GST and service charge, here’s what you need to know

Umno Youth's Economy and Entrepreneurial Development (BEPU) chairman, Azlan Abdullah -- Picture courtesy of Azlan Abdullah
Umno Youth's Economy and Entrepreneurial Development (BEPU) chairman, Azlan Abdullah -- Picture courtesy of Azlan Abdullah

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KUALA LUMPUR, April 10 ― Since the implementation of the Goods and Services Tax (GST) on April 1, Malaysians have seen much confusion ― and many articles ― in its wake.

One of the primary issues has been the need (or not) for service charge. The fact that many people were also confused between service charge and service tax further exacerbated the misconceptions of GST among both the consumers and service providers.

At the height of the confusion, Deputy Finance Minister Datuk Ahmad Maslan made several attempts to explain the difference between the two.

To explain it in pure layman’s terms, a service tax is a form of tax collected by the service provider on behalf of the government. A service charge, on the other hand, is a fee charged by the service provider for delivering services.

For example, a restaurant may impose a 10 per cent service charge for serving consumers food and beverages ordered by the latter.

The analogy made by Ahmad is quite clear. However, the minister further commented that if one is unhappy with the service provided by a hotel or a restaurant, one may choose not to pay the service charge imposed.

This is where the issue lies.

The chairman of Umno Youth’s Economy and Entrepreneurial Development Bureau (BEPU), Azlan Abdullah, expressed concern that consumers may not have an option.

“This is because while it is true that ‘service charge’ is not a tax collected by the government under the current Goods and Services Tax Act 2014, it does not mean that one can choose not to pay service charge imposed by restaurants and hotels.

“Based on the principles of the law of contract, when one steps into a restaurant, and upon reading the menu, agrees on the terms and conditions of the menu, and proceeds to order the food listed in the menu, one has in fact offered to be contractually bound by all the aforesaid terms, regardless of whether such desires to be bound by the terms on service charge, was consciously done or otherwise. When the order is accepted by the restaurant, a contract is then formed between the restaurant and the consumer,” the senior lawyer told Malay Mail Online.

This means that consumers cannot choose to opt out of their contractual obligation to pay the service charge that they have agreed to, unless they are able to prove that the service rendered was so bad that it is tantamount to a breach of the terms, which, in reality, is highly impractical as the burden of proof is on the consumer.

“While it is not directly related to the newly implemented GST Act, it is imperative for policies that are compatible with one another to be formulated by the government.

“The public’s concern about service charge has to be given priority. The rationale behind service charge must be reviewed in light of the recent changes of our legal system,” Azlan added.

The rationale behind service charge

For the longest time, service charge was used to cover the labour costs of service providers such as those in the hotel industry and restaurants.

When a hotel or a restaurant charges 10 per cent service charge, it collects the sum on behalf of the employees. Typically, 90 per cent out of the collected sum will then be distributed to the employees as part of their wages, in addition to their basic salary.

Often, these sums constitute as much as 50 per cent of their total salary. Hence, service charge is vital to maintain the livelihood of the workers in the industries mentioned.

However, in 2012, the trend was largely changed due to the implementation of the Minimum Wages Order 2012 (MWO) which imposes a minimum wage of RM900 in West Malaysia.

The MWO allows service charge to be considered as part of the employees’ wages in meeting the aforesaid requirement of minimum wage, and as a result, more and more service providers chose to pay a fixed sum to their employees to meet the requirements of the MWO while maintaining the collection of service charges to offset labour costs at the same time.

Now, if there are to be policies formulated to restrict the imposition of service charge by service providers, the employees in the relevant industries will not be affected much as they are now somewhat protected under the MWO.

Hence, the rationale for maintaining service charge for the benefit of employees is no longer relevant.

Since the MWO is not a statute legislated by Parliament, there are some who think that there would be an increase in the overall price of the services if one were to restrict the imposition of service charge, adding that it would lead to an inevitable increase in labour costs.

However, with the relatively new Competition Act 2010 and the increasingly higher emphasis on enforcement, the market price of services should be balanced out eventually with healthy competition within the respective industries.

Furthermore, such restrictions will not prevent consumers from voluntarily tipping the employees for a job well done. It only restricts a mandatory imposition by service providers.

Such changes are not unprecedented. Recently in the US, its Internal Revenue Service (IRS) made major changes which took effect in January last year, resulting in a discouragement of automatic gratuity ― tipping ― which was imposed by service providers.

While the US system largely differs from Malaysia’s and those changes are far from a blanket restriction, there is no reason why such changes would be detrimental to our economy.

Since the government has been more progressive in implementing a new tax system (GST), it should also be progressive in molding other compatible policies for the benefit of the people.

Domestic Trade, Co-operatives and Consumerism Ministry secretary-general Datuk Seri Alias Ahmad recently made further comments that consumers need not pay the service charge if there is no collective agreement between the service provider and its employees.

His remarks clarified the purpose of the service charge is for the benefit of the employees and without the collective agreement, the service provider may exploit the system by profiting from the service charge collected.

“However, it must be noted that consumers are in a difficult position to know whether there is in fact a collective agreement made between the service provider and its employees. It is also not practical for the consumers to demand for the collective agreement to be shown to them before they make a choice whether to pay the service charge or not.

“Hence, the service charge must be restricted through the formulation of new policies (law, rules and regulations) by the government,” Azlan further stressed.

He also urged Putrajaya to act quickly in order for consumers to be relieved of the burden of paying the service charge in light of the implementation of GST.

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