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Would GST lead to higher costs for developers? If so, how can we hedge against it?

Malaysia’s Goods and Services Tax (“GST”) is a form of value-added, consumption-based tax. In the past, the sales and services tax were applied only at the end user’s final purchase price. With the GST, the tax is structured to a more comprehensive approach whereby tax is chargeable throughout the entire supply chain.

Sales & Services Tax

Raw material sold to factory; Factory sells to manufacturer; Manufacturer sells to distributor; Distributor sells to end customer = Final Price + Sales & Services Tax = Y

Goods & Services Tax

Raw material sold to factory + 6% GST = A; Factory sells to manufacturer + 6% GST = B; Manufacturer sells to distributor + 6% GST = C; Distributor sells to end customer +6% GST = D

Total payable by end customer A + B + C + D = X

Ultimately the cost of production would increase due to inflationary pressure and other contributing factors. With the GST implementation, it is expected that additional costs would be passed down to consumers indefinitely.

Hedging against GST/Inflation:

  1. Evaluate your financial health. Are you able to undertake additional commitments? How are you faring financially? Identify and differentiate between your wants and needs. Prioritise your needs.

  2. Assuming that the above factors would lead to an estimated 30-45% increase on overall costs, it is best to adjust your savings to cater for the potential hike and other costs, such as legal fees, renovations, utilities, and etc.

  3. Is your savings sufficient to cover for the additional increase in costs? Identify other sources of income and find ways to grow your net worth, such as investing in mutual funds and fixed deposits.

  4. Compare between different banks on their financial products. Different banks have different financial packages that would suit your needs.

  5. Consider investing in sub-sale property in less prime areas.

GST increases the tendency for hike in construction material costs and directly increases other development-related costs including marketing costs. You can’t really hedge on cost push inflation because it is industry wide, however, property developers may turn their primary focus in building well-demanded residential and affordable housing properties that are exempted from GST.  

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