SST vs. GST: Understanding Tax Systems in Malaysia

Malaysia’s tax system has undergone significant changes in recent years, with the Goods and Services Tax (GST) introduction in 2015 and its eventual replacement by the Sales and Services Tax (SST) in 2018. These shifts in taxation policies were made in response to both economic factors and public concerns about GST’s complexity and its impact on businesses and consumers.

This blog aims to clarify the key differences between GST and SST, two major tax systems in Malaysia. Understanding these differences is crucial for businesses to ensure tax compliance and for consumers to grasp how each system impacts pricing and the economy.

Through this guide, we’ll delve into the structure, advantages, disadvantages, and overall impact of both GST and SST on Malaysia’s business landscape and economy.

What is GST?

The Goods and Services Tax (GST) was introduced in Malaysia on April 1, 2015, to replace the Sales and Service Tax (SST). A broad-based consumption tax, GST aimed to modernize the tax system, improve compliance, and generate more stable revenue. However, after three years, it was abolished on September 1, 2018, due to public dissatisfaction and implementation challenges, leading to a return to the SST system.

Key Features of GST

Multi-stage Taxation: GST was applied at each stage of production and distribution, ensuring that businesses charged tax on sales but could claim back tax paid on inputs through the Input Tax Credit (ITC). This avoided tax cascading and kept the system transparent.
Input Tax Credit (ITC): Businesses could offset the GST paid on raw materials, services, and other business expenses against the GST collected on their sales. This ensured businesses didn’t bear the full cost of tax on each transaction, promoting efficiency and reducing tax burden.
Applicable Tax Rates: The standard GST rate was 6%, but certain goods and services were exempt, zero-rated, or subject to special rates. Essential goods like food and healthcare were exempt, while exports were zero-rated to encourage international trade.

Reasons for GST’s Introduction

Broader Tax Base: To reduce reliance on income and petroleum taxes, GST aimed to create a more stable and predictable revenue source for the government.
Improved Compliance: The multi-stage tax and regular filings helped improve tax collection and reduce evasion.
Global Alignment: Malaysia adopted GST to align with global trends in modern tax systems.
Revenue Generation: GST was designed to boost public finances and reduce the national deficit, supporting infrastructure and social programs.
Encourage Exports: By applying a zero rate on exports, GST was meant to make Malaysian goods more competitive internationally.

GST aimed to modernize the tax system, increase revenue, and improve compliance but faced significant challenges, ultimately leading to its replacement by SST in 2018.

What is SST?

The Sales and Service Tax (SST) was reintroduced in Malaysia on September 1, 2018, after the Goods and Services Tax (GST) was abolished. SST had been the country’s tax system before GST’s implementation in 2015. The reintroduction of SST aimed to simplify taxation, reduce business costs, and address public dissatisfaction with GST.

Key Features of SST

Single-stage Taxation: SST applies a single-stage tax, levied either on the sale of goods (Sales Tax) or on services provided (Service Tax). Unlike GST, which taxes multiple stages of production, SST taxes goods and services only once, making it simpler for businesses to manage.
Sales Tax and Service Tax
- Sales Tax: Levied on goods manufactured or imported into Malaysia. Rates typically range from 5% to 10%, with some essential goods exempt.
- Service Tax: Applied to services like telecommunications, insurance, and hospitality. The standard rate is 6%, with exemptions for certain services like medical care.
Tax Rates and Scope
- Sales Tax: 5% or 10%, depending on the type of goods. Essential items like food are usually exempt.
- Service Tax: 6% on specified services, such as those in the hospitality and telecommunications sectors.

Reasons for Malaysia’s Shift Back to SST

Simplification: SST is easier to manage than GST, requiring fewer records and filings, thus reducing the compliance burden on businesses.
Public Discontent with GST: GST faced backlash due to higher consumer prices and the administrative challenges it imposed on businesses. SST was seen as a more consumer-friendly and business-simplified option.
Economic and Political Factors: While SST generates less revenue than GST, the government prioritized public satisfaction and ease of implementation. The shift was also a response to promises made during the 2018 election campaign to abolish GST.

