Goods and Services Tax in Malaysia

At the end of 2009, Malaysia’s prime minister Datuk Seri Najib Tun Razak announced that a bill on the proposed introduction of Goods and Services Tax (“GST”) will be tabled at this year’s Budget 2010. Some indicated expectations about GST are as followed:

  • GST is to be implemented from the 3rd quarter of 2011;
  • The rate is set at 4%; and
  • GST is applicable to all businesses with turnover above RM500,000.

What is GST?

GST is to set to replace the current Sales Tax and Service Tax systems in Malaysia and it is a multi-tier consumption tax; which simply means GST is applied at every stage of the supply chain; i.e. from raw material supplier, all the way until the retailers selling to consumers (or end-users). In a nutshell, the consumer bears the burden of the ultimatum tax figure.

The word “consumption tax” is used.

This indicates that GST is applied on consumption value, and not earnings or profits. GST is applicable on virtually all supplies of goods and services, except for this essential commodities such as rice, flour etc.

How GST works

It’s actually very simple. GST paid on purchases (are called “input tax”) shall be deducted from the GST charged to customers (called “output tax”). This offsetting mechanism is to ensure GST paid by businesses are incremental, based on value-added basis and do not end up being permanent cost…. well, consumers do not apply here.

Below is an illustration, showing how GST works:

GST mechanism in the Supply Chain

How does GST work? GST's mechanism in the supply chain for GST calculations and tax in Malaysia, for budget 2010

How does GST work? GST’s mechanism in the supply chain for GST calculations and tax in Malaysia, for budget 2010

  1. Let’s say the selling price from the supplier is RM100, and where 4% GST is charged.
  2. The supplier then charges the tax to the manufacturer, where you can see “value added” is pushed on.
  3. When the distributor receives and pays for the tax, it’s transferred to the consumer at the end price.

Payment of GST to the Government

  1. Supplier will pay RM4 (output tax) to the Government.
  2. Manufacturer will pay RM4 (output tax of RM8 less input tax of RM4) to the Government.
  3. Distributor will pay RM2 (output tax of RM10 less input tax of RM8) to the Government.

At the end of the day, consumers are the ones who are paying for GST of RM10, and the Government, who eventually receives total GST of RM10.