GST Under the Microscope
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GST Under the Microscope
iProperty.com gets some professional help in dissecting the Goods and Services Tax
Posted Date: Feb 23, 2015
By: iProperty.com

iProperty.com gets some professional help in dissecting the Goods and Services Tax and what it means for everyone especially in regards to the property market. - By Ong Xin Ying & Branavan Aruljothi

Introduced in the Budget 2014, the Goods and Services Tax (GST) is a consumption-based taxation system which is set to be implemented on 1st April 2015. A replacement for the existing Sales and Service Tax (SST), the 6% charge is based on the value-added concept; barring specific exempt items, those who buy more will be charged more.

The introduction of the GST in Malaysia is not a new idea; the first announcement of a possible implementation was made by the government a decade ago in September 2004 but the tax saw two postponements before its implementation was finally confirmed for this year. Additionally, many developed nations across the globe use this tax and Malaysia will have to follow suit as it progresses so it is something that should be expected.

However, a lack of understanding of the tax has led to a great deal of confusion, displeasure and panic among the public which is also to be expected; the income tax received strong opposition from all sides when it was first introduced in 1948 but it has since become an accepted part of everyday life. In the meantime, businesses are themselves wrestling with how to deal with the introduction of the tax and those in the real estate industry are no different.

As with other industry sectors, the 6% increase in items such as raw materials and labour costs will be reflected in the end product although matters are somewhat complicated by the fact that residential properties are exempted from this tax. Nevertheless, the Real Estate and Housing Developers’ Association (REHDA) has said that residential property prices will rise by 3-3.5% while the Royal Malaysian Customs (RMC) has also admitted that according to their calculations, housing prices will increase by 0.5% to 2%.

In order to try and clear up the issue, iProperty.com consulted the following experts on how they view the GST and its possible effects on all parties involved:

Concerns about the GST
Aruljothi Kanagaretnam: One of my concerns is the misinformed mind-set that many people have. Explaining the actual benefits of creating a new source of income that will sustain and grow Malaysia’s economy is a challenge, so it is important that people participate in the various training programmes and briefings given by the Customs Department so that they understand how the GST works and what measures need to be put in place to get ready for it.

Another big concern of mine involves those who have yet to reorganise their accounting systems to include GST requirements and the issuance of tax invoices. Companies need to train their staff to familiarise them with maintaining records and filing GST returns as per the requirements. If these are not done in accordance to the GST law, heavy penalties can be applied.

James Tan: More information must be disseminated so that everyone is fully aware of what it is as a lot of people are still in the dark about it. More time must also be given to those who have yet to complete their GST registration.

More importantly, what impact will this have on end consumers? Businesses may use this as an excuse to raise prices but fail to lower them when things such as fuel prices dropping occur, so people in the low- and middle-income groups will undoubtedly face difficulties as a result.

Jacky Cheng: Although public opinion of the GST’s implementation has been largely negative, I do believe that it is a fair move by the government as now every consumer has to contribute in support of Malaysia’s economic growth. However, my concern is that when the tax kicks in, the whole market will go quiet as everyone adjusts their lifestyles and behaviour to accommodate it which will in turn have a short-term effect on the economy.

Ryan Khoo: I think the basic concern is implementation as the GST is more complex compared to what most businesses are used to today. The public’s response to it in terms of take-up rate and level of understanding will take time. Meanwhile, many people and businesses will hold back due to the uncertainty and this will lead to temporarily depressed consumer spending in Malaysia.

In regards to the real estate industry, I speak generally when I say that the price of raw materials will see a slight increase. As with many other things in life, GST will be a contributor to inflation.

Dr Daniele Gambero: My concerns are primarily due to the possible profiteering of general businesses that deal with material supplies and perhaps developers to an extent as well. Some of these parties may just jump on the GST bandwagon and increase their prices without discrimination, something which the government’s Price Control and Anti-Profiteering Act 2011 promises to curb.

Another concern I have is how Malaysia is a market rooted in perception. At present, many people have a flawed view of the GST. There are those rushing out to buy property before it kicks in while others will wait until its implementation has long passed before making their purchase. At the end of the day, however, the GST is the way to go if becoming a developed nation is the goal. Many countries including neighbouring developing nations implemented the tax a long time ago. It may seem like it is a big burden now but the truth is that it is not.