SST is a simpler tax system, applied either on goods (Sales Tax) or services (Service Tax) and was reintroduced to reduce compliance complexity and address public concerns over GST. It’s less revenue-generating but more manageable for businesses and consumers.

Key Differences Between SST and GST

The shift from Goods and Services Tax (GST) to Sales and Service Tax (SST) in Malaysia introduced several key differences in the tax structure, rates, compliance processes, and economic impact. Here’s a concise breakdown:

1. Tax Structure: Single-Stage vs Multi-Stage

GST (Multi-Stage Taxation):
GST was a multi-stage tax applied at each step of the supply chain. Businesses could reclaim tax paid on inputs through the Input Tax Credit (ITC), ensuring taxes were only applied to the value added at each stage.
SST (Single-Stage Taxation):
SST is a single-stage tax, applied either on the sale of goods (Sales Tax) or services (Service Tax). Tax is only levied once, making it simpler for businesses to manage but lacking the refund mechanism for input taxes, which can increase costs.

2. Tax Rates: Comparison of Rates Under Both Systems

GST Rates:
The standard rate was 6%, applied to most goods and services. Essential items like food and healthcare were either zero-rated or exempt.
SST Rates:
- Sales Tax: 5% or 10%, depending on the goods, with exemptions for essentials.
- Service Tax: 6% on specific services, including telecommunications and hospitality.

3. Compliance: Filing Processes and Complexities

GST Compliance:
GST required businesses to file regular returns (monthly or quarterly), maintain detailed records, and track taxes paid at each stage, which increased administrative costs and complexity.
SST Compliance:
SST is simpler, requiring businesses to file returns only for Sales Tax or Service Tax. This reduces the compliance burden but still requires businesses to manage tax filing accurately.

4. Revenue Impact: How Each System Affects Government Income

GST Revenue:
GST generated more revenue due to its broader base and multi-stage taxation. However, it led to higher consumer prices and dissatisfaction.
SST Revenue:
SST generates less revenue because it taxes fewer stages. While it’s simpler and less costly to administer, it doesn’t raise as much income for the government.

5. Business Impact: Operational Differences and Cost Implications

GST Impact:
Businesses had to adapt their accounting systems to track GST at each stage of production, leading to higher operational costs and complexity. Small businesses, in particular, found compliance burdensome.
SST Impact:
SST reduces administrative costs as businesses no longer need to track taxes at every stage. However, since businesses cannot claim back taxes on inputs, it can result in higher costs, which may be passed on to consumers.

6. Consumer Impact: Effect on Pricing and Purchasing Behavior

GST and Consumers:
Under GST, consumers experienced higher prices due to the cascading tax effect. Although GST was transparent, many businesses passed on the tax burden to consumers.
SST and Consumers:
SST generally resulted in lower consumer prices since tax is applied only once. However, some sectors may see price increases due to the reintroduction of taxes on previously exempt goods and services.

The key differences between SST and GST lie in their tax structures, rates, compliance complexity, and revenue generation. GST was more comprehensive but complicated and resulted in higher costs for consumers.

SST is simpler, and easier to manage, but raises less revenue and may still lead to higher costs in some sectors. Understanding these differences helps businesses and consumers adjust to the tax landscape in Malaysia.

Pros and Cons of GST and SST

Both Goods and Services Tax (GST) and Sales and Service Tax (SST) offer distinct advantages and challenges. Here’s a concise breakdown of each system:

GST:

Advantages:

Transparency
GST offers greater transparency as it’s applied at every stage of the supply chain, making it easier to track the tax paid on goods and services. This reduces tax evasion and ensures fair taxation.
Input Tax Credit (ITC)
Businesses can claim ITC on taxes paid for inputs, eliminating cascading taxes (tax on tax) and reducing the overall tax burden. This is especially beneficial for manufacturers and service providers.

Disadvantages:

Increased Compliance Costs
GST requires businesses to file regular returns, maintain detailed records, and manage tax at every stage, leading to higher compliance costs. This is especially burdensome for small businesses.
Potential Price Inflation
Although GST is transparent, it can lead to higher consumer prices as businesses may pass on the tax burden. Sectors with high input costs are more likely to increase prices, affecting consumers’ purchasing power.

