GST vs SST: An introduction
Every other person and their cat has had a go at explaining how the Goods and Services Tax (GST) is different to the Sales and Services Tax (SST), so I figured I’m not going to miss the boat. I feel like it’s important to have a refresher, given that our Minister of Finance has announced SST: The Sequel.
In its most basic form, both the GST and the SST are consumption taxes. The idea is that the more you consume, the more taxes you have to pay. In an ideal world these taxes are supposed to be progressive. What this means is that, the more well-off, who tend to consume more, are taxed more. The less well-off on the other hand tend to consume less, are hence, taxed less.
The main difference between these two taxes, is who ends up paying. The SST is taxed at manufacturing level. The GST on the other hand, is pass through until the goods reaches the final consumer. The other main difference? SST is a cost to the person who buys it from the manufacturer. GST, whilst charged at every level, becomes a tax credit to everyone in between (provided you’re a registered agent) except the final consumer. I’m going to show you what I mean in a bit.
For the GST, there are three main categories which are in scope namely:
- Standard Rated
- Zero Rated
Customers will have to pay the full tax rate on standard rated items, which in Malaysia, was 6%. Items that are zero rated aren’t charged any GST, and the supplier can claim any taxes they’ve paid on their input . You won’t have to pay any GST on services that are exempt, but since the supplier can’t claim back any taxes they’ve paid on input, so they may pass the cost to you anyway.
GST vs SST: What’s the difference?
Now I’ll illustrate the difference between how SST would normally work against a standard rated GST goods. In this example, I’ll only go through four levels which are; the manufacturer, the distributor, the retailer and the consumer. For simplicity, I’ll also ignore taxes on input.
I’ll be using these assumptions:
- Four levels throughout; the manufacturer, the distributor, the retailer, and finally, the consumer.
- I’m ignoring taxes on input i.e. raw materials consumed by the manufacturer
- Standard rate for GST is 6%, and SST is 10%
- At each level, the businesses add a 20% margin.
Here’s how it looks:
In the example above, government revenue from GST is slightly lower than what they’d get from SST. Turns out it depends a lot on how much markup on prices is applied at the different levels. You can try it out here :
As you start playing along with the numbers, you’ll realise that practically every time, price of goods under SST, will be slightly more expensive, compared to prices of goods under the GST regime. Why? Simply because SST is an embedded cost, that gets buried (and compounded) as you go further up the supply chain.
In the new old regime, the government will be charging 6% tax on services but 10% on goods. What is not clear is the scope of taxes imposed so it may not be the same as the old SST. A point to ponder will be my favourite chicken place, I normally rack up a bill of RM75 for chicken and the restaurant charges 10% service charge (RM7.50). Under the old GST way, I get charged 6% on the food (RM75) and 6% on the service charge (RM7.50) bringing my total GST payable to RM4.95. I’m not sure if starting September 1st my bill will be RM75 + 10% sales tax plus RM7.50 + 6% service tax or just 10% sales tax on my chicken.
GST vs SST: What I think
At this point, I’m not going to comment on the kind of effect the incoming SST is going to have on general price levels. My guess is that it might add to existing price levels (given that I haven’t seen much price changes since GST was set to zero across the board). I’m of the opinion that the GST is a more transparent type of taxation as opposed to the SST. With the GST mechanism, it’s clear that the end consumer is the one being taxed, plus it’s mandatory to be displayed on the tax invoice so you get to see exactly how much you’ve paid. It’s in the best interest of businesses also to file properly their paperwork in order to be able to claim credit on GST they’ve paid.
In any case, I hope what I’ve written above has explained pretty much, how GST works in comparison to SST.
Any comments? Which one do you think is better? The GST or the SST? Any questions? Hit me up on the comment section below!