Richard Oon: Even though the government has conducted public awareness programmes on the GST, the public is still unsure as to how it will affect them. What concerns me more is that businesses themselves are uncertain about the mechanics of this tax and may unnecessarily increase the prices of their goods and services as a result. In fact, an increase in prices of certain goods and services can be seen today as businesses are probably doing so in anticipation of the GST’s implementation.

Koong Lin Loong: The way I see it, the three groups in the property industry who will be most affected by the GST are the developers, construction companies and property investors. It is the investors in particular who have been confused by the issue and do not know whether to buy or not to buy property; this might have a noticeable effect on the market.

Fennie Lim: The GST has been a constant point of conversation for the past ten years that I have been a tax practitioner. Having actively looked at its viability over the last few years, it is my opinion that it is a much fairer and better system than the current Sales Tax and Service Tax. After all, if it is not a good system, why would 85% of the world’s countries have adopted it or the conceptually similar Value-added Tax (VAT) system?

My concern regarding the GST is primarily for the entrepreneurs who are the drivers of the economy; if the driver drives well, things will go smoothly. Time is needed for things to settle down and for everyone to better understand the GST system and how it works which is important so as to avoid complications in its execution.

When GST is implemented, the entrepreneurs should not increase the prices by 6% blindly because at the end of the day, the ones who will bear the costs are the consumers.

Common Misconceptions about the GST

AK: A major one is that the price of goods and services will all rise to the point that inflation will occur. In the first place, goods and services which were subject to the SST of 10% and 6% respectively will now be subject to the 6% charged under the GST. If you think about it, there will be a small amount of savings in that alone.

For items not previously subjected to the SST or any other tax, the 6% will apply as well. However, if the input and output mechanisms are effectively applied, the nett increase will be far lower than 6%.

JC: One common misconception is that the GST is a ‘new tax’ that will make you pay more for everything you buy. However, according to the authorities, it is in fact a replacement for the existing SST.

JT: Aside from a lack of information on it, there is also the deception that this is something that is good for the people when it is the people who will suffer the most due to having to pay higher taxes.

RO: One of the biggest misconceptions is that the GST will cause the prices of all goods and services to increase. This is untrue because during the present indirect tax regime, we have the sales tax (10%) and service tax (6%) in force. Consumers may not be aware that the former in particular has already been embedded into the prices of goods that they purchase now. Considering the fact that the GST rate is only 6% as compared to the sales tax rate of 10%, there will actually be a reduction in the prices of certain goods.

However, the same cannot be said for property prices as most construction and building materials do enjoy a preferential sales tax rate of 0% and 5% respectively. With the implementation of the GST, such materials will no longer enjoy such preferential sales tax rates.

RK: The biggest misconception is that only some people will be affected by the GST. Many businesses have yet to register or even enquire about it because they think they are under the threshold and thus not influenced but the simple fact is that everyone will be affected. Businesses must consider that their suppliers and customers may be GST-registered, so it is best to go and get some basic understanding of it. A good start would be speaking to your accountant.

DG: A lot of consumers have a very poor understanding of how it is going to work. The information is readily available through numerous outlets but is likely accessed by only 10% of Malaysians. My hope is that people educate themselves and learn how to properly navigate this tax. For example, the GST is going to be an additional cost so everyone is expecting prices to rise by 5-10%. There are many sole proprietors and small companies that factor it in before calculating their profits which simply does not make sense especially when you take GST-exempt supplies into account.

KLL: A lot of people think that there is a clear cut-off point where the GST is concerned in regards to the real estate industry but that could not be further from the truth. There is the misconception that property dealings are no different from how transactions involving any normal everyday product when the matter is actually not that straightforward.

As long as the ownership of the property in question has not been transferred before 1st April 2015, there might be a GST-related impact on the various steps in the purchasing process. This is especially true in the case of commercial properties.