SST:

Advantages:

Simplicity
SST is simpler, with tax applied only at the point of sale or service. Businesses don’t need to track taxes at every stage, reducing administrative complexity and saving time, particularly for SMEs.
Reduced Compliance Burden
SST requires fewer filings and less documentation, lowering the compliance burden. This makes it easier for businesses to focus on operations without complex tax procedures.

Disadvantages:

Limited Transparency
SST lacks the transparency of GST. As tax is applied only once, businesses can’t reclaim tax on inputs, which may lead to a cascading tax effect and higher overall costs for consumers.
Potential Cascading Taxes
Without ITC, tax is paid on goods and services at each step, which can lead to higher prices due to the tax burden accumulating through the supply chain.

GST offers transparency and ITC benefits but increases compliance costs and may cause price inflation.
SST is simpler and reduces compliance costs but lacks transparency and can result in cascading taxes. Businesses must weigh these factors based on their size, industry, and need for tax simplicity versus efficiency.

Impact on Businesses

The transition from GST to SST in Malaysia brought significant challenges for businesses. Here’s a more concise look at how it impacted businesses:

Challenges During the Transition

System Overhaul
Businesses had to update accounting systems and processes to adapt to the single-stage tax model of SST. This included reconfiguring software and training staff to comply with new requirements.
Loss of Input Tax Credit (ITC)
Unlike GST, SST does not offer ITC, which meant businesses could no longer offset taxes paid on inputs. This increased costs, especially for industries reliant on high-volume inputs, like manufacturing.
Compliance Uncertainty
The shift from a multi-stage to a single-stage tax system created confusion. Businesses had to quickly adjust to new filing requirements and often faced errors or delays in compliance.

Changes in Accounting and Compliance

Simplified Filing
Under SST, businesses now only need to track Sales Tax and Service Tax, reducing the complexity of tax filings compared to the multi-stage GST system.
Accounting Adjustments
Businesses had to update their accounting practices, as the new system required less detailed record-keeping and no longer tracked tax at every stage of production.
Pricing Strategy Changes
With no ITC, businesses faced higher costs, leading many to adjust their prices to cover these additional expenses. This impacted pricing strategies, especially for industries with tight margins.

Financial Implications for Small vs. Large Enterprises

Small Businesses
The simplified compliance under SST benefited small businesses, but the inability to claim ITC increased their costs. This was particularly challenging for those with low-profit margins, as they had to raise prices to stay competitive.
Large Enterprises
Larger businesses, though better equipped for the transition, also faced higher input costs. Despite simplified filing, the loss of ITC added financial pressure, leading to the need for price adjustments and revised budget plans.

While the transition to SST simplified compliance, businesses of all sizes faced challenges in adapting to the new tax structure. Small businesses struggled with higher operational costs due to the loss of ITC, while larger businesses had to revise pricing strategies to absorb increased input costs. Both groups had to adjust quickly to remain competitive and compliant.

Impact on Consumers

The transition from GST to SST in Malaysia had a significant impact on pricing trends and consumer perception. Here’s a concise but detailed breakdown:

How Pricing Trends Were Affected Under GST and SST

Pricing Under GST:
- Multi-stage Taxation:
  GST is applied at every stage of the supply chain. While businesses could claim Input Tax Credit (ITC), many passed on costs to consumers, leading to price inflation.
- Sectoral Impact:
  Retail and consumer goods prices rose significantly, even for essential items, as indirect costs accumulated along the supply chain. Service sectors like telecommunications also saw cost increases.
- Consumer Impact:
  Higher prices under GST contributed to dissatisfaction, particularly among lower-income groups, who struggled with increased living costs.
Pricing Under SST:
- Single-stage Taxation:
  SST applies tax only once, reducing visible tax burdens. However, the absence of ITC meant businesses bore the tax on inputs, often passing these costs to consumers.
- Sectoral Effects:
  Prices for many goods stabilized compared to GST, but manufacturing and import-reliant sectors faced higher production costs, affecting final prices.
- Essential Goods:
  SST provided some relief for necessities like food and healthcare, contributing to more stable prices in certain sectors.

