Sales and service tax: Where to from here?
Single rate for simple budgeting, ease of compliance
AMIDST the chatter on the goods and services tax (GST) making a comeback, the Finance Ministry has indicated that it is unlikely to be announced in Budget 2023 tomorrow.
This is despite the government’s medium-term revenue strategy to widen the country’s tax base, to ensure that Malaysia has enough revenue to spend on the country’s development in the longer term.
The inherent limitations of the current sales tax and service tax (SST) regime, as a single stage tax, is well known.
Yet there are still opportunities for government to improve collections, while simplifying compliance for businesses.
Some areas for consideration include:
Service tax scope
Some of the more mature GST and value-added tax (VAT) jurisdictions have already addressed the taxing of non-fungible tokens and digital currency under their indirect tax framework. This has yet to be considered under the current service tax laws.
As more and more businesses digitise their services, trade in virtual products and venture into the metaverse, there is potential to expand the scope of taxable digital services or introduce new categories of taxable services.
Single sales tax rate
There is potential for the sales tax rate to be standardised, moving from exempt, 5% and 10% to a single rate, with minimal exemptions.
This has been proposed for the taxing of low value goods and is the approach taken in a number of GST and VAT jurisdictions.
A single rate of tax simplifies government’s budgeting and eases compliance for businesses.
Currently, under the sales tax regime, businesses will first need to accurately assess the HS Tariff Classification of their goods to determine the applicable tax rate.
An incorrect assessment would result in an incorrect use of the tax rate, possibly leading to unintended revenue leakage. A single rate, with minimal exemption, eliminates this.
Clarity and certainty
The effectiveness of this tax system as a collection tool hinges on a clear understanding of what is taxable and what is not.
An ongoing challenge with service tax, for example, is in defining the scope of a positive list of services amidst evolving business models.
Introducing new interpretations that expand the scope through mentions and examples in tax guidelines, as we have seen recently, can create more uncertainty.
Due to the limitations of a positive list, it would be valuable to taxpayers and the tax administrators, to fix interpretations upfront.
Changes to the scope and interpretation of an existing legal provision, due to evolving business models or industry disruption, can be done through a formal notice to businesses and inclusion to the interpretation notes or the law.
Early industry engagement and the release of whitepapers that detail the proposed changes to the laws will go a long way too.
Currently, we are seeing changes that are put into effect retrospectively, or issued overnight.
Refund mechanism
Presently, exemptions are used to minimise the cascading tax effect. Businesses assess their eligibility and automatically apply the exemption.
The implications of this are collection foregone where the exemption is applied, and revenue lost where the exemptions are incorrectly applied.
Refund mechanisms can achieve the same effect and mitigate revenue loss.
Businesses that incur SST in the course of producing SST taxable outputs would pay the tax due on their outputs and claim a refund or credit for the tax incurred on their inputs. This is one of the underpinning mechanisms in a GST/VAT system.
Also, government will have earlier access to cash as compared to the use of exemptions (no cash inflow). Of course, for this to work, the refund process needs to be administered as efficiently as the tax collection process.
To expedite the processing of refunds, a separate account should be set up and compensation for late refunds should be payable similar to the refund of overpaid taxes in the income tax system.
Eliminating exemptions also means businesses need only ensure compliance with one set of requirements for a valid refund. This would make the tax audit process a lot more efficient as well.
In conclusion, the indirect tax system will eventually grow into a system similar to the GST or VAT, if not directly replaced.
Until such time, gradual shifts in this direction will smoothen the transition for businesses, consumers and the government.
We already see this trend in some of the more recent SST developments.
Moves to converge our current indirect tax to what is used globally will allow us to better adapt global or Organisation for Economic Co-operation and Development recommended enhancements to our system.
An ongoing challenge with service tax, for example, is in defining the scope of a positive list of services amidst evolving business models.