The recent report that Prime Minister and Finance Minister Dato’ Seri Anwar Ibrahim’s ministry is studying the possibility of incorporating some features of the Goods and Services Tax (GST) into Malaysia’s existing Sales and Service Tax (SST) has reopened an old and highly sensitive debate.
GST was abolished in August 2018. It had become one of the major political issues used by Pakatan Harapan (PH), together with the 1MDB controversy, in the campaign that brought down the Barisan Nasional government.
Yet GST has never really disappeared from public discussion. Supporters continue to argue that it is a more efficient and transparent tax system, while opponents remember the impact they associated with GST on the prices of everyday goods.
Recent changes have made the debate even more interesting. The government has increased SST rates and expanded its scope, while introducing other forms of taxation. The implementation of e-Invoicing has also prompted some critics to describe it as a “backdoor GST”.
There is therefore value in putting the politics aside for a moment and understanding what GST and SST actually do—and whether some of the strengths of GST can be incorporated into SST without bringing back the entire GST system.
GST and SST in Simple Terms
The easiest way to understand the difference is this: GST is collected throughout the supply chain, while SST is generally collected at a particular point.
Consider a simple example. A manufacturer makes a product and sells it to a wholesaler. The wholesaler sells it to a retailer, and the retailer sells it to you.
Under GST, tax is collected at each stage. However, businesses can generally claim back the GST they have already paid on their business purchases. In simple terms, the tax is intended to apply to the value added at each stage, with the final burden ultimately falling on the consumer.
This is why GST is often described as a value-added tax.
Its major advantage is transparency. Because transactions are recorded throughout the supply chain, there is a clearer trail of how much tax has been collected.
But there is a price for this efficiency: GST is relatively complicated. Businesses have to keep detailed records and understand what tax they have collected and what tax they can claim back.
For a large company this may be manageable. For a small business, it can be a significant administrative burden.
SST works differently.
Sales tax is generally imposed on specified goods at the manufacturing or import stage, while service tax is imposed on specified services.
There is normally no mechanism for businesses to claim back the SST they have paid on their inputs.
This makes SST simpler, but creates what economists call a “cascading effect”. In simple language, a tax paid earlier in the supply chain can become part of the cost of the next transaction. Eventually, some of that tax can be hidden inside the final price paid by the consumer.
This gives us a simple description:
GST is more transparent but more complicated. SST is simpler but can be less transparent and can create hidden tax costs.
What About e-Invoicing?
It is important not to confuse e-Invoicing with GST.
e-Invoicing is not a tax. It is a digital system for recording and reporting transactions. It gives the Inland Revenue Board (LHDN) greater visibility over business transactions. In effect, it allows the tax authorities to see more clearly what businesses are buying and selling.
Critics may call it a “backdoor GST”, but technically it is not. Nevertheless, e-Invoicing does provide some of the digital infrastructure that could make a GST-type system easier to administer in the future.
Could SST Borrow from GST?
This is perhaps the most interesting possibility. Malaysia does not necessarily have to choose between retaining today's SST and bringing back the full GST system.
One possibility is to retain SST but incorporate selected GST features. The most important could be an input-tax credit mechanism.
For example, if a manufacturer pays tax on certain raw materials or business inputs, it could potentially receive a credit or deduction for that tax rather than having the tax permanently become part of its costs. This could reduce the cascading effect of SST without turning the whole system into GST.
The government could also use e-Invoicing to verify these transactions digitally. In theory, this would create a system that retains the simplicity and targeted nature of SST while adopting some of the efficiency and transparency of GST.
Why Could This Be Attractive?
There are several potential advantages.
First, it could reduce hidden taxation. Businesses would not simply pass tax paid on inputs through their supply chains as part of their costs.
Second, it could remain targeted. The government could continue to focus taxation on selected goods and services rather than taxing virtually every transaction.
Third, it could protect essential consumption. Basic necessities and socially important services could continue to receive appropriate exemptions or relief.
Fourth, it could improve tax collection. Better transaction records and digital verification could reduce leakage and under-reporting.
Fifth, it could make Malaysian businesses more competitive. Particularly for exporters, reducing unnecessary tax costs embedded in production could help Malaysian products compete internationally.
But There Are Significant Concerns
The biggest danger is creating the worst of both worlds.
If Malaysia adds GST-style credits, complicated exemptions, elaborate reporting requirements and extensive digital compliance to SST, businesses could end up with a system almost as complicated as GST—without necessarily obtaining all of its advantages.
There is also the important question of tax refunds.
One of the lessons from the previous GST experience was that businesses became frustrated when legitimate input-tax refunds were delayed. For businesses, a tax refund is not merely an accounting entry. It is working capital.
The government must therefore ensure that any new credit or refund mechanism is fast, predictable and transparent.
Another concern is the cost to businesses.
Many businesses are already frustrated by having to modify or replace accounting, point-of-sale and other software systems whenever new government requirements are introduced.
The government should avoid creating another expensive technology exercise.
Where possible, businesses should be allowed to use their existing systems, with government providing common digital standards and interfaces.
The Way Forward
The debate should therefore not simply be about whether GST is coming back. A more useful question is:
Can Malaysia design a better consumption-tax system by combining the best features of GST and SST?
A sensible approach could be to retain SST as the basic framework while considering several GST-inspired improvements:
- introduce limited input-tax credits to reduce cascading;
- use e-Invoicing to verify transactions rather than create another separate system;
- continue protecting essential goods and services;
- retain higher taxation on luxury consumption where appropriate;
- ensure quick and predictable refunds;
- provide affordable digital solutions and assistance to SMEs; and
- consult extensively with businesses before making major changes.
Most importantly, the government must explain the changes honestly and clearly.
The argument should not be whether GST is “good” and SST is “bad”, or vice versa. Both systems have strengths and weaknesses. The real objective should be a tax system that is fair to consumers, manageable for businesses, efficient for government and supportive of economic growth.
Malaysia may therefore have an opportunity to find a middle ground: an SST that is simpler than GST, but smarter, more transparent and less prone to cascading than the SST of the past.
Whether that can be achieved will depend less on what the system is called than on how intelligently it is designed and, above all, how well it is implemented.
Goodbye Yellow Brick Road
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