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Sakmongkol ak 47

Tuesday 1 December 2009

Some thoughts on the GST/VAT

Let us illustrate the workings of a VAT or GST as it's called in our country. GST is scheduled to be implemented next year.

Assume a case, where no tax is imposed at all.

  1. A toy maker spends RM 1 on purchase of raw material to make a toy.

  2. Toymaker sells the toys wholesale to a retailer for RM1.20 each and makes a profit of (1.20-1) = 20 sen.

  3. The retailer sells the toy to a consumer at RM 1.50 each making a profit of 30 sen.

The government gets nothing of course since it imposes no tax. We say, how can they pay no tax? Let's impose a 10% sales tax. This is tax at the point of sales where the seller/retailer sells to the end user or consumer. This is what happens:-

  1. Toy maker pays RM 1 for raw materials-he pays no taxes because he is not a consumer.

  2. Toy maker sells to retailer at RM 1.20 who is not an end buyer and still makes 20 sen as in the case where he pays no taxes.

  3. Now, the retailer charges 10% sales tax on final buyer/consumer. He sells to consumer at RM1.65 (RM 1.50 + 10% of RM1.50). He carries out extra paper work to pay the government the amount of the sales tax of 10% i.e. 15 sen. He still makes a profit of 30 sen, the same as in the no tax regime.

So the consumer has paid 10% ($0.15) extra, compared to the no taxation scheme, and the government has collected this amount in taxation. The retailers have not lost anything directly to the tax, and retailers have the extra paperwork to do so that they correctly pass on to the government the sales tax they collect. Suppliers and manufacturers have the administrative burden of supplying correct certifications, and checking that their customers (retailers) aren't consumers.

Politicians are not happy. Those who are thinking people start asking, why must the end user be the only party that pays taxes? Toy maker and retailer makes profit but pay only corporate taxes and that also, they can do all sorts of accounting to avoid paying full tax.

Let us introduce VAT- where a tax is levied on each value added level. Toymaker adds value to raw material by manufacturing toy. Retailer adds value by marketing, sales and advertising. How to tax at each valued added level? Let's introduce value added tax or consumption tax. Imagine every single actor in economics- producer, retailer and household is a consumer.

Basic principle.

The basic principle is to say a business owes some percentage on the price of the product minus all taxes previously paid on the good.

Supplier of raw material.

Moving on from the example number 2, the manufacturer buys raw material from supplier at RM1. The supplier pays no tax in the previous example. As supplier of raw material he has expended energy and money into making available a resource and thus he has added value. Since he has added value to the whole business process, he must pay tax. He pays a 10% VAT. Therefore he pays 10 sen. (RM 0.10, 10% of RM1)


The manufacturer sells to retailer at the wholesale price of RM1.20 plus 10% VAT. This means he sells at RM1.20 plus ( 1.20 + 1.20 x 10%) = 1.32sen. That means at the second stage of business transaction, he has added 12 sen. He owes some proportion on the wholesale price to the government. Remember, he needs to pay the government only 10sen so that if and when he charges gets more than 10 sen, he needs to hand over the difference, i.e. 2 sen to the government. He hasn't lost anything because he still sells at RM 1.20 making a profit of 20 sen.

That 2 sen is the difference of the percentage in the price of the product minus the tax he pays at the first level. The percentage amount in the second level is 12 sen and the tax he pays at first level is 10 sen. So 12-10 is 2 sen.

The retailer.

What is the price the retailer needs to sell to still make a profit of 30 sen? He must sell at RM1.50 plus 10% VAT. Therefore he sells at RM1.50 + (10% of 1.50=15 sen) which is RM 1.65. He has added 15 sen and owes a percentage from this 1.65 to the government. Remember at the 2nd level the manufacturer has already paid 12. The retailer now deducts 12 sen from his own 15 sen and thus pays the government 3 sen.

How much tax has the government collected? It has collected 10 sen from raw material supplier, 3 sen from manufacturer and 2 sen from retailer making a total of 15 sen. This is the price paid for by the end user or consumer, 1.65 which has incorporated a VAT of 10%.

So the consumer has paid 10% ($0.15) extra, compared to the no taxation scheme, and the government has collected this amount in taxation. By paying the 15 sen extra to the government, with VAT he has ensured that the supplier, manufacturer and retailer each have paid their share of tax to the government.

