It is probably not an exaggeration to say that the results of the Malaysian General elections in May of this year took nearly everyone by surprise... But with a Trump-Kim meeting happening, four time champions Italy not making the FIFA World Cup, and Loki actually dying in an Avengers movie, is there anything that really surprises anyone anymore?

This party, which now forms the government in Malaysia, made several sweeping promises when they were campaigning as the opposition. Perhaps not expecting an outright win, one of those promises was to abolish the hugely unpopular Goods and Services Tax (GST) introduced by the previous administration in 2015.

Now that they have won, they appear to have wasted no time in keeping their word. The GST was abolished as of June 1, 2018, and in its place, the old Sales and Service Tax (SST) system will take its place. The exact standards and implementation dates are yet to be finalized but the government has announced a target of September 2018.

For businesses that either only recently entered the Malaysian market, or have forgotten what the SST was, it was also a tax on goods and services. The difference is in the way it works. For the remainder of this blog, our focus will be specifically on Sales Tax which applies to the movement and import of goods. Service tax, as the name suggests, applies to services.

The Sales Tax system is based on a 1972 regulation and, much like the GST which replaced it in 2015, and which it now replaces again, was either payable upon import or removal of goods from a bonded or customs supervised zone for domestic consumption.

Unlike the GST, however, which was a pass-through 6% tax on all except certain specified zero-rated goods and services, Sales Tax is a one-time tax at a default rate of 10%. The bad news is that it is unrecoverable – in much the same way as import duties are.

The good news, though, is that many more classes of goods (essentials like food, milk, pharmaceuticals, medicines and household necessities) were exempted in comparison to those that were zero-rated under the GST system. Essentials that were not exempted were at least subject to a reduced sales tax rate of 5%.

Only a handful of commodities (namely alcohol and tobacco) were taxable at a higher rate of 20%. Before the introduction of GST in 2015, there was also a system in place in which the majority of raw materials used in manufacturing could be exempted from Sales Tax as a measure of ensuring that Malaysian manufacturers remained competitive.

In short, sales tax is a higher consumption tax on a smaller pool of goods, which nets off the considerably lower GST base rate in terms of revenue to the government and costs to consumers. The intended result: lower costs for necessities, higher costs for luxuries.

With an infrastructure already in place, reverting should seem straightforward. But the simplicity ends there, for several reasons:

• The Sales Tax Order is HS based. The Malaysian Tariff has undergone 2 significant changes since the last Sales Tax Order was in force, namely having transitioned from HS2012 to HS2017, at the same time aligning itself to a region-wide ASEAN initiative to adopt the AHTN as a single tariff nomenclature. The pre-GST Sales Tax Order was in force at a time when the national tariff (9-digits) and AHTN (10-digits) were distinct sets of nomenclatures in Malaysia.
  
  
• Malaysia has participated in several trade facilitation programs like the ASEAN Single Window (ASW), the WTO’s Trade Facilitation Agreement (TFA) and the Trans-Pacific Partnership (TPP). It needs to be sensitive that a re-introduction of a non-recoverable import duty like a tariff on certain goods does not infringe on its commitments to trade facilitation or worse, come across to trade partners as being discriminatory or protectionist.
  
  
• The majority of businesses have structured their operations around GST for the long term, unsurprisingly not expecting that it would be abolished so soon; and
  
  
• National and regional priorities have since changed

If the present government intends to stick by the September target for re-introduction, it has all this to sort out in the next 3 months, in addition, to administrative procedures. Business operators clearly have more to ponder than the obvious uncertainty.

Clearly, based on the pre-GST set of Sales Tax regulations, mobile phone makers, for example, could rejoice over a reduction from 6% GST to being exempted from sales tax.

A medical device importer, on the other hand, could have been exempted under the pre-GST system, then be subject to 6% GST, and now find themselves subject to 10% sales tax depending on how exactly commodities are classified under the current HS nomenclature. It will all depend on how the system is re-introduced.

Nothing can be taken for granted at this point in time but one thing is certain; regardless of the outcome of the re-introduction and barring an outbreak of a global trade war (see our other recent blog posts), importers and business operators who have hesitated in the past will hardly find a better opportunity than this.

For a thorough HS classification exercise – which can very well be the difference between 10%, 5% and no sales tax at all, and in the case of manufacturers, whether or not to make preparations for obtaining exemptions on raw materials.

Those who disagree may turn out to find another opportunity hard to come by.

For questions on any of these topics, reach out to the experts. Tradewin has customs compliance experts located globally that are here to help.