Subramanian: Businesses can save costs from new taxation

THE prices of goods and services should not be going up a full 6% once the Goods and Services Tax (GST) kicks in come April 1, says the Customs Department, adding that the resulting impact on household expenditure should be an increase of just 0.58% to 1%.

Its GST director Datuk Subramanian Tholasy says this is due to the nature of the GST, which allows businesses to pass cost savings down the supply chain by claiming for their input costs.

Giving an example, he says that based on Customs’ projections, Astro’s prices, which currently have a 6% service tax, should come down as it would enjoy more cost savings.

“Astro’s input costs which are currently not claimable would become claimable. So the cost of doing business will come down a little and I expect a slight drop in prices. The extent of savings would depend on the type of business,” he tells The Star.

Subromaniam says businesses also currently pay the 6% service tax for their costs such as audit fees, as well as 10% for goods such as furniture and office equipment, all of which are not claimable under the current tax system.

However, once the GST kicks in, he points out that any costs related to business would be claimable as input tax and businesses would be able to save costs this way.

“The biggest immediate challenge is for businesses to identify all their input costs. We reckon that some will take the easy way out and charge a full 6% increase but in the longer term, they will lose out to responsible businesses who pass on cost savings,” he says.

He notes that the challenge to be more competitive could also spark a price war, which would ultimately benefit consumers.

Subromaniam says that the major suppliers, such as Nestle, Proctor & Gamble and Unilever, had met with Customs and assured it that they would be passing down the savings once the GST regime begins.

“What is important is that every­one in the supply chain must pass down the costs. Frankly speaking, I don’t think consumer fears of shooting prices will happen,” he says.

As for Malaysians feeling the pinch of rising costs, he adds that there are also many other factors in play despite the misperception that it is all because of the GST.

According to a computation done by Customs, Malaysians are expected to see a mix of savings and cost increases in their usual household expenses, including on grocery shopping and utilities payment. “Prices are controlled by many factors, including the exchange rate.

When the ringgit depreciated last year, imported items became more expensive and that, to a certain extent, contributed to the price increases,” he says.

He says factors influencing cost increases varied depending on the goods. For example, he says that steel importers would have to deal with the foreign exchange factor, while the electricity tariff was a factor for local manufacturers’ production costs.

Additionally, he says manufacturers also often gave reasons for price increases including the minimum wage policy and labour costs. He notes that Malaysians have been slow to see any price reductions despite fuel prices coming down in recent months as manufacturers also said that their transport costs are a fraction of their overall production costs.

“From our feedback, one of the reasons why traders may not want to reduce prices is because of our pricing policy. Once they reduce, it is difficult to increase prices again. So instead of decreasing, they give promotional items,” he says.

As an example, he says that if prices are supposed to come down to RM28 from RM30, traders might decide to keep the goods at RM30 but offer RM2 savings in other forms such as promotions.

For the purpose of finding out the potential GST impact on monthly household expenditure, The Star provided the Customs’ GST division with a list of basic monthly expenses for households with a total expenditure of RM3,000, RM6,000 and RM12,000 respectively (see table).

According to its computation, the households’ respective total expenditure is expected to increase to RM2,574.79 from RM2,560 (0.58%), RM5,822.51 from RM5,768 (0.95%) and RM11,865.04 from RM11,747 (1%)

Medical insurance, which is a standard-rated service, is expected to increase 3.27%, translating to a RM16.34 increase, assuming a pre-GST payment of RM500.

As for domestic electricity usage, he notes that the first 300kWh is zero-rated while the remainder is standard-rated.

Other notable increases include Telekom Malaysia’s UniFi broadband service fee, domestic air travel and private tuition classes, which are expected to go up 5.32%, 4.6% and 4.99% respectively.

Besides this, Subramanian says that certain expenses will be slightly more expensive although they fall under the GST-exempted category. Under this category, retailers are not allowed to claim back the GST incurred while no GST will be imposed on the consumer. These expenses include life insurance, toll fees, school transportation and private school fees, which are expected to see an increase of 0.4%, 3.42% and 1.09% respectively.

“Expenses in which savings are expected include car prices, ­petrol, water, Astro, zero-rated grocery items, government ­tertiary school fees, as well as outbound and inbound travel,” he said. Groceries, which are a big expense for households, can be split up into zero-rated and standard-rated purchases. Assuming total expenditure of RM1,000 per month spent on 40% zero-rated goods and 60% ­standard-rated goods, households would see 0.58% savings (RM397.68 from RM400) in the former and an increase of 2.78% (RM616.68 from RM600) in the latter.

“As for water and Astro, our computation shows that there should be 0.72% and 0.64% savings respectively,” he said, noting that this was despite Astro being a standard-rated service. On the prices of cars, he said they were also expected to come down by around 1.91%, bringing a theoretical monthly payment of RM1,200 down to RM1,177.10.

Subramanian notes that Customs has also announced a special refund for traders with sales taxable stock-in-hand items during the transition period from the SST to the GST to prevent them from simply tacking on a 6% additional charge for those stocks.

He says this would be very damaging for consumers as price levels would permanently increase without the special refund, noting that businesses normally held on to one to two months’ worth of stock.

He acknowledges that there are some unscrupulous traders who have already increased their ­prices pre-GST and attributed the cost increase to the new tax system.

“This is where the anti-­profiteering mechanism kicked in from January, where the Government will monitor their actions based on the net ringgit margin rule,” he says, stressing that traders should be getting around the same profit margins once the GST is implemented.

In the long term, Subromaniam explains that the GST is a very efficient and transparent tax system which can pass on cost savings, unlike the existing sales and service tax (SST) where there is a cost “cascading effect”.

Because of the input and output mechanism, he says that Customs will be able to trace every level of the supply chain and track who exactly is marking up prices unscrupulously.

“Unscrupulous traders won’t be able to hide from us, be they manu­facturers, middleman or retailers.

We will be able to see the value added at each level,” he says. In this aspect, Customs will work together with the Domestic Trade, Cooperatives and Consumerism Ministry, who oversees the Price Control and Anti-Profiteering Act.

Consumers can also verify on their own whether the company has the right to charge them GST by checking its GST status on the Customs website at www.gst.customs.gov.my.

GST-registered businesses will have a GST number printed on their receipts. The receipts must also state whether the purchases were subjected to the standard 6% rate or zero rate.