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Goods & Services Tax (GST) – Changes for Malaysia
The Malaysian Government announced its intention to introduce GST into the Malaysian tax framework in December 2009, and the GST legislation was expected to have been enacted as law in March/April 2010. However, in an unexpected turn of events, the introduction of GST has been deferred pending further studies by the Government on the impact of GST, etc. GST has been mooted for several years and was initially to have been introduced with effect from 1 January 2007. However, its introduction at the time was postponed until the recent December 2009 announcement. The further deferral which has recently been announced creates some uncertainty as to when GST will be introduced, but the general expectation is that the Government will introduce GST as there is a need for an alternative sustainable source of tax revenue.
GST will replace the existing sales tax and service tax regimes and is expected to be imposed at the rate of 4%, which will be one of the lowest, if not the lowest rate amongst countries which have a GST or Value Added Tax (VAT) system. Taxand Malaysia investigates the impact of the GST regime when this is introduced and recommends how businesses can prepare so they can benefit.
The Malaysian GST regime
The Malaysian GST regime will have the same basic features as other GST and VAT systems as a transaction based tax which will be imposed at each stage of a transaction, i.e. at each stage of the production and distribution chain leading to the ultimate sale of a product/service. GST will operate under a self-assessment and collection mechanism, whereby the supplier of goods/services will charge and collect GST on the sales while claiming a credit (input credit) for the GST incurred on purchases and acquisitions.
It will be important to distinguish between standard rated, zero rated and exempt supplies to ensure that input credits are appropriately claimed. Standard rated supplies and zero rated supplies will allow for a recovery of GST paid (via input tax credits) while exempt supplies will not allow the taxpayer to claim input tax credits. The difficulty arises where a taxpayer makes mixed supplies and the allocation of input tax needs to be addressed. Financial institutions are a clear example of this and in many jurisdictions, given the importance of ensuring a healthy and competitive financial services industry, specific rules have been implemented to allow financial institutions to claim a portion of their input tax credits. The Central Bank of Malaysia is looking into this issue for the financial services industry.
The Government has announced that basic food supplies, education services, health services, some financial services, residential accommodation and domestic electricity and water supplies (up to a certain limit) will be classified as exempt supplies. It is hoped that the GST Regulations to classify the various categories of supplies, will be released once the GST legislation is enacted, to enable taxpayers who make mixed supplies to review their supply chain and ensure that their supplies are properly categorised. However, classification issues and disputes will surely arise as not every possible supply will or can be legislated for.
The GST Bill incorporates provisions governing the time of supply, the value of the supply, the treatment of imported supplies, the reverse charge mechanism, compliance requirements with respect to registration, filing of GST returns, payment of GST, etc. These provisions are largely similar to those of other VAT/GST regimes.
As mentioned above, it is not certain as to when GST is expected to be implemented, but it is hoped that the Government will provide adequate lead time for businesses to prepare themselves to transition towards a GST compliant system and to ensure that they are able to self assess and pay GST in a timely manner. In this regard, it is vital that the GST Regulations be released early to allow businesses to review their supply chain to determine the incidence of input and output GST and to ensure that their accounting and IT systems are modified for GST compliance. Clearly, the Customs Department (as the agency responsible for the administration of GST) will also need to ensure that it is prepared to deal with the voluminous requirements to ensure that the GST system is properly implemented.
The Government has held dialogues with various industry groups as well as professional bodies to understand their respective concerns regarding GST and to deal with their questions. It is hoped that these concerns will be addressed promptly, when GST is eventually implemented.
The shift from the current sales and service tax regime to a GST regime is significant and timely given the need to find an alternative and sustainable source of tax revenue. The challenge to the Government lies in ensuring that the tax is properly administered and that refunds are made on a timely basis to enable businesses to manage their cash flow. No doubt, there will be numerous questions and issues surrounding the initial implementation of GST, but in the midst of these uncertainties, one thing is certain, all businesses must gear themselves towards being GST ready. Taxand recommends businesses to review their processes and supply chains to identify the incidence of GST at each stage of the supply chain, review their contracts and trading terms to manage the transition to GST and ensure appropriate systems and documentation are in place to account for and ensure GST compliance.
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