Goods and Services Tax in Malaysia
By KC Chia, KC Chia & Noor
“Journey of a thousand miles begins with a single step […] It does not matter how slowly you go as long as you do not stop.” Confucius - The Malaysian government will follow in the footsteps of more than 160 countries worldwide by implementing the Goods and Services Tax (GST), which will become effective from 1 April 2015, giving a lead time of approximately nine months for businesses in Malaysia to prepare and comply.
GST, also known as value added tax (VAT) in many countries, will replace the current sales tax and service tax (SST) regime, which is outdated and has many inherent cascading and multiplying weaknesses that make administration ineffective and difficult.
GST is a multi-stage consumption tax on goods and services whereby each point of the supply chain is potentially taxable until the retail stage of distribution. Even though GST is imposed at each level of the supply chain, the tax element does not form part of the cost of the product because suppliers are entitled to recover the GST incurred on their input. The basic fundamental of GST is its self-policing features which allow taxable persons to claim their input tax credits by way of automatic deduction in their accounting systems. This eases the administrative procedures on the part of businesses and the government's delivery system will be further enhanced.
The essence and highlight of the GST in Malaysia can be summarised as follows:
The prescribed threshold of registration is an annual taxable turnover of MYR 500,000. Consequently, any business with an annual taxable turnover of MYR 500,000 or more has to be registered as a taxable person while business below the threshold may also register as a taxable person on a voluntary basis.
The standard rate for GST is fixed at 6%.
Types of supplies
Supplies mean all types of supplies of goods and services in the course of business in Malaysia, including imports. There are three types of supplies:
i) Standard rated – GST is charged at a standard rate. Taxable persons can charge GST on their outputs and recover tax credits on their inputs. If input tax exceeds output tax, they can recover the surplus or vice-versa
ii) Zero rated – GST is charged at a zero rate. Taxable persons can charge GST on their outputs at a zero rate, but they are eligible to recover tax credits on their inputs
iii) Exempt supplies – These are exempt or non-taxable supplies which are not subject to GST. Taxable persons cannot charge GST on their outputs and cannot claim or recover tax credits on their inputs
To ease the burden on the middle and lower income groups, basic essential goods and services are not subject to GST, so are either zero rated or tax exempt. These include basic foods, piped water supply and certain usage of electricity per month for domestic use, public transport services, services rendered by the government such as licensing, education and health care, sale and rental of properties for residential and public purposes and selected financial services.
GST reliefs and facility
To lessen the burden on businesses, GST reliefs and facility are granted for the following:
i) Bad debt relief – Taxable persons are entitled to recover the output tax paid, if they have not received any payment or part of payment within six months in respect of the taxable supplies.
ii) Second hand goods relief – To avoid double taxation, taxable persons who acquired second hand goods with no input tax previously charged may opt for the relief i.e. GST will only be charged on the margin of the respective second hand goods sold.
iii) Group registration – Facility given to a group of companies with a direct or indirect majority control to register as a group with the benefit that supplies made between the group constituent members are disregarded.
To alleviate the cash flows for GST payment, the input tax on the importation or supply of goods to the taxable persons under special schemes is suspended until the trigger point for GST is met. Such schemes include: (i) approved trader scheme, (ii) approved toll manufacturer scheme, (iii) approved jeweller scheme and (iv) warehouse scheme.
vi) Tourist refund scheme – To encourage more tourist spending and promote Malaysia as a tourist shopping destination, a tourist is entitled to the GST refund for the goods purchased if they satisfy certain conditions.
vii) Flat rate scheme – To facilitate the purchases of agricultural goods from unregistered farmers with low literacy, the taxable persons are allowed to treat the prescribed flat rate addition paid as their input tax.
Adjustments for mixed suppliers
Where the taxable person is undertaking mixed supplies inclusive of taxable supply and exempt supply, certain input tax is not directly attributable to either taxable supply or exempt supply is termed as “residual input tax”. Adjustments need to be made for GST purposes:
i) Partial exemption – Input tax claimable is restricted to the proportion of the taxable supplies over total supplies (equivalent to the sum of taxable supplies and exempt supplies).
ii) De Minimis Rule – A taxable person is entitled to claim the entire input tax on exempt supplies if the amount of such supplies is not more than (a) an average of MYR 5,000 per month and (b) 5% of the total supplies in the particular taxable period.
iii) Annual adjustment – To even off the possible fluctuation of supplies, as well as over-deduction and under-deduction of residual input tax from one taxable period to another over the whole tax year, an annual adjustment needs to be made to account for such difference in the pertinent GST return.
iv) Capital goods adjustment – To provide a fair and reasonable attribution of input tax to taxable supplies, adjustment is made for each financial year for changes in the proportion of taxable use of such capital goods over a period of time i.e. about 10 years for land and buildings and 5 years for other items.
In all, GST is regarded as a more effective and efficient tax as it is a fairer broad based tax system with greater transparency. It provides a more stable source of revenue to the government as it is not susceptible to economic downturns with lesser reliance on direct taxes and as an effective measure to cushion the country’s gradually depleting natural resources, especially petroleum and gas. GST also helps to reduce the transfer pricing bias and enhances the government’s ability to lower the income tax rates for both companies and individuals so that is comparable to neighbouring countries, making Malaysia a more conducive destination for business and investment, which in turn can help stimulate growth and benefit the country’s economy in the long run.
Kwong Chow Chia
KC Chia & Noor, Kuala Lumpur, Melaka, Kluang, Johor Darul Takzim, Malaysia
published: May 2014