Breaking Down the SST in Malaysia
Following the recent announcement of the re-introduction of the sales and service tax (“SST”) in the market, many people started to revisit how the SST tax regime and what’s the impacts of it? According to the Finance Minister of Malaysia, Lim Guan Eng, SST will make a comeback with its rate set at 10% for sales and 6% for services. While SST is not a type of progressive tax like GST and might lead to a drop in tax revenue, experts expect prices will adjust after the re-introduction of SST.
First things first, let us dive in to understand what SST is and how it works.
SST at One Glance
1. What is SST?
Many people confused over the SST as the Sales and Service Tax. In fact, SST is two separate taxes – Sales Tax and Service Tax. The second misunderstanding is none other than many people think it is a new tax regime. SST, however, is not something new but it’s been part of Malaysia’s tax regime since 1970 and it was only scrapped in 2015 due to Goods and Service Tax (“GST”).
- The Sales Tax
Sales Tax, as the name implies, is a single stage tax charged and levied on certain goods ( taxable goods imported or manufactured in Malaysia). The re-introduction of the Sales Tax also means that there is no credit mechanism for tax paid, unlike the GST tax regime.
- The Service Tax
Service Tax is another single stage tax. The Service Tax is charged and levied on services that are in-scope at a rate of 6%.
Misconceptions of SST
1. The Myth of 16% Tax?
The re-introduction of SST has also sparked certain doubt and misunderstanding among consumers. One of the misunderstandings is many people started to think they are going to pay a whopping 16% tax under the new tax regime.
So, are we going to pay tax twice under SST?
This is a misconception because SST’s mechanism does not work in that sense. While it is possible that the Sales Tax and Service Tax could apply on the same item, but it is hardly the case because there will be not much crossover and the scope of these taxes are narrow. In the case when the crossover does exist, the total cost of tax will not be 16% as claimed by the public.
2. SST will cause fluctuation in product prices?
Another most debated topic related to SST is about the product prices – many people are curious about the fluctuation of prices after the re-introduction of SST. While we can be certain that the implementation of previous GST had caused a slew of price hike in the market, but the replacement of it with SST does not mean it will cause another price surge, either. It is because we need to factor in the following issues:
- How many levels involved in the product supply chain between manufacturer and consumer?
- What types of products are there (SST will charge and levy differently on different products)?
Furthermore, Malaysia’s Prime Minister has denied the claim that SST will cause a price surge in the market because the new tax regime will charge and levy on fewer items, if compared with GST. Another plus point is SST will boost the purchasing power of Malaysians, as the SST is a single level tax and impose a lesser burden on everyday spending. In a nutshell, we can only expect to see some differences and adjustments in product prices depending on what type of service or good being paid for.
What is the Difference Between SST and GST?
- SST is taxed at the initial output level and the retail level while GST levied the final consumption or sale of goods and services.
- SST is a narrow-based tax regime where it levied at a single stage of the supply chain – service tax at consumer level and sales tax at manufacturer level; GST is a broad-based tax regime as it spread the tax evenly at each level of the supply chain.
- Despite the fact that SST can go very high (6% for service tax and 10% for sales tax), it applies to lesser goods while GST taxes almost everything.
- GST removes the cascading effect of tax (consumers do not pay tax twice) while SST is a tax system works on accumulated cost.
Long story short, a tax reversal to SST is expected to bring down the prices of goods and services, and at the same time, put more cash in customers’ pockets.