Modernising the SST

Now that it is clear that the Government is not intending to make any wholesale changes such as the reintroduction of the goods and service tax, there should be some focus on improving the existing tax system to make it more business friendly.

The Sales Tax and Service Tax, commonly referred to as "SST”, in its current form is difficult to navigate, overburdened by process, negatively impacts exporters and attracts multiple layers of tax through the supply chain. Due to its narrow scope, the burden of the tax is also more skewed to the manufacturing and the services sectors, with other sectors impacted in only a limited fashion.

It is important that these inherent issues in the SST are addressed if we want to maintain our competitiveness in the region. We look at some critical areas:

Export challenges

Malaysia aspires to be a regional manufacturing hub, with good reason, as a lot of manufacturing is based here. However, there is now a lot more competition - we need to compete with our neighbours such as Indonesia, Thailand, Vietnam and even Singapore.

Ideally, we would want to ensure that goods exported from Malaysia are ‘tax-free’ as these goods would be taxed in the country where they are imported into and consumed. It is also consistent with international norms, as most countries (including all of our key competitors) adopt a GST / VAT type tax that allows for ‘tax-free’ imports, i.e. no tax charged and embedded in the price.

While the sales tax provides for a multitude of ‘exemptions’ and ‘drawback’ claims that allow manufacturers to remove any embedded sales tax, in practice, this is cumbersome and inefficient. We have encountered numerous scenarios, where exporters have encountered difficulty in accessing these concessions and as a consequence, needed to bear the cost. Furthermore, the ability to offset or reduce the SST cost is only limited to sales tax, while service tax continues to be an additional burden that needs to be factored into the final price. Our competitors have regimes where exporters can offset all of the GST/VAT they pay, so they are truly free of tax. At best, our SST only allows partial offset and, in some cases, none at all.

The export services sector does not fare much better as the service tax only ‘exempts’ export services in limited and ‘vague’ circumstances. Our competitors have adopted the GST / VAT concept of taxing services where the customer ‘consumes’ the service, whereas Malaysia has a principle of exemption only if the “subject” of the service is “outside of Malaysia”. The former is much clearer on when tax needs to be applied. There is also very little guidance on how and when tax should be imposed in Malaysia. Many exporters simply impose service tax on their services which increases their service cost. Additionally, as the foreign customer is most likely in a GST / VAT jurisdiction, they would need to pay tax under their domestic rules for importing services. This creates a further competitive disadvantage for Malaysian exporters of services.

Lack of cohesion between the Sales Tax and Service Tax

While the term SST implies it is a single tax, it comprises of two separate taxes operating independent of each other, with no common principles. Sales tax is a tax on manufacturers and importers and is imposed on the import and wholesale value. Service tax is imposed on the provision of services and on the final sales price charged. While there are exemptions / concessions in both of these taxes, they are only limited to those operating under the respective tax regime, i.e. it is not possible for a service tax registrant to claim a concession under sales tax without first being registered for sales tax and meeting the relevant conditions.

The tax rates that apply are also not consistent, with sales tax using rates of 5%, 10% and exempt while service tax has 6% and exempt. From a tax policy standpoint, it is not good for one form of business activity to be taxed on totally different principles to another form of business activity, as we see here between the manufacturing and services sectors. As both sectors are critical sectors to the Malaysian economy, it would make sense to have a more consistent methodology for taxing this activity.

Supply Chain

The recent pandemic has highlighted how interdependent our supply chains are. It is no longer the case where you have a single business responsible for all facets of how a product is ultimately delivered to you. In this technological age, we are seeing even more advancements in the way that services are delivered. If Malaysia is to continue to be a competitive ‘cog’ in this global supply chain, it needs to ensure that the SST system is not creating additional ‘cascading’ costs.

Unfortunately, the service tax, and to a lesser extent, the sales tax can create multiple layers of tax throughout the supply chain. Since the reintroduction of the SST in 2018, there have been attempts to address the issue of double tax or cascading tax. This has largely been patchwork and ‘firefighting’ measures, which has resulted in concessions with limited application and complex requirements to satisfy that have ultimately failed to tackle the core issue.

What steps can we take to modernise?

What is outlined above is certainly not a comprehensive list of all the issues that businesses are facing with the SST. However, I consider these to be the most critical to ensure we retain our competitiveness.

Here are a few measures that could be explored to ‘modernise’ the SST and put our businesses on a level playing field to our counterparts in Vietnam, Indonesia and Thailand:

1.  Allow exporters of goods and services the ability to offset / refund any sales tax and service tax incurred in relation to undertaking that activity
2. Adopt a ‘consumption test’ for exported services so that only services consumed in Malaysia are brought to tax
3. Provide a broad based ‘offset’ for any sales tax or service tax incurred by a business through its supply chain to ensure tax is only paid once and not multiple times

While the Government has made it clear that now is not the right time to reintroduce the GST, it does not mean we cannot take steps to modernise our SST, so that it does not impact our competitiveness as an economy and our attractiveness as an investment destination.

Senthuran Elalingam is the Tax Technology Consulting Leader of Deloitte Malaysia. The above views are his own.

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