This article addresses the reintroduction of the Sales and Service Tax (SST) regime in Malaysia on 1 September 2018. The article is relevant for candidates preparing for FTX (MYS) Foundations in Taxation as well as providing a good foundational read for candidates taking the TX (MYS) Taxation and ATX (MYS) Advanced Taxation exams. The article is based on prevailing laws as at 31 March 2019.
Sales and Services Tax (SST) was reintroduced by the Malaysian Government on 1 September 2018 to replace the Goods and Services Tax (GST) which had only been introduced just over three years before that, on 1 April 2015. Prior to this, the country was under a sales and service tax regime similar to the current SST regime, which as a result, is often coined as SST Version 2.0.
The author notes that there appears to be confusion amongst candidates on the SST regime as they tend to still apply the GST principles. The fundamentals of the two tax regimes are rather distinct. The purpose of this article is to try to draw out the difference between them and allow candidates to appreciate the basic principles of SST.
1. There is no such thing as 'SST'
Firstly, candidates must appreciate that there is no tax legislation called the 'Sales and Service Tax Act'. Unlike GST, there are two separate pieces of legislation that govern the tax regime, namely the Sales Tax Act 2018 and the Service Tax Act 2019 which impose sales tax and service tax accordingly.
Sales tax is a single stage tax charged and levied on all taxable goods manufactured in or imported into Malaysia. On the other hand, service tax is imposed on certain prescribed services called 'taxable services'. A person who provides taxable services exceeding a specified threshold is required to be registered and is known as a 'taxable person' who is required to charge service tax on his taxable services made to his customers.
The basis of taxation differs between sales tax and service tax as well. Sales tax is applicable to manufactured and imported goods whilst service tax is imposed on certain prescribed services which may include goods such as food, drinks and tobacco. The prescribed service in relation to the sale of goods normally refers to those sales of goods which come with a service element such as when a meal is sold in a hotel or a restaurant.
2. Multi stage vs. single stage tax
GST is a multi-stage tax where every businesses within the supply chain is required to charge GST. Sales tax and service tax, however, operate under what we call a single stage tax regime whereby the tax is only collected at one point in a supply chain.
For sales tax, it is charged at the point of manufacture or importation. Subsequently, when the goods move through the supply chain, there is no requirement to charge sales tax anymore. Neither a wholesaler who sells the goods to a retailer nor the retailer who subsequently sells them to consumers are required to charge sales tax.
Notwithstanding that the wholesaler is not required to charge sales tax to the retailer, if the wholesaler has purchased the goods from a manufacturer, the manufacturer would have charged the wholesaler with sales tax. The sales tax cost would therefore be embedded within the price of the goods when the wholesaler sells the goods to the retailer.
In the case of service tax, it is imposed at the stage when the services are being provided.
Being a single stage tax, the number of businesses required to be registered are a lot less and therefore, the administrative burden on businesses is reduced. This is one of the key plus points of sales tax and service tax.
3. Absence of input tax credit mechanism
As GST is imposed on various levels throughout the supply chain, to avoid the multiple level of taxes, it operates an input tax credit mechanism to allow businesses to recover the GST suffered on their purchases. This would mean that ultimately, only the final consumer would be the one bearing the GST.
Sales tax and service tax, however does not operate an input tax mechanism and therefore the sales tax and service tax charged would become a cost of business to the purchaser of the goods or services.
4. SST adopts a narrow tax base approach
One key reason for the abolishment of GST is that the tax has been burdensome to the man-on-the-street as the tax regime is broad based. Under GST, all goods and services are taxable unless specifically zero rated or exempt. However, the sales tax and service tax regime impose tax on certain goods manufactured and imported in Malaysia and certain prescribed services only. With this, consumers should see cheaper consumer prices on the goods and services.
5. Tax rates
GST adopted a single rate of tax i.e. 6%, whilst sales tax and service tax have a standard rate of 10% (with some goods at 5% or exempt) and 6% respectively.
Even though the sales tax is higher at 10%, this does not necessarily mean that the goods suffer a higher incidence of tax. This is because the imposition of sales tax is at the earlier stage of the supply chain when the sales value is expected to be a lot lower as compared to GST which is imposed at all levels up to the retail price.
Let’s go through an example to illustrate the interaction of both sales tax and service tax.
