The article is published in the January issue of the ISCA Journal.
It looks set that the 6% Goods and Services Tax (GST) would finally kick in for Malaysia on 1 April 2015, following the slew of handouts for the needy and the expansion of zero-rated items to include bread and noodles.
Announced by Malaysia Prime Minister and Finance Minister Datuk Seri Najib Razak in the Malaysia 2015 Budget speech, the new GST will replace the existing Sales and Services Tax. As another revenue source, it may help to address the persistent budget deficit and increasing debt that Malaysia faces today. Undoubtedly, GST will bring forth radical changes to Malaysia’s tax landscape.
At a glance, the Malaysia GST appears to have adopted some of the rules and schemes in Singapore’s GST regime. However, differences do exist, largely in the scope of tax and how it will be administered.
If you have businesses operating in Malaysia and have not considered the impact of the implementation of Malaysia GST, you should act now. While you may have knowledge of Singapore GST, you ought to be mindful of the differences.
In this article, we will provide guidance for the implementation of Malaysia GST.
Malaysia’s threshold for GST is set at RM500,000, a level that is low and could require most companies to register and be responsible to collect the tax. Businesses need to have complied with the GST registration rules by 31 December 2014. Failing that, a penalty would be imposed.
Scan through the list of zero-rated and exempt supplies in the Malaysia GST legislation to assess if any of your supplies fall within these two lists. To know the nature of your supplies, your best bet is your general ledger, which captures your transactions.
Reviewing your contracts is necessary to assess if the services provided could qualify for zero-rating. Once you have ascertained the GST treatment, you need to enhance your accounting software to ensure that your software developers follow the recommendation provided by the Malaysia Royal Customs Department. For example, it should be able to generate a standard file known as the “GST Audit File”.
Unlike Singapore, Malaysia has a long list of zero-rated items. This is because zero-rating affords claiming of input tax to the supplier without the need to charge GST to its customers. Exemption, on the other hand, denies the claiming of input tax to the supplier, although the supply is made without GST. Thus, businesses would prefer their supplies to be zero-rated since GST charged by the suppliers are claimable and would not be a cost to their businesses.
Given the political landscape and the need to address the call by the lower income group to manage the rising cost of living and for GST to be acceptable, it is not surprising that basic commodities such as rice, sugar, flour, cooking oil, vegetables and poultry are zero-rated, along with water and certain quantity of utilities supplied to households. Exemption is extended to private health care and education services, domestic transport, toll fees and agricultural land. Hence, you should be mindful of the types of goods and services that fall within this list when coding your supplies in your accounting system.
Automating the GST treatment to all your supplies by coding them in the accounting system is a more efficient approach as human intervention is removed, thus minimising human errors.
Exemption of Financial Services
If you are a financial institution, in categorising your fees into taxable and exempt, you should be mindful that the Malaysian rules for exemption of financial services are narrower and more specific in comparison to Singapore’s GST regime. For example, a supply is only exempt for Malaysia GST purposes if the consideration for the supply is in the form of an interest or a spread. The fees charged in connection with the provision of a financial product would be taxable.
On the other hand, in Singapore, where the fees are a consideration for the provision of the financial services which are exempt, such fees are similarly exempt – for instance, fees charged to maintain current account and cheque books. Apart from this, services provided directly in connection with certain financial products in Singapore may be treated as zero-rated supplies if they are supplied to non-residents. This is not the case in Malaysia, as broking services in connection with the transfer of securities traded in Malaysia or insurance contracts relating to risks in Malaysia cannot be zero-rated, despite supplying to an overseas person.
Free services to connected persons
Malaysia considers the provision of “free services” provided to connected persons as a deemed supply of services. Consequently, you may track the costs or value of free services provided for the purposes of deeming the output tax in an Excel template; you need not tinker with your accounting system.
Free goods to employees
Singapore has a special set of rules to determine whether GST is applicable on such gifts. In Malaysia, free goods provided to the employees are not subjected to GST if they are specifically listed in their employment contracts. This affords planning opportunities.
Reverse charge mechanism
A GST-registered business is partially-exempt if it makes both taxable and exempt supplies.
Unlike Singapore, Malaysia will implement a reverse charge mechanism to level the playing field for foreign and locally GST-registered suppliers. It is also to minimise “round-tripping” by partially-exempt businesses.
One approach of capturing the reverse charge is at the vendor creation phase, where you capture the details of vendors in your purchase module. Consider automating the computation of reverse charge when the invoice of an overseas vendor is paid in the accounting system. At the same time, if you are a fully taxable person, input tax should be claimed. Otherwise, you should consider the input tax claiming rule.
In designing your accounting system, you need to track when the goods are delivered and services performed if you do not issue the tax invoice within 21 days of this event.
To do away with tracking, you automate the creation of tax invoice immediately after the delivery of goods or performance of services, at least within the next 21 days. Moreover, if you receive an advance deposit, you should remember to report the output GST in the correct prescribed accounting period. Alternatively, you may consider automating this by creating a tax invoice upon receipt of advance payment from customers within the day.
Tax coding of expenses
Unless you made exempt supplies, input GST incurred should be claimable in full. The exception is that on blocked expenses. To avoid human errors, consider coding the expenses into categories – 6% taxable purchases, 0% taxable purchases, reverse charge purchases and purchases where GST is not claimable. The last category includes all purchases where no GST is claimable or no GST is charged.
The Malaysia GST prohibits input tax claims on entertainment expenses to a person other than employees or existing customers, probably to curb abuse. There is no such restriction in Singapore.
As a result, you must track and differentiate entertainment expenses incurred for existing customers and prospective customers. Training the staff who processes the invoices into your accounts payable module in the selection of the correct code is a must.
Annual capital goods adjustments
If you are a partially-exempt business, your accounting system should be designed to extract information for the performance of annual capital goods adjustments, which is over and above the longer period adjustment required in Singapore. These annual capital goods adjustments only apply to your plant and equipment, and land and building, where each capital item costs RM100,000 or more.
You need to consider other adjustments that are required for your industry. The general ones are the repayment of input tax and bad debt relief.
The Malaysia GST requires a GST-registered business which has made an input tax claim but fails to pay his supplier within six months from the date of supply to repay the input tax.
Similarly, you are entitled to a relief for bad debt if payment is not received within the same six-month period. This is subject to meeting the qualifying conditions.
You should review your debtors and creditors’ aging reports for the purposes of such adjustments before the submission of GST return.
To improve your cash flow and to remain competitive, scan through the GST schemes offered and assess if any of these apply to your business.
Design a worksheet where figures are extracted from your sales and purchase listings and general ledger for the preparation of your GST return.
Ad hoc or one-off transactions are areas which you may overlook when accounting for output tax. In your worksheet, cater a line to capture such a transaction to serve as a reminder to peruse your general ledger.
Finally, you should maintain all business records, including tax invoices issued and received, for seven years. In the event of audit, they should be readily available.
Given that the implementation date is looming, you should start the implementation now to avoid any last-minute panic.
The article is contributed by Lam Kok Shang, Partner and Head of indirect tax, KPMG in Singapore and Gan Hwee Leng, Partner of indirect tax, KPMG in Singapore. The views expressed are their own.