Public Perception and Acceptance of GST and SST

Public Perception of GST:
- Transparency and Inflation:
  While GST was promoted for its transparency, its visible impact on prices led to public backlash. Consumers perceived GST as driving higher living costs, overshadowing its economic benefits.
- Widespread Opposition:
  GST’s complexity and multi-stage nature were seen as burdensome, fueling dissatisfaction and calls for its repeal.
Public Perception of SST:
- Simplicity and Stability:
  SST was welcomed as a simpler system with a single-stage tax, reducing complexity and stabilizing prices for some goods. Its less visible nature made it more consumer-friendly.
- Mixed Reactions:
  While SST was seen as an improvement over GST, price increases in some sectors due to higher business costs tempered consumer enthusiasm.

GST’s multi-stage system caused price inflation and dissatisfaction, while SST’s simpler single-stage model brought some stability but led to cost increases in specific sectors.

Consumers largely preferred SST for its simplicity and reduced visibility, but both systems had challenges in balancing economic efficiency and public acceptance.

Compliance Tips for Businesses

Ensuring compliance under the Sales and Service Tax (SST) is vital for avoiding penalties and maintaining smooth business operations. Here are concise yet detailed tips for effective SST compliance:

Best Practices for Staying Compliant Under SST

Understand SST Requirements
- Familiarize yourself with SST categories, applicable rates, and exemptions.
- Determine whether you are required to collect Sales Tax or Service Tax based on your business activities.
Register with Authorities
- Ensure timely registration for SST with the Royal Malaysian Customs Department (RMCD) if you meet the taxable thresholds to avoid penalties.
Maintain Accurate Records
- For at least seven years, keep detailed transaction records, including invoices, receipts, and tax-related documents to meet regulatory requirements and ensure audit readiness.
Timely Filing and Payment
- SST returns every two months and makes timely tax payments to avoid fines. Automate reminders to meet deadlines.
Conduct Regular Audits
- Periodic internal audits help ensure accurate reporting and compliance, identifying errors before they escalate.

Key Considerations When Adapting to Tax Changes

Monitor Updates
- Stay informed about tax changes through RMCD announcements to adapt quickly to new rates or regulations.
Train Your Team
- Equip your staff with the knowledge to handle SST processes and stay updated on changes, reducing compliance errors.
Adjust Pricing Strategies
- Without Input Tax Credit (ITC) under SST, factor in tax costs when pricing goods or services to maintain profitability.
Plan for Transitions
- During regulatory changes, update contracts, systems, and pricing promptly to ensure compliance.
Seek Expert Advice
- Consult tax professionals for guidance on complex tax scenarios and compliance optimization.

How Accounting Software Aids in Tax Compliance

Automated Tax Calculations
- The software applies correct SST rates, reducing errors and ensuring accurate tax computation.
Organized Record-Keeping
- Tools maintain transaction records systematically for easy access during audits and filings.
Simplified Filing
- Many solutions integrate with RMCD’s e-filing system, streamlining the tax return process.
Real-Time Tax Monitoring
- Businesses can track tax liabilities in real-time, ensuring timely payments and compliance.
Adaptability to Changes
- Modern accounting software updates with regulatory changes, keeping businesses compliant with minimal disruption.

Compliance under SST requires understanding the tax system, timely filing, and adapting to regulatory changes. Accounting software simplifies the process, automating calculations, maintaining records, and streamlining filings. By following these tips, businesses can ensure smooth operations while avoiding compliance risks.

Conclusion

The shift from GST to SST brought significant changes to Malaysia’s tax landscape. GST, with its multi-stage tax structure and Input Tax Credit (ITC), offered transparency and efficiency but faced criticism for its complexity and perceived role in driving up costs. SST, a simpler single-stage system, reduced compliance burdens but lacked ITC, increasing operational costs for businesses.

While GST generated more revenue and ensured tax transparency, its complexity led to public dissatisfaction. SST, though more consumer-friendly, has limitations in revenue generation and addressing tax cascading.

For businesses, compliance under either system requires staying updated on regulations, adapting quickly to changes, and utilizing tools like accounting software to simplify processes. Proactive measures can help businesses navigate challenges, manage costs, and maintain competitiveness.

As tax policies evolve, businesses must stay informed and prioritize compliance to thrive in Malaysia’s dynamic economic environment.