The new system. Following the reintroduction and implementation of a new Sales and Service Tax (SST) structure on 1st September 2018, uncertainties have arise as to how it differs from the “pre-GST” SST structure and GST structure. Kenanga Investment Bank recently hosted a group of analysts and fund managers to its Corporate Luncheon where we invited the Indirect Tax and GST Department of Grant Thornton Malaysia, which was led by Mr. Alan Chung, Executive Director, to share their professional views. Alan presented various key differences between the three structures and provided an understanding on areas that could see the most impact.

(Note that the information regarding the SST structure provided is as per guidelines and regulations as of 5th September 2018 and may not capture subsequent revisions and updates to the tax.)

Key Highlights

Broader sales tax definition. Sales tax of either 5% or 10% is charged on taxable goods that are manufactured in, and sold or imported into, Malaysia. Under the new SST system, manufactured goods (with the exception of petroleum goods and installation of equipment for construction) are deemed as new products if they had undergone changes in size, shape, nature, composition or quality, with the latter two being new additions to the definition. For petroleum goods, manufactured goods, which previously only covered those undergoing the refining process, it now also includes separation, purification, conversion, and blending processes. The registration threshold for manufacturers is annual turnover of RM500k, historical or projected, of taxable goods. Most manufactured goods are taxable, but there are certain exemptions.

Service tax remains a 6% charge on specified services provided by a taxable service provider in Malaysia. This is independent of sales taxes and may involve the sale of previously taxed goods (i.e. restaurants serving food and beverages). In comparison to the GST, the return to SST now sees services provided by private hospitals and veterinaries as non-taxable. However, against the previous SST system, additional taxable services are classified such as non-rural air service domestic flights, betting and gaming, electricity (charged on electricity more than 600kWh) and IT services. A threshold of at least RM1.5m in annual sales was determined to deem a food establishment as liable to pay this service tax, while other services see a threshold of RM500k and above. For Customs agents who are responsible for clearing imported goods, there is no minimum turnover. Previously, the threshold during the GST system of RM500k was set across the board.

Problems at hand. Alan highlighted that by returning to the old system, several past issues could resurface. This includes complications from transfer pricing, difficulty in interpreting scope of implementation, higher costs for certain business and trickling taxes could lead to higher-than-expected price increases (sales and service tax do not allow for the input tax credit which was available under GST. There is also the likelihood that certain businesses (particularly franchises) may not be charging service taxes while others might despite presenting a similar brand or image. This could cause confusion to consumers owing to the different net prices. Further, the list of exempted goods could be later revised and expanded upon with the government being open hearing suggestions and complaints by businesses on the implementation of the taxes.

Post-implementation

Are we better off? The new coalition government’s agenda with the reintroduction of the SST was to bring about lower prices to consumers, aided by the higher levels of tax-exempted goods. Further, it is estimated that only c.100k persons and organisations will be liable to pay both or either one of the sales and service taxes. This is a large drop from the reported c.476k GST-registered entities. While price reductions may have yet to be fully reflected in the economy, there appears to be mixed impact within selective industries.

Likely beneficiaries. We believe retail outlets with highly localised content will benefit customers with the wider degree of tax exemptions likely to trigger price cuts. Auto manufacturers (BAUTO (OP, TP: RM2.50), DRBHCOM (MP, TP: RM2.35), MBMR (OP, TP: RM3.60), SIME (MP, TP: RM2.55), TCHONG (OP, TP: RM2.30), UMW (MP, TP: RM6.50)) are also offering lower prices owing to the exemption of CKD imports which could translate to a small degree of savings to buyers, and possibly rejuvenating demand to some extent. Property developers (large caps players being: IOIPG (MP, TP: RM1.70), SETIA (OP, TP: RM3.50), SUNWAY (MP, TP: RM1.55), UEMS (MP, TP: RM0.970), UOADEV (MP, TP: RM2.30)), on the other hand, may see some support from lower construction costs with building materials now being tax-exempted. However, consumers may not benefit from noticeably lower house prices as these companies are facing cost pressures elsewhere in the form of land costs and operating expenses.

Higher prices will still persist, particularly for tobacco products and alcohol which importers/manufacturers have planned to pass down the tax to consumers. Adding to this, the food service industry may also resort to higher prices from the service tax imposed to customers. Note that certain establishments may impose percentile service charges, which are separate from the above tax. Going back to retail shopping, certain operators and brands run business models with a high imported product mix and may see a higher tax exposure from the 10% sales tax given their less complex supply chain. Customers of these outlets may notice some difference in pricing owing to this if the companies choose not to absorb the taxed amount.

Taking a gander on consumer stocks. From the abovementioned, we believe retailers such as AEON (OP, TP: RM2.60) could see consumer demand being stimulated from the perceived lower prices. This could boost other expansionary initiatives such as strategic location openings and expanding their e-commerce presence. While PARKSON (OP, TP: RM0.810) could also potentially see better domestic results, group level earnings could still be undermined by their regional footprints, which are seeing less favourable returns. On the other hand, net importers such as AMWAY (UP, TP: RM6.50) and PADINI (UP, TP: RM5.60) could see lower demand from the higher prices caused by higher tax costs. Additionally, weak domestic currency may further add to cost pressures to these companies.

Sin stocks (BAT (UP, TP: RM28.25), CARLSBG (UP, TP: RM17.10), HEIM (MP, TP: RM20.40)) have implemented an industrywide price increase as they traditionally do not absorb value-added taxes. While these companies also struggle to combat the unrelenting illicit trade market, brewers may see additional pressures from a potential slowdown in demand from their on-trade segment, which is exposed to the 6% service tax. High tobacco prices would also affect convenience store operators (MYNEWS (UP, TP: RM1.25), SEM (MP, TP: RM1.55)) which owe a high proportion of revenue to tobacco sales.

With regards to food manufacturers (DLADY (MP, TP: RM71.20), F&N (UP, TP: RM32.15), NESTLE (UP, TP: RM132.55), PWROOT (OP, TP: RM1.90), QL (UP, TP: RM4.70), SPRITZER (MP, TP: RM2.40), we suspect demand will be more vibrant ahead of healthier spending habits. This would be particularly beneficial for smaller players (i.e. PWROOT) which saw depressed domestic demand during the past few years as consumers become price sensitive and inclined towards more prominent household brands. Meanwhile, large cap names could continue to maintain their market leading position and still expand with an enlarging market.

Source: Kenanga Research - 18 Sept 2018