Govt needs to re-introduce input tax mechanism to counter tax-on-tax effects


THE government needs to re-introduce the input tax mechanism or credit system into the service tax regime to counter the effects of tax-on-tax, Ernst & Young Malaysia (EY) said.

It said there are some measures that could be made available to preserve Sales and Services Tax (SST) as a single-tier tax, and for the tax to be imposed only to end-consumers of the taxable products and services.

“Aside from the many legislative updates that need to be tracked, the ambiguity surrounding certain categories of taxable services (eg consultancy, management and information techology services, and even the coverage of digital services) does persists.

“Tax-on-tax scenarios drive up costs of doing business,” the assurance, tax, transaction and advisory services firm said in a report titled “Expectations for Budget 2020” yesterday.

The tax expert said a year after the implementation of the SST, assessing the taxability of a service could still sometimes pose a major challenge for businesses.

“Setting up an advisory panel of industry experts for consultation with the Royal Malaysian Customs Department on SST matters is also important, as well as expanding coverage of the business-to-business and intra-group exemptions to include other groupings of taxable services.

“On a positive note, the Customs Department does regularly issues guidance to provide a clearer understanding of the relevant implications, and tax-payers’ obligations under the legislation,” it said.

The audit firm said with the confluence of factors affecting the global economy and pointing to a weak economic outlook in the near term, it is looking forward to greater clarity and direction from the government of its vision and focus on sustainable growth; identification of specific priority sectors to encourage foreign and domestic investments; and commitment to innovation in the long run.

It also said that the Tax Review Committee (TRC) has been mapping measures to reduce tax leakages, tax the underground economy, enhance tax administration and identify new revenue streams.

“Beyond the budget, we expect to see changes introduced to the tax system in the future based on the work that TRC has done,” it said.

From the personal income tax perspective, it said the government should consider broadening and reducing the number of income tax bands.

“Broader income tax bands would encourage individuals to improve their earning capability through increased productivity and self-development as they would be able to enjoy the fruits of their labour, thereby improving our efforts to become a high-income nation.

“The additional take-home income would also allow for the increase in consumption of goods and services, some of which are subject to SST,” it said.

It also added that in the upcoming Budget 2020, more attention should be given to measures to support growth of businesses and enhance the current tax administration, including clarity on the digital tax implementation.

“This also includes consideration of the impact of taxing this new segment of the economy and ensuring that comprehensive engagement with industry and professional bodies is conducted to ensure clarity and fair treatment,” it said.