The introduction of the six percent GST in Malaysia from April 1 2015 will bring forth radical changes to the Malaysian tax landscape. The GST, also known as value added tax (VAT) in some countries, is not a new concept of taxation as other countries in the region introduced GST/VAT years ago.
Both the Malaysia GST and Singapore GST are broadly modelled on the UK VAT. At a glance, the Malaysia GST appears to have adopted some rules and schemes in Singapore's GST regime. However, differences do exist between the two, largely in the scope of tax and application of administrative requirements.
In Singapore, GST has been in place for 20 years. Singapore-based businesses with operations in Malaysia can tap into some of their GST experience from Singapore as a starting point to manage their GST compliance in Malaysia, since implementation is set to be effective in less than six months.
However, while the Singapore and Malaysia GST regimes are broadly similar, businesses must nevertheless be cognisant of the salient differences between the two so that they are well prepared for the implementation of Malaysia GST.
An overview of GST/VAT
The GST is a broad-based consumption tax on goods and services. The basic concept of GST is that only the value added to goods or services should be taxed. The GST system is designed in this manner to ensure that the GST cost is ultimately borne by the final consumer of the goods and services, and does not end up as a cost to business in the value chain.
Each country has developed its respective GST/VAT system to incorporate these concepts along with specific rules to meet its policy objectives.
Scope of taxable supplies
Singapore adopted a comprehensive taxation approach, under which almost all goods and services are taxable except certain financial services, sale and lease of residential properties, sale and import of qualifying investment metals, which are exempt from GST. Only export of goods and international services are zero-rated.
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, it is notable that basic commodities such as rice, sugar, flour, cooking oil, vegetables and poultry will be categorised as zero-rated. These include a certain volume of water and all utilities supplied to households. This aims to ensure no GST cost is passed to the consumers. As with the regime in Singapore and most other countries, export and international services are zero-rated.
Exemption is also extended to private healthcare and education services, domestic transport, toll fees and agricultural land. Businesses should be mindful of the types of goods and services that fall within this list.
Time of supply
Since January 1 2011, Singapore has simplified the time of supply rules and this has offered much welcome relief to businesses as it alleviates compliance costs. Tracking of goods delivered and services performed is no longer required, and the time of supply is generally the earlier of the date of invoice and the date of payment.
Malaysia has incorporated Singapore's previous 14-day time of supply rules, but instead of the 14-day rule, Malaysia has implemented a 21-day rule.
In short, to determine when a supply is, Malaysian tax authorities will determine the time of supply based on the earliest of the following three events:
- Goods being delivered/appropriated or services being performed (referred to as the basic tax point);
- Date of invoice; and
- Date of payment.
If the tax invoice is issued within 21 days from the basic tax point, the tax invoice will be regarded as the time of supply, provided that no payment has been received earlier.
Hence, in situations where payment is not received before the issuance of invoice or the basic tax point, tracking of the basic tax point is necessary to ensure compliance with the GST rules, unless a tax invoice is issued within 21 days of the basic tax point.
Reverse charge mechanism
Reverse charge is generally seen as a mechanism to place overseas suppliers on the same level playing field with local GST-registered suppliers, and to minimise round-tripping by partially-exempt businesses.
Unlike Singapore, Malaysia is implementing a reverse charge mechanism requiring recipients of imported services, regardless of their GST registration status, to self-account for GST on imported services.
If the recipient is GST-registered and uses the services to make taxable supplies, he is entitled to claim as input tax, the self-accounted output tax. However, a partially exempt business may not be able to claim such input tax in full. Hence, such businesses should consider establishing controls to capture such information.
In Singapore, the reverse charge provision, while being in the GST legislation, is not activated as this may not be required to address the round-tripping issue given the few goods and services which are exempt from GST.
Exemption of financial services
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 Malaysian 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, whereby 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.
The Malaysia GST treatment may be considered simpler to implement for financial institutions, but may be more costly to non-registered business and consumers in terms of the additional 6% GST they have to bear taking effect from April 1 2015.
In Singapore, financial services may be treated as zero-rated supplies if they are supplied to non-residents. This is not the case in Malaysia, as the transfer of securities or units in unit trusts traded in Malaysia or insurance contracts relating to risks in Malaysia cannot be zero-rated, despite supplying to an overseas person.
This may have an adverse impact since GST incurred for the making of zero-rated supplies is recoverable but not that incurred for the making of exempt supplies.
In addition, the annual capital goods adjustments required by partially exempt businesses would add to the compliance cost as the formula is not straightforward. Businesses should consider the extraction of such information when designing accounting systems.
Deemed supplies to connected persons
Malaysia considers the provision of free services provided to connected persons as a deemed supply of services. Consequently, Malaysia businesses must track the costs or value of free services provided to compute the correct output tax to be deemed.
In Singapore, deeming requirements do not apply to the free supply of services but only to goods. Malaysia seems to be more stringent in mitigating any potential GST leakage due to related party transactions, while Singapore is prepared to let go of such planning, probably bearing in mind the compliance cost it would otherwise impose.
Claiming of input tax on entertainment
In general, taxable businesses are eligible to claim input tax, provided that sufficient documents are maintained. However, input tax incurred on certain expenses is specifically blocked, notwithstanding these are for the business purposes as these are personal expenses that could be abused if GST claim is permitted.
