On 1 April 2018, GST marked the 3rd anniversary in Malaysia.
This is a hot and ever debatable topic among politicians since the GST introduction 3 years ago. The reason I’m posting this is not whether it should be abolished or replaced, but rather to share my observation on the effect among small businesses after the implementation.
Output Tax vs Input Tax
By now, I believe business owners should have a good understanding what GST is and they need to apply 6% on every goods and services sold except zero-rated and exempt-rated supplies.
A common characteristic any countries which adopts GST, there is something called output tax vs input tax, once these two knocks off each other, the difference will either make you to pay the tax or get the refund.
In a normal situation, a growing company should be paying GST which means output tax is more than input tax.
The GST Experience in Malaysia
If one may ask any small business on the street today, it’s not surprised to see many are trapped with cashflow especially business which offers credit term! I’m sure you are aware when it’s time to file the GST return, owner need to fork out their own cash to pay for the GST even their customers have not settled the invoice yet! This is because the approach GST is implementing still largely on accrual basis in Malaysia. In some other countries, they name this as invoice basis or non-cash basis.
As a result, many businesses are desperate to get additional financing to meet the cashflow gap, eventually this will bring operation cost higher because of the borrowing.
Accrual vs Cash
Other than accrual basis, probably most businesses do not realise GST can be introduced differently and noted this approach has minimum cashflow impact among small businesses, that is cash basis! With lower operation cost, this can help small businesses to be more competitive.
It works exactly opposite to the accrual basis, only pay the GST after the invoice has been settled; if the invoice is partially settled, then pay GST partially! Similarly this approach also mean the company can only claim the input tax after they have settled.
This approach is also benefitting to the tax authority where they can focus manpower on analysis and field audit.
Let’s see the following other countries that adopt the cash accounting basis and its annual turnover threshold:
United Kingdom – Annual turnover of £1.35 million or less vs VAT registration threshold is £85,000
Australia – Annual turnover of A$10 million or less vs GST registration threshold is A$75,000
New Zealand – Annual turnover of NZ$2 million or less vs GST registration threshold is NZ$60,000
Do we have cash accounting scheme in Malaysia?
Yes, we actually have this and listed on the KASTAM website but this limits with annual turnover threshold is RM1 million and come with other criteria along.