Has business lost anything? The businesses have not lost anything directly to the tax. By levying VAT, each level of business does not need to request certifications from purchasers to know they are not end users. But they do have the extra accounting to do in order that they correctly pass on to the government the difference between what they collect in VAT and what they spend in VAT . Note that in each case the VAT paid is equal to 10% of the profit, or 'value added'.

The advantage of the VAT system over the sales tax system is that businesses cannot hide consumption by certifying it is not a consumer.

The problem is, the end user does NOT see it this way. While it works for the government in the sense that VAT broadens the tax base and in theory helps the government to recover money at each level, the consumer thinks in absolute terms. He knows nothing about the distribution of tax burden. Al he knows that he has paid RM 1.65 for a toy. While the government wants to ensure there are no leakages at each level of business transaction, the consumer thinks he is subsidising everything.

The government appears to want to plug every possible leakage at each business level. By plugging all possible leakages at each business transaction, how much money do you hope to recover Mr. Minister? Ah, RM 1 billion.

The end user (who will become the voter come next election) says, if the government really wants to raise its revenue, plug in the other bigger leakages. Make sure it earns every sen in all business transactions it conducts. In the sale of government land for example, auction them so that we get the best competitive price.


Pak Zawi 1 December 2009 at 09:56  

Dato' Sak,
That is why we are saying it is time to change this government which provide only lip service to the Rakyat. Leakages are aplenty but they don't care to rectify them because the leakages are going to their pockets.

"Joe" who is constantly craving 1 December 2009 at 10:49  

the bit abt the sales tax is technically incorrect. sales tax is charged at the stage of the manufacturer. which means at rm1, theres a sales tax i.e. 10% = 1.10. the middle men would make profit on top of the embedded sales tax which also makes the current tax an ineffective tax.

Ariff Sabri 1 December 2009 at 10:57  

thanks for pointing that out.

walla 1 December 2009 at 12:17  

So this GST is for govt benefit, presumably to be used for rakyat benefit. But why so many megaprojects which don't seem to benefit the rakyat? Where are the real investments which supposed to create jobs, increase wealth of the people, improve the economy, create more brain power, make country more competitive? And most importantly, why so many big leakages remain unplugged, money stolen and no action to get back? What happen to all those task force and committees under the chief secretary to get to the bottom? All quiet on the eastern front. Again the same rigmarole.

It's a mess.

So the govt is going to collect for a start rm1 billion more a year at 4%gst. But it leaks rm1xn billion more each year on its own.

Why not the other way then? The rakyat impose a rakyat tax on the govt. Say a sliding scale starting from 30 percent of forecast GDP. If less leaks, the scale slides down. In the end, a clean govt will pay zero tax to the rakyat. Where the govt find the money to pay tax? From their ill-gotten gains of the past. All of it. All the siphoned money must get back. It belongs to the rakyat. That the govt sets an agency to run around to chase those who have sucked it away shouldn't exonerate those who are not under the radar from being protected politically. The amount collected back will credit the govt account against the rakyat tax on the govt.

This govt goes round and round the mulberry bush. Just stop all the rubbish. Just do the right thing.

That the govt is not doing the right thing it is showing to itself everyday. The rakyat already know. You have a jpm minister confirming btn courses are not right while the dpm of permatang putih support fame said otherwise. How come like that? Don't just say the first thing that comes to mind. Speak only facts. Play no more games. Drop the spin. Exile the sandiwara. How to reform if can't even inform?

walla is ill.

walla 1 December 2009 at 12:17  

I hope someone will tell authoritatively if the govt has had problems collecting service tax.

You go to restaurant and get the bill. Sometimes it says service charge and govt tax. Is govt tax here service tax which means service charge is compulsory tipping? How can tipping be compulsory? Where's the law for that? Secondly, is service tax collected under registered company name or by outlet? Why should customer pay service tax at outlet if outlet's annual turnover is less than the minimum to collect service tax? Customer is not concerned about company's total annual turnover to qualify to collect service tax. Thirdly, how many outlets collect service charge portrayed as service tax?

Maybe that's why the govt introduces GST. But will that repeat the same problem even more?

I sense there will be implementation problems. The lines may be jammed up with people trying to get specific answers. It is better if the govt gives actual calculations for various categories before implementing. I understand that the EEC has a whole lot of problems when they introduced VAT. One set related to software and IT services.

