UNLIKE the goods and services tax, the sales and services tax does not capture the “grey economy” and thus, foregoing a substantial chunk of revenue, said a tax expert.

Malaysian Association of Tax Accountants president Abdul Aziz Abu Bakar said this is among the main weaknesses of “SST 2.0” that the government must fix before the tax is rolled out on September 1.

He said the grey economy refers to businesses and activities that do not, but should, pay tax.

The sale of smuggled and counterfeit goods is an example.

Aziz said another problem with SST is its “cascading effect”, which, if not stopped, can result in inflation due to profiteering.

“The government should modify the SST regime. Take the strengths of GST and implement them in ‘SST 2.0’, so that we can overcome the tax’s weaknesses,” he told The Malaysian Insight.

According to the Customs Department, goods subjected to SST will be taxed at either 0%, 5% or 10%, while services will be taxed 6% across the board.

The Pakatan Harapan government has blamed GST – which was zero-rated on June 1 – for burdening low-income groups, as it was imposed on more than 60% of goods and services.

SST, on the other hand, is expected to be levied on only 38% of goods and services.

Briefings on the new tax regime by the Customs Department begin today, while the SST Bill is expected to be tabled in Parliament next week.

Cascading inflation

Aziz said GST was able to capture and tax transactions in the grey economy as it was imposed at every stage of the supply and consumption chain.

“Every business had to record every sale and purchase in the GST accounting system.”

For instance, if a wholesaler bought smuggled items and sold them off, he would record an output tax for the sale to the retailer or consumer.

“But because the items were smuggled, he would not be able to record an input tax,” said Aziz.

“When the input tax is not recorded, the transaction gets flagged, and he will get a visit from the Customs Department.”

With a tax base of 400,000, GST was able to collect an average of RM40 billion from 2015 to last year. Its estimated collection for this year is RM44 billion.

In comparison, SST, with a tax base of just 68,000, is projected to collect RM21 billion.

SST will be imposed only on manufacturers, importers and select service providers, such as pay TV, telecommunications, car companies and restaurants, that make more than RM500,000 a year.

Another problem with SST, said Aziz, is how price increases tend to cascade down the supply chain, from manufacturer to wholesaler to retailer.

For example, a manufacturer sells a product to a wholesaler for RM100, and charges RM10 in SST. The wholesaler then levies a 10% profit margin on the RM110 to sell the product at RM121 (RM110 + RM11).

Under GST, the wholesaler is only allowed to charge a profit margin on the original cost of the product, which is RM100.

“This leads to products and services costing more as it cascades down the supply chain,” said Aziz.

He said to prevent this, the government should consider allowing businesses to charge a profit margin only on the original cost of goods.

“But at the end of the day, the only way to curb profiteering is for the government to enforce the system.

“Without efficient enforcement, any tax system will fail.” – July 24, 2018.