FL: It all boils down to a lack of understanding. There are two groups of entrepreneurs: those who think that GST is their cost and those who know it is not but do not believe it. One is theoretical while the other is practical. As long as you are a GST-registered business, it will never be your cost.

However, some entrepreneurs do not believe that and do not trust that their competitors will reduce their prices accordingly. If every business thinks this way, they will adopt a conservative approach and maintain their current prices; as a result, it will be the consumers who suffer. The government will help as it has declared 532 items as discountable articles, but my worry is that not everyone will adhere to it.

Is It the Right Time for the GST?
AK: It is well-known that the main source of revenue of governments around the word is taxes, be they direct or indirect ones. In the eyes of economic experts, the reliance on a particular tax will adversely affect the nation’s financial position. Such is the case with Malaysia which currently relies heavily on petroleum revenue, making it imperative that the government undertake an overall tax reform to correct the imbalance.

One of the measures put forth was to slowly introduce the GST which is a more efficient system compared to the current tax model and is already practised by more than 160 countries, the alternative being VAT. In our case, the 50% fall in petroleum prices in June 2014 affected our government’s revenue from that source and caused most economists here to agree that now is the appropriate time to introduce and implement the GST.

RO: Many people describe the GST as a regressive tax but that is not how I would describe it as the government has made efforts to zero-rate numerous essential items such as rice, poultry and vegetables so as not to burden the poor. The public will also be exempted from paying GST on critical services such as public transportation, toll, healthcare, education, residential property and financial services.

The GST will be a fairer tax system as it will be based on the consumption and not on the earnings of an individual. Therefore, it will be a better source of stable revenue for the government which will be important in developing the nation.

DG: If implemented the right way and observed well, the GST is a great step towards becoming a developed nation. The best way for people to understand this is to study the impact this tax had on other countries which have already introduced it. Based on what I have seen so far, there have been no adverse effects from its implementation in these nations, some of which have GST rates higher than 6%.

Simply put, the GST is a value-added tax. When you buy something, you pay the tax. If you incorporate or transform the item into something else and sell it, you collect on it. The system is more rational and will help alleviate the popular Malaysian trend of ‘creative accounting’.

KLL: The GST is what I call a consumption-based or indirect tax as it affects anyone who buys goods that have been taxed under it and thus is not limited by the income bracket they are in. It is a fair tax which will allow the government to collect the money needed to finance Malaysia’s growth. This is actually a reflection of our country’s journey to become a developed nation as our ability to pay more taxes means we are making and spending more money to begin with.

JT: Yes. The government needs to widen the tax base but I feel they should start with a lower rate such as 1% or 2% and increase it gradually.

JC: Certainly. We are looking forward to Malaysia becoming a developed country by 2020 and the realisation of Vision 2020; the implementation of the GST is something that I believe will contribute to that.

RK: The short answer is yes. While we will see some short-term pain during the implementation stage, the GST will result in higher revenues for the government and price inflation which is good for assets and business revenue numbers. The government needs more money to invest in infrastructure such as MRT 2, LRT 3 and the High Speed Rail to Singapore as well as to improve existing services. This will have a spill-over effect on the economy as long as the money is spent efficiently.

FL: I truly believe that implementing the GST is a positive step. If we hope to become a high-income society, we cannot just depend on the organic growth of the economy.

This tax is the equivalent of an ‘economic tsunami’ in the sense that it is a huge wave that will push everything to the next level. Nobody can get away from it and it will affect the whole market. Nevertheless, we should give it a try for two to three years as I truly believe that after a while, the “water will find its level”.

Despite how some entrepreneurs may deal with the change, I really think that they will decide the outcome. They may be inhibited by the Price Control and Anti-profiteering Act 2011 which is meant to prevent exploitation but its enforcement may be challenging. Rather, I expect the heroes among them to be aggressive and lower prices to increase competition which will hopefully help to level the price increase tendencies.

Potential for Abuse of the GST
RO: I personally feel it would be less of a case of abuse and more of a case of misrepresentation by developers’ sales teams towards potential buyers. Having spoken on numerous occasions on behalf of the developers, I realised that the sales teams of some developers may not be well-trained on the GST aspect and may misrepresent certain facts to potential buyers. As such, the training of these employees on matters pertaining to the tax is essential.