This change of regime may ignite something. People remember how it was when petrol subsidy was reduced. Tempers flared at stations. People woke up to how small their take-home pay, how uncompetitive the economy, how messed up everything. Now if govt applies this to increase its revenue after supposedly spending billions on stimulus and other mega-projects, people will start to think things more sharply.

They may ask the question: what is govt to me? And their new answer will be: govt is just one of many service providers. Like plumber. It is not big deal.

Stripped of all the hyperbole and spin, it is just a service provider which is supposed to make sure the country is safe (but not necessarily the rakyat in society), the utilities work (but not necessarily efficient and price-attractive), the social services are available (but not necessarily relevant and effective), the trade and economic channels are open (but not necessarily competitive and relevant).

Next the rakyat will ask how has the govt been performing. They will think back to the petrol hike and the fast turnabout to spend more money to give rebates. Then they will look with disbelief the megabillions which have been siphoned off. Disbelief for five seconds, then belief that since no smoke without fire, even ten percent true must be colossal. Their suspicions are confirmed year after year from the Auditor-General's reports. In fact, last week the rakyat of Sarawak woke up and discovered they have been screwed for billions over the years. What are the incumbent politicians saying? Nothing. Silence is deafening. Guilt is unspoken. Retribution is not forthcoming. Pointing to ?

Anonymous,  1 December 2009 at 13:00  

"In the sale of government land for example, auction them so that we get the best competitive price".

I don't think the govt will do it. Look at the latest land for convention center swap at Hartamas area. Reports indicates that the current land value there is somewhere between rm250-300psf. The 62 acres(after deducting 13 acres for the center) given to Naza is worth anything between rm680mil to rm818mil.

The covention center reportedly will be built at rm628mil. Naza makes between rm52mil to rm190mil from the deal on the land alone. But never mind, we are helping the Malays they said. This what we say "rights for special Malays".

Like Pak Zawi said, all these leakages/wastages are flowing back as kickbacks to the pockets of certain individuals and UMNO political funds. Are they willing to make public the money that goes to political funds? Be more transparent?

Power and greed is the game. Honesty and integrity down the drain.

d'enricher 1 December 2009 at 13:34  

All being said, I agree most with your last paragraph.

Seriously, do we really care with all the leakages ???.

My question is of the very recent issues, such as PKFZ, AG Report and the stories about Sarawak 60%/40% scandals.

Care to comment?

Donplaypuks® 1 December 2009 at 15:51  


Having worked in UK, S'pore and Oz for many years, I can safely say that I am more informed about VAT than most.

What is often not understood is that all VAT registered businesses will be mere collecting and remitting agents for the Govt.

They will net off the VAT on their sales (output) against the VAT on their expenses (input tax), and remit the difference to the Govt, or claim a refund from the Govt is there is a deficit.

Neither the VAT on expenses nor that on sales will be included in their P&L or in their product costing. Businesses can also claim back VAT on capital expenditure such as plant & equipment, f&f etc.

Thus a manufacture who buys raw materials for $1 and who is subject to VAT at 10%, will continue to treat his cost as $1. The VAT of 10 cents (10% input tax) will be accounted in his balance sheet as owing by the Govt to him.

If he sells his product for $2.50 he will charge VAT of 25c and invoice for $2.75. The manufacturer will pay 15c being the difference to Customs & Excise on the due date.

In his P&L, the manufacture will show sales of $2.50, cost of sales of $1 and profit before tax of $1.50.

Therefore, the reality is that it is always the end user who will bear the brunt of VAT which becomes the Govt’s revenue. But since VAT is charged at every stage of a sale to someone, the Govt’s cash flow improves tremendously as there will always be a time lag between collection and refund.

Given that the Govt expects to only collect RM 1 billion in VAT revenue, it seems to me that it is not worth subjecting the whole country to so much unproductive paperwork.

More than that, VAT will only be successful if the Govt is able to secure a very high % of registration of businesses, including coffee shops, mini marts, hawkers, kway teow and rojak stall operators as well as doctors, dentists and the like who siphon out huge amounts of cash takings as undeclared income.

Given that only some 15% of our populace actually pays taxes, it is obvious that many have evaded the income tax net for donkey’s ears.

Therefore, the enforcement division of the IRD must be beefed up and get results before we take the cudgel to the weary and over-taxed man in the street.

It is also conservatively estimated that the opportunity cost in the Govt and MITI giving away motorcar AP’s in gaji buta fashion costs us at least $2 billion every year. Between 1998-2009, that is a massive $24 billion sacrificed for a few cronies and well connected Bumis.

