Introduction to GST – Part 4

  • How does GST works?

A taxable person or business will make acquisition (purchases) of goods or services, which may or may not have incurred GST (Input GST).

Value is then added by the taxable person or business and the final product is then sold which may or may not have been charged GST (Output GST).

A taxable person or business then accounts the Output GST after deducting the Input GST incurred, known as Input Tax Credit (ITC). The net Tax is paid to the government or claimed by the taxable person or business.

Illustration:

The illustration shows how GST generally works by using a simple example of a chain of supplies leading to a sale to a consumer.

CB Sdn Bhd (manufacturer) sells circuit board to IT Sdn Bhd for RM26 which includes RM1 GST. IT Sdn Bhd sells hard disk & circuitry to ePod Sdn Bhd for RM104 which includes RM4 GST and finally, ePod Sdn Bhd sells the product ePod for RM312 which includes RM12 GST

Activities Input GST (RM) Output GST (RM) Net Tax (RM)
Manufacturer CB Sdn Bhd purchases goods or services (let’s say no GST was incurred)

0

CB Sdn Bhd sells circuit board to a manufacturer, IT Sdn Bhd at RM26 (inclusive of GST of RM1)

1

CB Sdn Bhd accounts for GST to the government as follows:

0

1

1

       
IT Sdn Bhd purchases circuit board for RM26 (inclusive of GST of RM1)

1

IT Sdn Bhd adds value and sells to a manufacturer, ePod Sdn Bhd at RM104 (inclusive of GST of RM4)

4

IT Sdn Bhd accounts for GST as follows:

1

4

3
(4 – 1)

       
ePod Sdn Bhd purchases the hard disk & circuitry for RM104 (inclusive of GST of RM4)

4

ePod Sdn Bhd adds values and sells the final product, ePod at RM312 (inclusive of GST of RM12) to consumer David

12

ePod Sdn Bhd accounts for GST as follows:

4

12

8
(12 – 4)

       
Consumer, David buys the ePod for RM312 and being a consumer pays for the full GST of RM12.

       
The government receives a total GST of RM12 from
CB Sdn, IT Sdn Bhd and ePod Sdn Bhd.

12
(1+3+8)

GST is effectively borne by private consumers when they acquire anything to consume. There is no input tax credit for anything acquired or imported for private consumption. Consumers therefore bear the GST.


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