Another possible point of concern involves buyers of non-residential properties which are still under construction. Depending on how the Sales and Purchase Agreement (SPA) is drafted, most agreements would have clauses that allow the developer to charge GST on the uncompleted portions of such properties from 1st April 2015 onwards. There may be some agreements in the market whereby there is no such clause which means that the developer will be unable to recover said costs from the buyer and have to bear it themselves. It is my hope that such developers do not take advantage of the ignorance of the buyers and attempt to pass this cost on to them nonetheless.

DG: There is of course such a potential as there will definitely be entities in the market that participate in shameless profiteering regardless of the industry. For example, the GST was implemented in Italy in the 1970s and prices rose by 15-20% in the span of just a few weeks. It was only after the government took action that things settled down.

RK: What I can foresee now is that all businesses whether they are in the construction or development fields will use the GST as an excuse to raise prices. Even if it is basically paid to the government, there will be a cost for businesses to comply with and implement the tax and this can all be passed on to the customer.

When GST was implemented in Singapore and Australia, prices in general in both countries increased across the board. Of course, it is hard to say how much of that is due to businesses profiteering and how much of it is solely due to the tax kicking in.

FL: As with all things, there is of course room for abuse and misconduct. In order to understand how things work, you have to go to the ground level. You have to understand the effect of GST for the developer, their contractors and even the sub-contractors. Developers are the captain of the ship and they need the coordination of all their professionals which include the architects, lawyers, surveyors and engineers. Generally, people’s mind set is that there will be a 6% increase in the overall development costs. However, one should know that most professionals are already subject to a 6% service tax; so transitioning to the GST which has the same 6% rate will not add any additional cost. If at all, the 6% GST should only impact those construction costs which were previously not subject to Sales Tax or Service Tax, e.g. some building materials and labour costs. Nevertheless, I agree that there will be an increase in construction costs but it should not be a blanket 6% on all items.

At the end of the day, whatever increase in construction costs is the additional GST collected and this tax is akin to catching fish from a much bigger pond because the pool of taxpayers will be greatly enlarged since everyone is a consumer.

JT: I do not think so as all stages will be ‘captured’. Developers have to have sophisticated computer/accounting systems to track the input and output taxes so as not to be fined. In a slowing economy collection will likely be slow but once billed, the issuer of the invoice has to remit the money to the authorities within a stipulated time frame. Failure to do so will result in a heavy fine.

JC: As far as the real estate industry is concerned, the GST affects all types of property transactions. While residential properties are exempted from this tax, it does not necessarily mean a rosy situation for homebuyers. As the GST is a multi-level tax system applied to all levels of the supply chain which is balanced by an input tax rebate system aimed at preventing double taxation from happening, this should theoretically avert the problem of escalating prices and make buying non-residential properties seem to have better value due to the ‘claim back policy’.

However, the real estate market is always moving forward; even if you disregard the issue of rising construction costs, property prices will continue to rise as long as there is demand in the market.

KLL: I do not think this is possible because there are a lot of certificates and parties involved in the process of developing a real estate project and this will help anchor the end price as everything must be accounted for when all is said and done. However, the issue is of course less clear for residential properties due to the fact that they are exempted from the tax although the costs incurred by building them will undoubtedly rise and developers face the dilemma of either passing these costs on to their customers or absorbing it themselves.

The Price Control and Anti-profiteering Act 2011 is meant to help prevent such abuses from occurring but we of course will have to wait and see what will happen.

AK: Just like any other industry, the real estate sector can be considered vulnerable to possible GST abuse. However, to check and contain potential abuse of the tax, the government introduced the Price Control and Anti-profiteering Act 2011 which empowers various authorities to monitor, control and take action on any price increase due to excessive profiteering.

Should One Purchase a Home Before 1st April 2015?
RO: House prices are expected to rise because even though residential properties are exempt supplies, construction costs will still increase. As developers are unable to claim the input tax incurred through the construction of these properties, the GST element will undoubtedly be passed on to the homebuyers.

