Introduction
A single rate. A single threshold. Covering virtually everything. These were the defining characteristics
of Malaysia’s 6% Goods and Services Tax (GST) when it was first rolled out on 1st April 2015.
However, three years after inception, policymakers terminated GST’s puerile lifeline and resurrected
the old Sales and Services Tax (SST), ironically to breathe new life into Malaysia’s tax system.
The new and the old
Although a familiar tax – Malaysia has adopted SST for four decades – the days leading up to SST’s
second coming has nonetheless been filled with controversy and confusion. One rumour purports that
SST escalates the tax burden to 16% (being a combination of Sales Tax at 10% and Service Tax at 6%).
Understandably, this proposition thrusts new concerns into the heads of consumers still recovering
from a GST-hangover.
The authors opine that the notion of “10% and 6% equals 16%” can be incorrect and instructive in equal
measure – depending on the situation. It is hoped that this article offers some clarification on that
enigmatic phrase.
Authors: MATTA President; Datuk Tan Kok Liang and Tax Advisor; Kenneth Yong (L-R)
Sales Tax for goods, Service Sales Tax for services
The supposition that “10% and 6% equals 16%” probably started as a result of replacing GST with two
separate taxes – Sales Tax and Service Tax – leading to the irresistible proposition that the two taxes
should be numerically combined to produce a meaningful comparison with GST.
However, Sales Tax (at 10%) and Service Tax (at 6%) each has a very different scope. Sales Tax covers
manufactured goods and imported goods, while the scope of Service Tax is written in its name – it only
covers services.
From a legal and policy standpoint, it is either 10% or 6%, not both at the same time. (Admittedly, Sales
Tax for certain items are at 5%).
Up to this point, the phrase “10% and 6% equals 16%” is clearly incorrect, even misleading. But is there
any occasion for combining 10% with 6% to produce a tax burden of 16%?
A composite item
Observant commentators would point out that certain real-world objects are a combination of
materials and services (i.e. composite items), and by logical extension, could potentially be exposed to
both Sales Tax and Service Tax. In such instance, would the tax burden embedded within this composite
item be: ‘10% plus 6% equals 16%’?
Commercial property–a blend of goods and services
Consider a commercial property. Its major constituent parts can roughly be analysed as follows:
(a) Land which is not covered by SST (i.e. 0%).
(b) Certain building materials (e.g. bricks, cement, tiles etc.) which are Exempt i.e. 0% Sales Tax.
(c) Certain other materials which are taxed at 10%.
(d) Construction services which are out of scope i.e. 0% Service Tax.
(e) Engineering and architecture services which are taxed at 6% Service Tax.
(f) The developer’s profit (embedded into the selling price) which would not be covered by SST (i.e.
0%).
In reality, different parts of the commercial property would suffer different tax rates (10%, 6% and 0%).
It would still be wrong to simply add up all the tax rates to arrive at 16%.
‘Averaging’ vs ‘Adding’
But instead of being either 6% or 10%, the final tax burden is a ‘weighted average’ number that sits
somewhere along the continuum of 0%, 6% and 10% – depending on the proportion of “stuff” that is
taxed at 0%, at 6% and at 10% respectively.
This again renders the phrase “10% and 6% equals 16%” inaccurate. Instead of ‘adding’ 0% or 6% to
10%, the situation calls for ‘averaging’ the numbers.
For a commercial property, it can be envisaged that the large components are land, bricks, construction
services and (possibly) developer’s profits – all of which are at 0% – and this shifts the ‘weighted average’
tax burden in the direction closer towards the 0% mark instead of the 10% mark.
SST’s major weakness
However, the SST system has an in-built weakness that may occasionally see transactions receiving
multiple exposure to tax.
Consider professional engineering services, which is subject to Service Tax at 6%. Engineer X produces
a set of engineering schematics (a taxable service) for Engineer Y and bills a fee plus 6% service tax.
Engineer Y in turn onward sells these schematics to the customer, again charging 6% service tax.
We then observe a snowballing of the service tax as the same schematics are subjected to service tax
twice (i.e. 6% and 6% equals 12%). In fact, this situation will happen every time there are taxable
persons stringed along the supply chain who on-sell a service.
Consider another example. A restaurant sells food to a caterer, charging 6% service tax. The caterer in
turn on-sells the food to the end-consumer, again imposing 6% service tax (i.e. 6% and 6% equals 12%).
And unlike GST, there is no input tax for intermediaries to claim back under SST.
Tax cascade
This multiple tax on essentially the same item is labelled as the “tax cascade” or the “cascading effect”
and indirectly raises prices of certain affected items, making them costlier (and less price-competitive)
with each additional SST-registrant along the supply chain.
Minimizing the Tax Cascade
Fortunately, the authorities are well aware of the havoc that the “tax cascade” can wreak on prices. Of
the various methods they deploy to minimize the “cascading effect”, three are worth mentioning.
(a) Firstly, the government raised the SST-registration threshold for eateries to RM 1.5 million p.a.
(from the default threshold of RM 500,000) to minimize the number of SST-registered food outlets.
This does not eliminate, but it greatly reduces, the opportunity of a tax cascade along the food
preparation chain.
(b) Secondly, to avert double-tax, the legislation identified (with great specificity) the types of persons
who can charge SST.
For example, only manufacturers are named as ‘taxable persons’ required to charge Sales Tax, not
wholesalers or retailers; thus, avoiding a tax cascade along the distribution chain.
(c) Thirdly, the number of goods scoped into Sales Tax is about 6,400 compared to 11,197 under GST
(representing about half) while a narrower band of services are covered under Service Tax. This
significantly reduces the situations for a “tax cascade” to dip its nose into.
GST to SST crossover
With so much negativity towards the inflationary effects of GST, any replacement tax system – SST 2.0
in this case – would need to be a revolution, or else it would be a disappointment. In truth, it seems to
be a bit of both.
SST by design, is a narrow-scope tax that drops many items out of the tax net to lighten the tax load on
consumers. SST’s implementers have projected a halving of the annual tax burden (from RM42b to
RM21b) by the switchover from GST to SST – something that looks set to please a populace fed-up with
the burden of GST. Hence, a revolution.
However, the “tax cascade” could raise prices of certain items covertly, thus affecting medium-term
price competitiveness of at least some parts of the economy. This may partly hamper the narrowscoped
SST from realising the full price-stabilisation that policy-makers are eyeing. Herein lies the
potential disappointment.
But despite the above, SST 2.0 remains a hard system to bet against. Even after implementation, the
authorities are still granting exemptions and doing fine-tuning. As the Minister of Finance and the Head
of the Royal Malaysian Customs personally engage with businesses during numerous public discourse
sessions, it seems clear what policy makers want for SST 2.0: to fix everything.
Conclusion
The tax rates for Sales Tax and Service Tax have been clearly set: 10% and 6% respectively (and the
occasional 5%). But the economy is a complex system where goods and services intertwine
continuously.
And with this, comes the possibility of tax rates interacting in an ‘averaging’ manner for composite
items (composed of taxable goods and taxable services), and in an ‘additive’ manner when multiple
taxable persons are stringed along a supply chain.
While the phrase “10% and 6% equals 16%” is certainly incorrect in a strict legal sense, its depiction of
the “tax cascade” problem is fairly exact and hence, very instructive: there are situations, albeit not
widespread, where double or even triple tax may occur – a grim reminder that no tax policy (GST or
SST) is without its problems.