There is that famous story of at least 1 AP King who did not open even a single car showroom!! If the Govt comes up with an open tender policy for AP’s, we can shelve VAT and save us all the bureaucratic entanglement, claptrap and paper shovelling involved.

Thus if the Govt tightens revenue leakage (especially in the form of corruption) from ALL sources, I am confident we can defer VAT for a good 10 years or more.

I am also surprised that PM Najib claimed that VAT will not affect inflation. This is pure nonsense! When petrol prices went up last year, inflation shot up immediately. The same scenario will prevail unless the Govt introduces other measures, such as exemptions and zero rating for basic food items, medicines, childrens’ clothing, school textbooks etc., to prepare the masses for a soft landing.

I would also point out that before 3% VAT was introduced in S’pore in 1994, there was a two year education and registration period and this was followed by a 3% cut in income tax. Otw, VAT will end up as an additional tax on the masses which may result in a downturn in retail business sales and defeat the Govt’s intention of securing a broad based for tax revenues!!

We are all of 1 race, the Human Race

DingDong,  1 December 2009 at 22:09  

Salam Dato,

As an Accountant currently working in a VAT country, Im totally against the VAT for Malaysia.

The GST will 100% cause inflation and burden the middle & lower income group.
The Government must understand the local culture and practice of Malaysian retailers & consumers.
PM should know better since he said he always gauge the public's opinion by going to the ground personally.
I bet out of 10 puduraya passengers all 10 will say hell no unless 1 or 2 of his toadies/worshippers happens to be in that random 10.

The roti canai when up 10sen juz bcz the Gomen workers had a pay hike.
I x think the majority of Mamaks roti canai sales are consummed by Gomen workers.
The Mamak said its not his fault
Its the kedai runcit's fault
Then the blame game goes on for a while until the public lupa since Malaysians mmg cepat lupa..

Any turnaround managers knows that to get savings u attack the top 3 costs.
Revenue/Tax paid from Pet almost 40B.
Attack the kickbacks and side deals by Pet employees & vendors & contractors.
Im sure DSNTR knows all about these in better details.
Its definitely easier than getting a GST act passed.

1)Malaysians are not ready
2)Revenue from other streams suffice if leakages@min level
3)BN popularity level all time low
4)Majority of the rakyat x accept GST

But why would this GST suddenly tabled in parliment?
I tot parliment are collective voices of the majority Rakyat not a clique of smartass who always thinks they know what is best.
I quite remember clearly DSNTR said "the period of Gomen knows best is over"..
Shame on DSTNR for going back on his words juz months into office..
Najib said politics is all about perception and numbers during Perhimpunan UMNO..what an irony now..what a fool I am for believing his better..

"UMNO is rotten to the core"Dr M.
Now I know why Dr M is worried..
BN is corrupt PR is incompetent full of popular seeking individuals..i will be joining the undi rosak clan or better still save my GE airplane ticket provision for holiday..wohoo..

Fi-sha 2 December 2009 at 08:03  


Dear Dato' Sak

No way to GST/VAT. Not until we are at least at par with The Little Red Dot - the level of integrity the government has, the quality of products being sold in that republic, not forgetting low personal income tax level.

Gee. Simply "Yang dikejar tak dapat, yang dikendong keciciran'.

Anonymous,  2 December 2009 at 10:01  

Everyday its bad news about Malaysia>>worst performer in corruption,transparency,FDI,economic growth etc etc...

And whatever steps government puts in place seems to have little impact except for the rhetoric and hot air by the local press.

The much espoused PM's liberalisation initiative>>whats the outcome?Are the investors surging into the country..are they quality investors?
Coupled that to blunders such as the 15 years vehicle MOT testing ..
Now,we got pronouncements about sugar/fuel subsidy restructuring..then we are going to have VAT.Thats going to hurt our pockets..and going to be hell for small biz to manage.More paperwork,more enforcement staff..more creative accounting too.But,eventually the rakyat have to pay more.

So,if one is to do some projections..within 2 years my cost of living (sans the subsidies plus the VAT and usual CPI) going to go up by 30%..but most pay stagnate (if i don't get retrenched).The future is certainly not bright for me.

And the PM seems to have forgotten his promise for less pomp/pageantry,his austerity drives,his Rakyat knows best,his walkabouts,his fight to cut down waste,corruption...a long long laundry list gone to the cleaners.

Now..Rakyat bears all the cost FIRST.

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