As such, moving forward, all future residential property projects will have this GST cost element in the picture which will ultimately affect how developers price their properties. That said, one must not ignore the demand and supply conditions of the market which will ultimately determine property prices when the GST comes into play.

AK: If you purchase a house before 1st April 2015, the price you need to pay would have to be written in the Sales and Purchase Agreement (SPA) which might not have addressed or acknowledged the GST obligation. This is not a serious issue for residential properties as they are exempt from the tax but there would be financial issues for non-residential properties. This is because progressive or periodic payments made after 1st April 2015 will be GST-chargeable as provided under Section 188 of the GST Act.

FL: There is no such thing as a “good time” or “bad time” when it comes to investment. Of course, if you had asked me this question at the end of year 2013 right after the announcement of GST, my answer would have been different. At that time, it was definitely a good time to buy because developers had not factored in the extra GST costs into the selling price compared to the new launches now.

From a purely GST perspective, I am neutral about whether we should buy property before 1st April 2015. Investors on the other hand should not consider 1st April 2015 as the cut-off point if they are buying it as a long term investment. This date should not stop a person to buy. Instead, one should think ahead of time and buy now, not to avoid GST, but becau se property prices in Malaysia are still reasonable.

The most important thing to remember is that Malaysia’s property prices are comparatively lower than those in many other countries. If you find a good property in a good location, go ahead and make that investment. However, do not speculate.

One thing about the GST is that it will most likely soften the market for a while. In the longer term, property prices will rise because generally speaking, Malaysians love investing in property and it is my opinion that this is the best way to safeguard your money.

KLL: The GST only has a direct effect on developers in this case as residential properties are exempted from this tax. Of course, this means that there is an indirect effect in terms of the extra costs being either absorbed by the developer or passed on to the buyer. As I mentioned before, concerned buyers should complete the ownership transfer process before the GST takes effect to avoid this, but as this process takes time I do not think it is possible for a lot of people to do so.

JT: Yes, as landed properties which are currently priced at less than RM1 million are not likely to get any cheaper.

JC: Property prices will rise once the GST comes into effect due to the increase in building material prices and services costs which are affected by it. Developers have no choice but to pass on the extra costs to their buyers and many of them already planned ahead by slowly increasing the prices of their products in 2014.

As such, I would say that buying property before the GST kicks in is a good choice but it is too late to enjoy the benefits as property prices have already been adjusted accordingly. However, those who made their purchases before the Budget 2014 announcement will truly benefit from this situation. On another note, commercial and industrial properties will incur GST costs but that can be claimed back when they are sold unlike residential properties.

DG: If you can purchase a home, yes. If you cannot, then purchase it when you can. Do not rush the issue; when you rush it, developers can increase property values and affordability will once again become an issue. To me, it does not make much difference if you look at the numbers as the GST has a greater impact on material prices compared to the housing project itself.

In my opinion, developers should work on creating investment-grade products. These days, investors are purchasing residential properties because that is their primary option although there are already some guaranteed returns-type products available which are presented as investment-grade products. Developers should focus more on this and work with management companies to make them an appealing investment option. They should create resorts, student hospitality establishments, office towers and hotels. Investors should also look into the many reputable management offices in Malaysia so as to widen their horizons.

Meanwhile, management companies should propose guaranteed-returns proposals which will shift investors in the direction of investment-grade products. This will result in less demand for residential properties which will in turn ease market pressure and help reduce costs. Consequently, property values will be more accessible.

RK: I think the GST implementation in April 2015 should not be your one and only factor in making such a big decision as the purchase of your home. However, as many have noted, it will result in higher costs for developers so new homes will not get any cheaper from a construction cost perspective.

Additionally, as time goes by, the increase in prices across the board due to inflation means that properties will not get any cheaper. As such, buying property due to things such as the GST and inflation means that properties retain good value which gets higher in the long run. As long as your finances are in place and you find something that suits you, go ahead. Do not let the GST scare you.

DISCLAIMER: The opinions stated above are solely those of the experts named above and are not in any form an endorsement or recommendation by iProperty.com. Readers are encouraged to seek independent advice prior to making any investments.

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Tags: Goods & Services Tax (GST)

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