Ali Engineering Sdn Bhd (AESB) is principally involved in the provision of engineering services with an annual turnover of RM3 million. It purchased computers from a local trading company as well as imported a design machine from Singapore. It also procured accounting services from Baba & Co, a service tax registrant. Outline the sales tax and service tax implications of the various transactions.
AESB is required to be registered as a taxable person for service tax purposes as the provision of engineering services is a taxable service and it has exceeded the registration threshold of RM500,000. As such, AESB will be required to charge and collect service tax in relation to the engineering service fee invoiced to its customers.
The purchase of computers from a local trading company is not subject to sales tax as sales tax is only applicable if AESB purchases them directly from a manufacturer or imports them.
The importation of the design machine from Singapore is subject to sales tax even though AESB is not a sales tax registrant. The sales tax will be collected at the point of importation, when clearing the goods from Customs.
In respect of the accounting service provided by Baba & Co, Baba & Co will charge service tax on the accounting fee invoiced to AESB.
The sales tax payable on the importation of the design machine as well as the service tax payable on the accounting service fee will become a cost of business to AESB. These are not recoverable against the service tax charged by the company on the engineering service fee to its customers.
Sales tax and service tax concepts
To facilitate the understanding of the basic features applicable to sales tax and service tax, the table below seeks to summarise the key points:
Scope of charge
Sales tax is charged and levied on all taxable goods:
(i) Manufactured in Malaysia by a registered manufacturer and sold, used or disposed of by him; or
(ii) Imported into Malaysia by any person.
Service tax is charged on:
(i) any provision of taxable services provided in Malaysia by a registered person in carrying on his business; or
(ii) any imported taxable services i.e. taxable services acquired by any person in Malaysia in carrying on his business from any person who is outside Malaysia.
10%, 5% or exempt. Specific rate applicable to certain petroleum products.
6%. Specific amount of RM25 applicable to credit cards.
Taxable goods / services
Taxable goods are class or type of goods that are not exempt from sales tax.
Taxable services (including sale of certain goods) prescribed under the Regulations.
Any person involved in the manufacturing of taxable goods above the registration threshold and not exempt from registration.
Any person who is prescribed to be a taxable person i.e. provides taxable services in Malaysia above the registration threshold.
Annual sales value of RM500,000.
The threshold depends on the type of taxable services, ranging from nil to RM1.5 million. The common threshold amount is RM500,000.
Manufactured goods - the sale value of taxable goods determined based on the transaction value of the taxable goods i.e. the price for which the taxable goods are actually sold by the registered manufacturer to the purchaser.
Imported goods - the sale value of the taxable goods shall be the sum of the following amounts:
(i) The value of such taxable goods for the purpose of customs duty;
(ii) Customs duty, if any, paid or to be paid on such taxable goods; and
(iii) Excise duty, if any, paid or to be paid on such taxable goods.
Taxable service for the sale of goods
(a) Where the receiver of the service is not connected with the taxable person, the value is determined based the actual price for which the goods are sold;
(b) Where the receiver of the service is connected with the taxable person or where no charge is levied, the value is based on the price at which the goods would have been sold in the ordinary course of business to a person not connected with the taxable person.
Other taxable services
(a) Where the receiver of the service is not connected with the taxable person, the value for charging service tax shall be determined based on the actual price for which the taxable services are provided or the actual premium or contribution paid for the insurance coverage;
(b) Where the receiver of the service is connected with the taxable person or where the services are provided for free, the value is based on the open market value of the taxable service i.e. provided in the ordinary course of business to a person not connected with the taxable person.
Accounting for tax
The tax is due at the time the taxable goods are sold, disposed of otherwise than by sale, or first used otherwise than as materials in the manufacture of taxable goods by the taxable person.
The tax is due at the point of importation (i.e. clearing the goods from Customs).
Taxable services by taxable person
The tax is due at the time when payment is received for the taxable service provided to the customer by the taxable person.
When the whole or any part of the payment in respect to the taxable service provided is not received within a period of 12 calendar months from the date of invoice, service tax is then due on the day following that period of 12 calendar months.
Imported taxable services
The service tax is due at the time when the payment is made or invoice is received for the service, whichever is the earlier.
Two month period
Two month period
Deadline to submit return
Last day of the month following the end of the taxable period.
Last day of the month following the end of the taxable period.
Written by a member of the FTX (MYS) and ATX (MYS) examining team