This is part two of a two-part article on the concept of supply for GST purposes and is relevant for candidates preparing for P6 (MYS), Advanced Taxation. The article is based on prevailing laws as at 31 March 2015.
The article is written on the assumption that candidates have a basic understanding of the GST principles in Malaysia. The first part of the article covered the concept of supply and when a deemed supply will arise. In addition, it also addressed the GST implications of the transfer of a business as a going concern (TOGC). The focus of this article is to look at the four key concepts of supply – namely type, place, time and value of supply.
In order to fully appreciate and understand the concept of supply, candidates must grasp the following key concepts:
We will discuss each concept in turn below.
Supplies can be categorised into taxable and non-taxable supplies. A taxable supply is a supply which is standard rated or zero rated. Exempt and out of scope supplies are non-taxable supplies and therefore, are not subject to GST.
Standard-rated supplies
Standard-rated supplies are taxable supplies of goods and services which are subject to a rate of 6%. A taxable person who is registered for GST has to collect GST on the supply and is eligible to claim input tax credit on his business inputs in making taxable supplies. All goods and services made in Malaysia (including imported goods and services) are standard-rated supplies except specific goods and services which are categorized under zero-rated supply and exempt supply orders.
Zero-rated supplies
Zero-rated supplies are taxable supplies of goods and services which are subject to GST at 0%. In this respect, businesses do not collect any GST on their zero-rated supplies but are entitled to claim credit on business inputs used in making these taxable supplies. Where a company is mainly providing zero-rated supplies, it is likely that the company will be in a tax repayment situation as the input tax credit claimable is likely to exceed the output tax payable.
Generally, essential products such as basic food items, electricity up to 300 units, treated water for domestic consumption and essential medicines are zero-rated. In order to ensure Malaysian products and services are competitive outside of Malaysia, exported goods and services and the provision of international services are also zero-rated.
Exempt supplies
Exempt supplies are supplies of goods or services which are not subject to GST. In this context, businesses do not collect any GST on their supplies and are not entitled to claim credit on their business inputs. In such a case, the GST input tax incurred by the exempt business would become a cost to the business.
Examples of exempt supplies include private healthcare and education, residential properties, mass public transportation (toll highways, public buses, taxis, etc) and financial services.
Supplies not within the scope of GST
Supplies which do not fall within the charging provision of the GST legislation include non-business transactions, sales of goods from a place outside Malaysia to another place outside Malaysia, employment income and penalties.
In addition, the provision of services by the Government is also out of scope. Specifically, the following types of supplies provided are not subject to GST:
(a) supplies made by the Government except as otherwise prescribed by the Minister of Finance
(b) supplies made by statutory bodies and local authorities with regards to regulatory and enforcement functions.
Supplies given relief
It should be noted that, to relieve the burden of GST on certain categories of business and consumers, the Government provides GST relief on the supply of taxable supplies which would otherwise be subject to GST. In this instance, businesses which provide taxable supplies which fall within the relief conditions are not required to impose and collect GST on the relevant supplies.
Examples of supplies which are given relief by the Government include:
It should be noted that before the relief can be applied, the relevant conditions for the relief need to be fulfilled. In addition, a certificate signed by the designated person is required to confirm the applicability of the relief.
A supply will only be subject to GST if it is made in Malaysia. The place of supply of goods or services is where the supply is made or is treated as being made. Supplies made outside of Malaysia are considered to be out of the scope of GST.
There are separate rules for determining the place of supply for goods and for services.
Place of supply – goods
The place of supply of goods is in Malaysia if the supply involves goods which are removed:
EXAMPLE 1
Happy Sdn Bhd is involved in the manufacture and distribution of furniture. The furniture is produced in the company’s factory in Penang, Malaysia. The products are sold to its distributors located in Kuala Lumpur as well as Japan. The products are delivered from its Penang factory by truck to Kuala Lumpur and exported by ship to Japan.
Based on the above facts, the supply of the furniture from the Penang factory to its distributor in Kuala Lumpur is made in Malaysia since the goods are removed from a location in Malaysia to another location in Malaysia. In relation to the goods shipped to Japan, the place of supply of the goods is still in Malaysia since the goods are removed from a location in Malaysia to a location outside of Malaysia. However, the export of goods is a zero-rated supply and, therefore, GST is applied at the rate of 0% on the sale of goods to the distributor in Japan.
EXAMPLE 2
Happy Sdn Bhd does not produce specialised chairs. Therefore, where it receives orders for such chairs from Japan, it has to order them from a third party factory located in Indonesia. The chairs are then delivered directly from Indonesia to Japan.
Based on this scenario, the goods are not removed from a location in Malaysia. In such a case, the place of supply is outside of Malaysia and, as a result, the transaction would not be subject to GST in Malaysia.
It should be noted that the place of supply of goods is outside Malaysia if the supply involves goods which are removed:
Place of supply – services
The place of supply rules for services are different. The place of supply of services is treated as made in the country where the supplier belongs. Therefore, a supply of services is treated as being made in Malaysia if the supplier belongs in Malaysia. A supply of services is treated as made outside Malaysia if the supplier belongs in a country other than Malaysia. Where a supplier belongs in Malaysia, every supply of services provided by him is within the scope of GST.
