How does it work?
Like a GST, an RST is a tax on final consumption. It is the individual consumer who bears the cost of the tax. Where they differ is in the collection mechanism.
An RST is levied on the final sale of goods and services to consumers. For example, if the selling price of a canned drink is RM1, the retailer will charge RM1.04 to the customer inclusive of four sen tax (assuming an RST of 4%). This amount would then be reported and paid to Customs via a periodic return (normally monthly).
A GST on the other hand, is collected at each stage of production (from manufacturer through to retailer). Businesses are allowed a “credit” to offset any GST paid on purchases, which ensures that only the final consumer bears the cost of the tax. To use the canned drink example, the total tax payable under a GST system would also be four sen, except that it is collected in part from each participant in the supply chain (the manufacturer, distributor and retailer) through an invoice-credit mechanism.
So, in a simple world, both RST and GST would produce the same tax outcome. It is merely the collection mechanism that is different. Unfortunately, we do not live in a simple world and before we decide on which approach to take, we need to consider issues such as the need to give concessional treatment to certain goods and services, the administrative costs to businesses and the possibility of revenue leakages as a consequence of fraud or evasion.
What are the issues?
1. The ability to manage concessions and tax a broad range of goods and services
Under the proposed GST model for Malaysia, the government has chosen to provide concessional treatment to a number of items including basic food, water, electricity, public transport and residential housing. There are also financial services such as interest and loans which are hard to value, and therefore must be excluded from taxation.
However, there are two types of concessions under GST — “zero-rated” (for example, food and exports) and “exempt” (financial services, residential housing and public transport). While GST is not charged on the final sale to the end-consumer under both concessions, only zero-rated items are totally free of GST while “exempt” items are taxed on their “inputs”. This means that while the bank that gives loans to consumers and the developer who sells condos to the public won’t have to charge GST on the sale, they will be blocked from recovering any GST they pay on their purchases (for example on construction costs, labour, equipment and so on).This GST cost is likely to be passed on through an increase in the final sale price to the customer, but this increase would still be lower than if the full 4% was applied to the sale price.
As the RST is only applied at the retail stage, there is only the option to tax or not to tax. There is no equivalent to GST “input taxation” on exempt supplies. It is possible to use multiple rates so that some products receive concessional treatment, but this adds an extra level of difficulty for the retailer, more confusion for the consumer and does not overcome the problem of how to tax difficult areas like financial services. Therefore, an RST provides less flexibility compared with GST to tax a broader range of goods and services.
2. Administrative costs to businesses
The introduction of any tax will pose a cost to business. The issue to manage is identifying a tax that is more cost-effective in terms of generating additional revenue while not being over-burdensome on business.
As a GST system involves all participants in the supply chain, it should involve more businesses than an RST that would only involve retailers. However, the government has chosen to limit GST registration to those businesses with an annual turnover in excess of RM500,000. This means that a large number of small businesses and sole traders will be excluded.
If an RST were to be applied, the registration threshold would need to be much lower because under an RST, if the retailer is not registered no tax is collected at all. GST applies across the supply chain, so even if the distributor and the retailer are not registered GST can be collected from the manufacturer. Therefore, in order to collect the same level of revenue, the registration “net” will need to be much wider to involve more smaller businesses. This is something that the government would want to avoid as it will place a greater burden on smaller businesses.
There are also some administrative issues in exempting business purchases under an RST. The retailer will need to develop a system to determine whether the purchaser is a business or a consumer, which is not easy to do. If a balance is not reached there is a risk that either revenue would be lost from failing to charge to consumers, or an increase in cost to businesses due to incorrectly charging them RST. The cost of developing this exemption mechanism would need to be borne by all registered retailers. As mentioned above, in order to produce the same outcome as GST this is likely to include more small retailers, who will now have to bear this cost.
In a GST system, there is no need for a seller to differentiate between consumer and business sales. If a business makes a purchase that includes GST, it can recover it from the government through a monthly GST return based on the tax invoice it obtains from the seller. This approach is much easier to implement for sellers.
3. Strength of tax system against acts of fraud or evasion
Regardless of whether the government introduces a GST or an RST, there will be people who try to defraud the tax system or evade the payment of tax. The key would be to identify the approach that provides the most protection against fraud and evasion.
An RST poses significant risks of evasion as it is only the retailer who is responsible for collecting the tax. If the retailer under-reports its sales, no tax is collected on the entire price of the good. The GST system, on the other hand, involves more companies along the supply chain which reduces the risk of no tax being collected. Further, the credit mechanism under GST also introduces a level of self-enforcement as businesses would need to obtain invoices from sellers in order to recover GST as a credit. This ensures that there is a document trail that can be verified and audited by Customs.
Though an RST is a simpler model than a GST, it will pose much more significant costs and risks in administration, compliance and potential for evasion. The GST model represents a sounder and more flexible approach to taxing goods and services, hence it should take preference over an RST.
Raja Kumaran is executive director and Senthuran Elalingam is senior consultant at PricewaterhouseCoopers Taxation Services Sdn Bhd