanism can encourage better compliance and reduce tax evasion, but the SST is only imposed on certain goods and services. Therefore, the classification of the taxable status of an item or service may contribute to compliance issues, leading to tax evasion.

On the red tape for tax-free materials, the ministry said because the GST is a self-policing mechanism, taxable persons may offset input tax credit incurred against output tax liability, while with SST, registered manufacturers are required to apply for exemption certificates to acquire tax free materials.

Despite the differences in structures, both the SST and GST offer an important fiscal tool to fund government programmes and projects.

Malaysia has imposed the single-stage SST system since 1972. It was replaced by the GST at a rate of six per cent in April 2015 and abolished in May 2018. The SST returned on Sept 1, 2018.

--BERNAMA