A supplier of services belongs in Malaysia under the following circumstances:
EXAMPLE 3
Happy Sdn Bhd provides management services to its subsidiary company located in Hong Kong. The services are provided from its office in Malaysia.
As the services are provided from its business/fixed establishment in Malaysia, the supply of services are said to be made in Malaysia.
EXAMPLE 4
Happy Sdn Bhd has its head office in Malaysia. It also has two branches – one in the US and one in the UK. It provides furniture repair services to its customers. For customers located in Asia, the repair services would be undertaken by the repair centre in Malaysia. For customers located in the US and Europe, the furniture would be sent to its branches in the US and the UK respectively for the repair works.
The repair services undertaken in the repair centre in Malaysia are made in Malaysia and, therefore, are subject to GST. However, the place of supply for repair services undertaken through the branches in the UK and the US are outside Malaysia and, therefore, do not attract GST in Malaysia.
The time of supply is the time when a supply of goods or services is treated as being made. It is important to determine the time of supply because a taxable person should charge GST at the time when the supply is made. Consequently, they account for GST for the taxable period in which the time of supply occurs unless they are allowed to account GST under payment basis.
The basic tax point for time of supply is when:
The time of supply of goods occurs when the goods are removed or if the goods are not to be removed, the time when the goods are made available to the customer. In the case of a supply of services, the time of supply is when the services are performed. A service is considered “performed” when the work is done or completed by the supplier of services.
The time of supply rule based on the basic tax point is then varied as follows:
EXAMPLE 5
Happy Sdn Bhd sold some furniture to its distributor and the goods were delivered on 18 January 2016. The tax invoice for the transaction was issued on 2 February 2016 and the company received payment on 30 March 2016.
Based on this scenario, the basic tax point is 18 January 2016 – ie when the goods are removed / delivered to the distributor. As the tax invoice was issued within 21 days from the basic tax point, the date when the tax invoice was issued can be taken as the time of supply. In this case, the time of supply for the sale is 2 February 2016.
EXAMPLE 6
The facts are the same as in Example 5 except that the tax invoice is only issued on 15 February 2016.
As the tax invoice is issued more than 21 days after the basic tax point, the time of supply reverts back to the basic tax point of 18 January 2016.
The GST legislation also provides for specific time of supply rules for different type of transactions. Some examples of the specific time of supply rules are provided below:
EXAMPLE 7
Happy Sdn Bhd commenced providing management services to its subsidiary, Awesome Sdn Bhd on 1 January 2016. The company issues monthly tax invoice on 30th of each month. Awesome Sdn Bhd pays the tax invoices within 60 days.
Provision of management services can be regarded as a continuous supply of services and, therefore, the time of supply would be determined based on the earlier of the issuance of the tax invoice or when payment received. In this case, as the tax invoice is issued before receipt of payment, the date of invoice would be taken as the time of supply of the management services.
EXAMPLE 8
The facts are similar to in Example 7. However, instead of issuing monthly tax invoices, Happy Sdn Bhd only issues a tax invoice at the end of the year – ie on 31 December 2016. Awesome Sdn Bhd is a company providing exempt supplies.
Based on this scenario, as Awesome Sdn Bhd is not allowed to claim the input tax fully or partially on the supply (being an exempt supplier), the supplies will be treated as separately and successively supplied at the end of the three month period, in which case, the management services for the first three months (ie 1 January 2016 to 31 March 2016) are regarded as being supplied on 31 March 2016.
The value of a supply is the value on which GST is chargeable. Therefore, it is important to determine the correct value of supply so that the appropriate GST amount can be ascertained.
The amount of GST is the value multiplied by the tax rate. The value of a supply is equal to the consideration less the tax chargeable. The consideration for a supply depends on what has been given in exchange for the supply. The consideration may be in the form of payment in money or in kind or both in money and in kind. Where all or part of the consideration for a supply is in a form not consisting of money, the value of the supply is based on the aggregate of:
For the supply of goods, the value includes excise duty paid/to be paid (where applicable). In the case of imported goods, the value includes customs duty and excise duty paid/ to be paid (where applicable).
Where value of supply is expressed in a foreign currency, it is to be converted into RM at the selling rate of exchange prevailing in Malaysia at the time when the supply takes place or, in the case of the importation of goods, at the rate of exchange determined by the director general of RMC at the time applicable for the calculation of customs duty or excise duty and valuation. If the taxpayer wishes to use a different foreign exchange rate, they would have to make a specific application to the director general of RMC for approval.
There are instances where the GST legislation requires the value of supply to be based on the open market value (OMV) of the goods or services. Examples include:
Schedule 3 of the GST Act provides specific rules on how the OMV of the goods or services can be determined. This is taken as the consideration in money which would generally be received for such a supply if the supply was freely offered and made, under the same terms and circumstances and at about the same time, between unconnected persons. OMV always includes GST (as it is used in place of consideration).
EXAMPLE 9
Happy Sdn Bhd provides repair services at a 20% discount to its group company. The group company is not a GST registrant.
On the basis that the group company is not a GST registrant and therefore not entitled to claim the input tax credit, the value of supply would have to be determined based on the open market value of the services and, therefore, the discounted price is ignored.
Written by a member of the P6 (MYS) examining team