This article first appeared in The Edge Financial Daily on May 14, 2018

KUALA LUMPUR: Transitional issues can be expected in the short term as the new Pakatan Harapan government carries out its pledge of abolishing the goods and services tax (GST) and bringing back the sales and services tax (SST), say tax experts.

New Prime Minister Tun Dr Mahathir Mohamad has confirmed that GST would be scrapped as per the “10 Promises in the First 100 days” pledge in Pakatan’s election manifesto, and replaced by SST.

PricewaterhouseCoopers Taxation Services Malaysia (PwC) executive director and head of indirect tax Raja Kumaran said rules need to be put in place by the government during the transition period from GST to SST.

“GST as you know covers everyone, retailers and traders. On the other hand, sales tax only covers manufacturers while services tax covers certain prescribed services such as professional services, so there must be a thought process on the transition to SST.

“Also there are still GST issues hanging around such as liabilities to be settled, so having transitional rules in place is going to be a challenge, and it is not something that can be done overnight,” Raja told The Edge Financial Daily.

Baker Tilly Malaysia tax partner and Asia-Pacific leader Anand Chelliah said the transition from GST to SST would obviously increase time and cost for businesses that had only recently invested in GST-compliant accounting softwares.

Meanwhile, there is the issue of how the government would make up for the shortfall in revenue with the abolishment of GST. Last year alone, some RM44 billion was collected in GST revenue. SST, according to chairman of the board of trustees of the Malaysian Tax Research Foundation SM Thanneermalai, used to only contribute about RM17 billion to the government’s coffers before GST came into force on April 1, 2015.

“This year Customs is targeting something like RM43 billion in GST revenue. Roughly there would be about a RM20 billion shortfall, but the shift into SST would not be immediate so there is still a half year’s GST revenue to be collected, therefore the shortfall could be less.

“Also oil prices are much higher than in [2015], so oil revenue could help make up for the shortfall,” he told The Edge Financial Daily.

Thanneermalai, who is also the founder of tax consulting services firm Thannees Tax Consulting Services, said that a widened scope of services tax could also help increase revenue for the government.

“The government could increase revenue by widening the number of services that can be subject to services tax. For example in some countries, even rental is subject to services tax,” he said.

PwC’s Raja opined that the government would need to play its part to ensure that expenditure is under control to make up for the shortfall in revenue.

“We must not only look at [the country’s finances] from a collection angle. We must also look at the expenditure, whether money is being efficiently spent,” he said.

Nevertheless, Baker Tilly’s Anand said the shift from GST to SST in the near term could be a boon for the man on the street, obviously for those in the Bottom 40 (B40) income group.

“As much as the GST model is actually one of the most efficient forms of tax collection, being broad-based and collected at every stage of the value chain, it cannot be denied that it inevitably resulted in a cost-push effect on prices of goods and services”.

This was to be expected, he said.

“That, to some extent, resulted in discontent for many, particularly in the B40 group, who were not previously taxpayers from the outset.

“Despite the fact that there are a multitude of exempt and zero-rated items, GST still translates into a significant amount for the B40 through its impact on prices, so the abolishment is most certainly a boon for this group of Malaysians. But it is left to be determined if the abolishment of GST will result in retail prices being adjusted downwards and in what manner and form”.

He also feels that maybe it is an opportune time for a review of the Consumer Price Index and the sample basket of goods in Malaysia to ascertain the real inflation levels affecting the man on the street.

“For businesses, to some extent, a short-term relief is that a significant administrative and compliance burden has been lifted with the abolishment of GST, as Malaysian businesses are only too aware of the penal provisions contained in the GST legislation for non-compliance, and it will now be left to be seen how the replacement SST framework will play out. We await the details of the new laws, and the manner in which the SST will be implemented,” he said.

In a note to investors last Friday, AffinHwang Capital said the market will be focusing on Pakatan’s strategies to fix the government’s fiscal deficit position with the abolishment of GST.

“GST had become an important source of the Barisan Nasional government’s revenue since its introduction from April 2015, following the decline in government oil revenue.

“While the Pakatan government has unveiled its fiscal reform review plan, we believe any fast action plans to address the deficit position concerns will safeguard and maintain the country’s sovereign credit rating outlook by the international rating agencies.

“In our opinion, the risk of the country’s sovereign rating outlook being downgraded is small, as we believe the Pakatan government will likely cut operating expenditure and demonstrate its commitment to fiscal consolidation as well,” the firm said.