Small (1997), there were around 518,996 of

and Medium Enterprises (SMEs) are defined as manufacturing companies or
companies that provide manufacturing-related services with annual turnover of
not more than RM25 million and employ full-time employees not exceeding 150 (Khairunnisa,
Zaimah & Mohd, 2013). In Malaysia there are various business opportunities
in Small and Medium Enterprises (SMEs) that have full support from the
government (Nanthakumar, Mohd Najit, Mohd Nasir et al., 2004). New Small and
Medium Enterprises (SMEs) came into force on 1 January 2013 with the annual
sales value of a business or the full number of full-time employees of a
business (Javed, Muhammad, Ahmed et al., 2011).

            In general, Small and Medium
Enterprises (SMEs) in Malaysia are defined in the manufacturing sector, annual
sales not exceeding RM50 million or full-time employees not exceeding 200
employees (Man & Lau, 2002). While in the services sector and other
sectors, annual sales do not exceed RM20 million OR the number of full-time
employees does not exceed 75 employees. The Small and Medium Enterprises (SMEs)
is the backbone of the country’s economic growth, especially in the
manufacturing sector in Malaysia. According to Moha Asri (1997), there were
around 518,996 of SME establishments in Malaysia representing 99.2 per cent of
total business establishments in Malaysia from various sector includes
manufacturing, services and agriculture sectors while the remaining 0.8 per
cent of business establishments are large enterprises (Mohd Khairudddin Hashim,

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            Nevertheless, the contribution of
SMEs to the country’s GDP of 32 per cent in 2006 is still low compared to other
countries such as China (60%), Japan (55.3%), and Germany (57%) (Mohd
Khairudddin Hashim, 2011). The success of industrial processes in countries
through strong SMI contribution such as in China, Japan, Germany proved the
role played by SMEs as a supporting and complementary industry in the
industrial process of the country. Even large-scale world economies such as the
United States are also affected by SMEs contribution of 40% to national income
(Bruce & Ireland, 2010). Its contribution in Malaysia encompasses several
aspects including creating employment opportunities, boost a more fair distribution
system of income among the people, reducing country’s import rate and also
stabilized foreign exchange.

2.2       Goods and Services Tax (GST)

and Services Tax (GST) is a value-added percentage tax (the difference between
the sales and cost of materials purchased by the inputs) at each stage
production (Mohd Rizal Palil & Mohd Adha Ibrahim, 2011). GST is a
wide-ranging consumer taxation covering all economic sectors for example all
goods and services made in Malaysia and imported except for certain goods and
services categorized under the order of zero-rated supply and supply orders
exempted as determined by the Minister of Finance and published in the Gazette
(Abdul Aziz Awang, 2010). According to the GST mechanism as stated in the 2009
GST Bill, there are three categories of GST rates namely Standard Rate, Zero
Rate and Exempted GST.

            According to the GST Bill, the
Standard Rate proposed by the Government is 4% on the price of goods or
services defined as “supply” (Chan, 2010). However, the supply of
basic household necessities such as agricultural products, livestock supplies,
basic neccesities, and others, will be placed in the Zero Rate category (0%).
Whereas public goods or services such as land and residential, public
transport, education, health services, financial services and highway charges
will be placed inside GST excluded category (Mansor & Ilias, 2013).
Nevertheless, the standard rate proposed by the government of 4% in the 2009
Bill has changed to 6% in the presentation of the Bill 2014. The implementation
of GST has bring about mixed impacts towards all units in economy. In this
chapter, the impact of GST on SMEs will be the main focus of this research.

2.3       GST
and its Impact on SMEs

SMEs operators encountered several difficulties in
complying with various and complicated tax legislations and regulations due to
their limited resources and inadequate expertise (Pope & Abdul-Jabbar,
2008). Thus, the implementation of GST would be another added tax compliance
burden. SMEs faced a relatively higher compliance cost upon GST implementation,
which is regressive for smaller organizations (Palil et al., 2013). GST compliance
cost among businesses would be high, particularly for businesses that are
involved with various taxable and exempted supplies (Palil & Ibrahim,
2012). Compliance costs can be divided into two categories; namely GST start-up
(or implementation) cost and annual recurring (or on-going) cost (Brown &
Marsden, 2002). GST implementation cost comprised of additional expenditure on
computer upgrading, staff cost to adjust the pricing of products, training and
IT consultation cost, cost for extra bookkeeping requirements and also time
costs spent by business owners on GST related activities, such as spending more
time on paperwork and on collecting taxes.

on GST compliance costs in the service sector in Queensland showed that the
mean start-up cost is around $5,61015 per organization while the mean for
recurrent cost is approximately $5,600 (Breen, Bergin-Seers & Sims, 2002). On-going
GST cost is a substantial burden in relation to GST compliance. Delayed
payments by firms’ debtors created cash flows problems when the businesses need
to pay their GST commitments. A study on 868 small businesses by Rametse (2010)
found that the preparation for GST implementation was a heavy management and
financial burden for each business, with an average of $7,888 start-up cost
being incurred on equipment, professional fees and stationery. In addition, in
terms of time costs, 131 hours were spent, costing to $2,882 to seek professional
accounting and information technology advice, and 58 hours (about $1,276 in monetary
term) in preparing GST.

Australia, total GST implementation costs were almost double ($4.5 billion) as
compare to the first-year GST operating costs ($2.5 billion), and that high GST
implementation costs have negative consequences on economy in various ways
(Tran-Nam, 2000). Therefore, in order to reduce compliance costs a simplified
method of computing such tax should be introduced (Chan, 2009). In Malaysia,
before the implementation of GST, the expected GST compliance cost for SMEs was
RM28,456 (Palil, et. al., 2013). The annual compliance cost consist of internal
cost of RM16,772 (58.87%), external cost of RM7,388 (26.01%) and additional
cost of RM4,296 (15.42%). Expected cost could increase due to external sourcing
of services for GST tax computation and tax planning. On an average, an
additional cost of RM6,336 was expected to be incurred on external sourcing of
services, and that most of the companies expected an increase in internal cost
for tax computation and tax planning after the implementation of GST.

to sales or assets value, SMEs faced higher compliance costs as compared to
large businesses (Weichenrieder, 2007). In general, compliance cost vary
significantly, depending on business size (Breen, Bergin-Seers & Sims,
2002). In Nigerian, an average of ?67,995 was spent on tax compliance cost for
SMEs who were engaged in VAT transactions (Eragbhe & Modugu, 2014). It is
also noted that on average, VAT compliance cost burden was higher than
compliance cost for other types of taxes, such as income tax, withholding tax,
and customs and excise duties.