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, Malaysian businesses must track and differentiate entertainment expenses incurred for existing customers and prospective customers. Inadvertently, higher compliance costs will be raised.
Repayment of input tax/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. From the supplier's perspective, he will be entitled to a relief for bad debt if payment is not received within the same six month period and subject to meeting the qualifying conditions.
On the other hand, Singapore allows a longer period of 12 months. This timeline is more practical as a six month timeline seems short, given that it is not uncommon for suppliers to grant a six month credit term. Such requirements would invariably drive up compliance costs for businesses in Malaysia.
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 employees are not subject to GST if they are specifically listed in their employment contracts.
A summary of the differences between Singapore GST and Malaysia GST are discussed in Table 1.
|Administration||• Monthly GST return filing for businesses with turnover in excess of RM 5 million (approximately S$200,000)|
• Registration threshold is RM500,000
|• Quarterly GST return filing, unless monthly filing is requested by the business|
• Registration threshold is S$1 million
|Time of supply||Time of supply is based on the earliest of three events, including the Basic Tax Point of goods delivery or performance of services||Time of supply is generally based on the earliest of two events, date of tax invoice and receipt of payment|
|Zero-rated supplies||Extensive list of zero-rated supplies||Limited list – only export and qualifying international services|
|Exempt supplies||• Certain financial services; |
• Sale and lease of residential properties / agricultural land;
• Private healthcare and education services;
• Domestic transport and toll fees.
|• Certain financial services; |
• Sale and lease of residential properties; and
• Investment in precious metals.
|Output tax on free services||Provision of free services to a connected person is subject to deemed output tax||Not applicable|
|Input tax on entertainment expenses||GST incurred on entertainment expenses is only claimable if they are incurred to entertain existing customers and employees.||No restriction|
|Imported services||Imported services will be subject to the reverse charge mechanism, that is, the GST-registered businesses must self-account for output tax||Not applicable|
|Financial services||Only interest and spread are exempt while fees charged are taxable||Fees charged in connection with the provision of certain financial services are exempt|
|Transfer of securities/units in unit trusts||Transfer of securities or unit trusts traded in Malaysia is standard-rated.||Such transfer to non-residents could be zero-rated.|
|Timeframe for the repayment of input tax/bad debt relief||6 months||12 months|
|Capital goods adjustment||Special annual adjustments applied to partially exempt businesses||Not applicable|
|Employee gifts to staff||Not taxable if provided under the employment contract.||Subject to gift rules|
|Designated areas||Most supplies of goods or services made within or between the designated areas of Labuan, Langkawi and Tioman are not subject to Malaysia GST||Not applicable|
|Early payment discount||GST calculated on full price of supply||GST calculated on price net of discount|
|Statutory limitation||7 years||5 years|
If you have not started the implementation of Malaysia GST for your operations across the causeway, you should start soon given that the implementation date is looming.
As GST is a transactional tax, any error in the GST reporting system may multiply to create significant tax exposures.
While you may be familiar with the Singapore GST, differences in the scope and administration of Malaysia GST should not be overlooked to avoid penalty.
|Lam Kok Shang|
Partner and head, indirect tax
Tel: +65 6213 2596
Kok Shang heads the KPMG indirect tax practice and the free trade agreement desk in Singapore. He has 27 years of experience working in a public accounting environment, with 13 years spent working on corporate tax before moving on to specialise in GST. He was involved with GST before its inception in April 1994.
On January 1 last year, he was appointed by Finance Minister Tharman Shanmugaratnam to sit on the GST Tax Review Board for three years. The board is an administrative tribunal established to adjudicate disputes between taxable persons and the comptroller of GST with regard to GST matters. Kok Shang also sits on the GST committee of the Singapore Institute of Accredited Tax Professionals.
Kok Shang has vast experience advising on transaction restructuring to achieve GST efficiency, and on GST implications arising from M&A, including the transfer of businesses. His experience also includes performing GST prudential reviews, GST due diligence and advising on the application for the ACAP, ASK and the mandatory compliance assurance programme (CAP).
Kok Shang is a regular contributor to International Tax Review and many of KPMG's international indirect tax publications. International Tax Review named Kok Shang as one of Singapore's leading indirect tax advisers in 2012 and 2013.
|Gan Hwee Leng|
Partner, indirect tax
Tel: +65 6213 2813
Hwee Leng is a partner of the indirect tax practice and has vast experience in GST related matters both as a regulator and as a business adviser. She has assisted businesses in responding to audit queries from the IRAS. She advises clients of their GST process controls in connection with the ACAP, ASK and the CAP.
Before joining KPMG, Hwee Leng was a senior tax officer with the IRAS. She was part of the GST implementation team that drafted the circulars on the operation of the GST, GST laws, schemes for businesses and the marketing of GST to relevant stakeholders. Following GST's implementation in 1994, she was involved in the audit of GST-registered businesses, the drafting of GST policy, the fine-tuning of the GST system, the implementation of the GST rate increase and the management of subsequent amendments to GST laws.
Hwee Leng is a lecturer of the GST courses at the Singapore Tax Academy. She also advises on Singapore's free trade agreements (FTAs). Hwee Leng is a regular contributor to International Tax Review and KPMG's international indirect tax publications. International Tax Review named Hwee Leng as one of Singapore's leading indirect tax advisers in 2013.
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