Saturday, 28 March 2015

GOT a WhatsApp message from my friend today saying that he heard my name mentioned over the morning run show of a business radio station.

It seems that I said something about GST which he could not understand. Well, since I did not hear what they said I said, I too do not understand what I supposedly said.

Come to think of it, nobody in this country has been able to explain to me what GST is all about.

On Your Own The politicians in power thumped their chest and said GST is good for you. Huh? The revenue collected will supposedly be used to build roads, bridges and schools. So what have they been using the revenue collected pre GST for? Never mind. I am not allowed to talk about something that I do not fully understand.

The politicians in the opposition shows the world how the GST has forced a 68-year old owner of a sundry shop to close shop because he does not know how to implement GST. Huh? I thought the Government through its Economic Transformation Program (ETP) would have assigned some assistance to him some four years ago. Like buying him a cash register and teaching him how to use. That would have stopped the opposition from dramatising this retirement charade.

The Trade Minister and Customs got into the act and said that all prices should come down post-GST because of the abolition of 10% sales tax. Huh? Not all products have sales tax and for those that do, the maths do not add up as per what the good Minister thinks.

Since last year, retailers have been warned not to increase the price of goods come April 1. Huh? Suddenly all goods and services come under price control. What happened to free trade? When the authorities realised they cannot control price increases of all products, the Profiteering Act came into the picture.

Tax agents

Now traders and retailers have to prove that if they increase their price more than the 6% GST, their profit margin must not be more than before. Who needs marketing managers and cost accountants when we have such efficient Customs officers in our midst? And again, what happened to free trade?

What is supposed to be an efficient tax revenue model for the government has now become the most politicised issue in the country. No thanks to all the smart politicians of the two divides, now we have a completely misunderstood GST.

So before I am called stupid, I would like to seek from the readers of this column your kind understanding of the following concepts:

All businesses that collect GST are now tax agents for the Customs department. We are now authorised to collect taxes on behalf of the Government. Adding one or two accounting staff should suffice. Treat it as national duty.

Price increase

Services that are already attracting a 6% service tax will not be impacted as it is replaced by the 6% GST. Phew… that was easy… no price increase here.

Services without service tax now having to charge 6% GST will have a price increase. No brainer here.

Goods with a 10% sales tax at import or manufacturing level will now be replaced with a 6% GST. Depending on the margins of the value chain, you might or you might not have cost savings. Say your cost is RM50 plus 10% sales tax and your final price to consumer is RM100, there would be a margin of RM45 in this value chain. If you do not increase your price of RM100, then your new selling price after deducting 6% GST will be RM94.30 which means less your cost of RM50, the margin in this post GST value chain will be RM44.30 which is slightly less than the RM45 that was made previously. Manageable, so no price increase nor decrease.

Higher margins

For value chains where higher margins are required to pay middleman like wholesalers and retailers and higher selling and promotion costs, a RM50 cost will be sold at RM150. Pre-GST with sales tax of 10%, the margin in the value chain is RM95. Post-GST, the new price will be RM141.50 which means the new margin in the same value chain is now RM91.50 which is RM3.50 or 3.7% lower than before. Since the retailer and the wholesaler are not willing to accept lower margins, the importer will have to bear the loss in revenue. So importers have to be prepared to lose at least 6% margin on sales. Definitely no decrease in selling price.

For goods without sales tax savings, prepare to tighten your belt if you are not allowed to increase your selling price or pass the 6% GST to your customers. The importer will lose at least 10% off his gross margins. Another no brainer.

For importers who have not increased their price due to depreciation of the ringgit and not allowed to pass the 6% GST to their consumers, you have my condolences. According to the Customs, your price increase can only be effected next year unless you can prove you are not profiteering. Let’s pray that you will survive till then or free trade reigns again.

As GST is a consumption tax, everybody including the poor pays tax to the government now. Price increases will be broad based and unavoidable. Whoever tells you that price will come down is as stupid as the next guy who tells you that he can change our Constitution.

With the depreciating ringgit worrying even our central bank governor, we will be facing depressed consumption amidst rising inflation. The next 12 months will be chaotic and confusing for all businesses but we will get through it just fine.

If you are now more confused than before, please accept my apologies. All 94% of it. The other 6% belongs to the Government.

Published: http://www.thestar.com.my/business/business-news/2015/03/28/simplifying-the-concept-of-gst/