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Tuesday, January 12, 2016

GST Model - Clearing Up the Confusion

Last night I had happened so on a question posed by a acquaintance on the GST model. 

Going through the scenario he posted, I found out the lack of understanding of the model, which in turn is likely to have led to people being misled about price increase and grudgingly accepting it and blaming the govt at the same time.


The scenario is as follows:
Ah Kong is a carrot seller and he prices his carrots at RM100 per bag. He sells it to Rahman who is a middleman at RM106 plus GST. Rahman then sells it to Bala, a grocery shop owner at basic price of RM120 and GST of RM7.20. Bala then sells this to Minah at RM135, incurring a tax of RM8.10. Total tax collected is RM21.30.

Scenario

What is wrong about the above scenario?
The above scenario is actually reflective of the old Sales & Service Tax scenario. A tax of 6% is levied. And there is no input tax to be claimed by traders. Thus, pushing up the final price. Traders too do not have the reason to declare to the Custom that they had collected the sales tax as the tax is included in their pricing.

Many of us do not realize the existence of input tax that is claimable by business owners in the chain. This component is the beauty of GST. It entices the greed in us human to declare what we have gained in order to gain the pittance that we can get from the input tax claimable. This is what the English saying of penny-wise pound foolish means too (the human nature).
So at the end, a consumer actually pays only RM8.10.

There's another weakness in this scenario (the scenario is from the acquaintance, but the words are mine). Basic food stuff is zero-r
ated. Meaning you pay 0% of GST. Even if the carrots had been sliced to smaller pieces, there's still 0% tax. There's 3 types of tax level, standard rate (6%), zero rate (0%) and exempt (0%).

What's the difference?
Both standard rate and zero rate is being used in cost input for declaring profit margin. These are direct cost. While exempt rate are what usually be found in indirect cost components.

Hope this clarifies.

Do share if you think this is useful. Any further clarification should be directed to a legally appointed GST tax consultant, which I am not (I can, but I love my current job).

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