In a GST regime (6% GST in this calculation), the following happens:

1. Starbucks buys the coffee beans from the wholesaler to make your cup of coffee for RM10 (RM10+ 6% GST). The Wholesaler keeps RM10 and passes on RM0.60 from Starbucks to the tax authorities.

2. You buy that cup of coffee from Starbucks which the beans were used to make, and pay RM15.90 (RM15 + 6% GST). Starbucks now keeps RM15 and passes on RM0.30 to the tax authorities (RM0.90 – RM0.60). The reason why Starbucks only passes RM0.30 to the tax authorities is because they have effectively already ‘paid’ RM0.60 in tax earlier on the first RM10, and only RM0.30 tax is left to be paid on the RM5 “value-add”.

We have graphically shown this example below.