Where India can learn from Malaysia’s GST experience

As India embarks on its biggest tax haul in history with the implementation of the nationwide Goods and Services Tax, it is worthwhile to take stock of Malaysia’s example and experience in shifting to the GST. This could provide some insight to the kind of problems that might be anticipated for India, and the possible expectations on the vehicle industry.

The Malaysian government began discussions on GST in 2009, in the middle of the global financial crisis. A decision was reached in October 2013 to implement the new tax regime in a year and a half on April 1, 2015 when a standard levy of six per cent would replace all the existing sales and services taxes.

The advent of the GST in Malaysia was mostly influenced by the government’s need for additional revenue to offset its rising budget deficit. It also had to reduce its reliance on oil revenue from Petronas (Malaysian state oil company) at a time when global oil prices were plunging. And like India, Malaysia also wanted to replace the existing complex tax system (the cascading taxes, double taxes, tax evasion etc.) with an effective, more transparent and business-friendly tax structure.

The direct impact of GST on Malaysia’s light vehicle sales is difficult to gauge since several incidents occurred at about the same time. First, in December 2014 (pre-GST), the government abolished its decades-old fuel subsidies to reduce the ballooning budget deficit, and partially battering light vehicle sales in January 2015.

Confusion about the prices of goods and services reigned just before the GST rates became effective. Many vehicle buyers anticipated a hike in vehicle prices, and rushed for purchases before implementation. However, the reality was very different.

Most OEMs pre-announced in March that they would cut the prices of vehicles as of April 1. In fact they minutely reduced prices or left them unchanged in April. Nonetheless, sales surged in March and declined in April.

On the whole, light vehicle sales on a seasonally adjusted annualised rate (SAAR) basis in Q1 2015 averaged 6,82,000 units. Between April and December 2015, the SAAR averaged 6,53,000 units. The year closed with a volume of 6,62,000 units, virtually flat from 6,60,000 units in 2014.

Sales again plunged in 2016, down by 13 per cent to 5,76,000 units although other factors such as vehicle price hikes (because of a plunging ringgit), more stringent hire loan approvals, the slowing economy and job market and high household debt were also to blame. In short, at the onset of GST, Malaysian consumers were confused about the prices of goods and services.

Hence, they became very cautious about spending, especially on big ticket items, such as cars and houses. This is further illustrated by the fact that consumer confidence in Q1 and Q2 2015 fell to the lowest levels since 2008.

The cost of living went up, since prices of many other goods were raised because of the GST. Headline CPI inflation rose after the GST implementation, but it is difficult to say how much of the rise in inflation in 2015 can be attributed directly to GST, because that was exactly the time that the ringgit started to plunge sharply (and the cost of imports jumped up).

It is also important to note that the Malaysian economy was already flagging at the time of the GST’s implementation. Malaysia is a major commodity exporter, heavily dependent on overseas shipments.

Hence, the falling global commodity prices as well as the ringgit hit consumption in the post-GST period of H2 2015. However, private consumption remained resilient: it did slow down – but did not decline – and so did light vehicle sales.

Another important factor is that Malaysia’s vehicle sales growth potential is limited because it is almost a mature market by the Asian standard with an already high vehicle density.

Thus, in the two-year span after the implementation, GST did not seem to have had any major positive/negative impact on new light vehicle sales in Malaysia.

One can imagine the Indian scenario to be more complex, with a far greater population likely to be uncertain about the prices of various goods and services under the four-tiered GST regime. Dealers are reportedly more cautious about accepting stocks from automotive plants and June numbers will be little to write home about. It remains to be seen how long this sentiment will last though the festive season could help in turning things around.

For the moment, we do not expect a major shift to our current light vehicle forecast from the implementation of GST with regards to the direct impact of the tax rates. However, we are concerned whether all stakeholders and systems will be completely ready to implement nationwide GST in India. The degree of the negative impact of this unpreparedness cannot be ascertained.

The complexity of the tiered structure and nuances of various Indian States makes a smooth implementation a difficult task. Hence, the lack of preparedness may cause short-term disruption to businesses.

The GST implementation may also create some inflationary pressure, as the experience in Malaysia has shown. In turn, these factors could lead to weaker vehicle sales.

Ammar Master is LMC Automotive’s Senior Manager and Meg Sunako is its Senior Economic Analyst

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