As Malaysia transitions to the sales and services tax, Choong Kwai Fatt FCCA explains how the system will operate and describes the implications for finance professionals
This article was first published in the October 2018 Malaysia edition of Accounting and Business magazine.
The sales and services tax (SST) took effect from 1 September 2018, replacing the goods and services tax (GST). SST comprises two legislative acts: the Sales Tax Act 2018, governing the manufacturing and oil and gas industries; and the Service Tax Act 2018 on selected prescribed service providers. The components of SST are a sales tax of 10% and a service tax of 6%.
SST is an enhanced version of the earlier Sales Tax Act 1972 and Service Tax Act 1975, which governed Malaysia’s indirect tax arena for over 40 years before the move to GST on 1 April 2015.
Concept and mechanism
SST operates on a single-stage basis, which means that the sales tax or service tax is imposed only once at the manufacturer stage (sales tax), importer stage (sales tax) or service provider stage (service tax). The prices of goods and services will not be escalated with tax even though the supply chain is spread far and wide.
For example, manufacturing will add in sales tax of 10% on manufactured goods in the invoice to the wholesaler (see box below). For the wholesaler, the sales tax is part of the inventory cost. Any subsequent sale from wholesaler to distributor or distributor to customers will have no sales tax imposed on the invoice issued. Sales Tax Act 2018 governs only manufacturing and oil and gas industries. Trading companies are not required to impose sales tax and are outside the ambit of Sales Tax Act 2018.
SST operates within Malaysia; the export of manufactured goods and provision of services outside Malaysia is free from SST. The SST has singled out designated areas (Labuan, Langkawi and Tioman) and special areas (free zones, licensed warehouses, licensed manufacturing warehouse and joint development areas) as SST free. Goods and services provided within or between designated and special areas are free from SST.
Unlike GST, the SST pricing methodology operates on an ‘add-on’ basis, relating to the sales value or value of service provided. The display, advertisement, quotation or published prices are SST exclusive. The invoice issued adds in the relevant sales tax of 10% or service tax of 6% depending on circumstances. To avoid misconception between customers and for a smooth transition into SST, business owners are advised to highlight to customers that the price displayed or quoted excludes SST.
Sales tax is imposed on manufacturing and oil and gas industries, while service tax is imposed on selected service providers, provided that they reach an annual threshold of RM500,000 and above. Service tax is imposed on foods and beverages (F&B) operators with an annual turnover exceeding RM1.5m. Manufacturing is defined in s 3 of the Sales Tax Act 2018 as a manufacturing process that transforms raw materials into goods of different quality, nature and quantity. It also includes assembly of cars or machinery, and petroleum extractions and refinery.
Service tax is imposed on taxable services defined in the Service Tax Regulations 2018. The industries include hotels, restaurants, F&B providers, professionals, gaming activities, specialised industries and credit card service providers. (A detailed list can be found on the Royal Malaysian Customs (RMC) website: customs.gov.my.)
Existing GST registrants in manufacturing, oil and gas and service provision are automatically registered for SST with the RMC. As at 19 August 2018, 77,451 businesses had transferred from MyGST to MySST. Of these, 32,557 are registered for sales tax and 44,874 for service tax.
A comparison between sales tax and service tax is provided in the box above.
SST is an added element into the invoice issued, based on goods delivered in the case of manufacturers (sales tax) or services performed in the case of service providers (service tax). The accountability of the taxes to RMC varies as sales tax is accountable on an accrual basis while service tax is accountable on payment received from customers.
The government acknowledges the long duration between invoice issued and payment received from customers in service industries – in particular, auditors, tax professionals, lawyers, engineers, architects and valuers. The payment of service tax upon payment received would ease up tremendously the cashflow and lower the business cost for service providers in the service tax regime.
Service tax, however, is deemed received in the event that payment is not received from customers within 12 months of the date of the invoice. Service tax is due on the day following that period of 12 months [s 11(2), Service Tax Act 2018].
Return submission and payment
The taxable period for SST is two calendar months. The SST return is mandatory and needs to be submitted one month from the expiration of the taxable period, even though no tax is due or payable. Any payment of SST needs to be paid at the same time of the submission of the return.
Non-submission of a return and non-payment of tax constitute two separate and distinct offences. Upon conviction, the fine and penalties are as follows:
- fine ≤ RM50,000
- imprisonment ≤ three years
[s 26(7); s 26(8), Sales Tax Act 2018]
[s 26(6); s 26(7), Service Tax Act 2018]
The late-payment penalty is imposed over three 30-day stages, totalling 90 days. Prosecution on the SST registrant takes place on or after 90 days.
Upon expiration of one month from the taxable period, 10% is imposed on any outstanding tax due to the government (first 30 days). Thereafter, for the second 30-day period, an additional 15% is imposed on any outstanding tax and for the third, an additional 15%.
[s 26(9), Sales Tax Act 2018]
[s 26(8), Service Tax Act 2018]
The first taxable period for SST is 1.9.2018–31.10.2018. The SST has to be submitted by 30.11.2018. The penalty calculation is as follows:
- first 30 days (1.12.2018–30.12.2018) – 10% calculated on 1.12.2018
- second 30 days (31.12.2018–29.1.2019) – 15% calculated on 31.12.2018
- third 30 days (30.1.2019–28.2.2019) – 15% calculated on 30.1.2019.
The penalty imposition is on the first day of every 30-day period on any outstanding unpaid SST.
Tax invoice to invoice
With effect from 1 September 2018, the serial number for SST starts anew, ie 000000001. Tax invoices ceased to be in use on 31 August 2018 unless issued to account for previous goods or services not billed. Likewise, credit notes and debit notes need to account for the GST element on any GST adjustment, even if it was issued on or after 1 September 2018. The output tax and input tax must be reflected in the last GST return, which is August 2018.
Last GST return – August 2018
The last GST return was in August 2018. This is allowed to be submitted within 120 days, computed from 1 September 2018, which would be 29 December 2018 at the latest. This allows any unclaimed input tax and input tax on goods returned to be included. This is the final input tax claimed and thereafter input tax would not be allowed once the last GST return has been submitted to RMC. [s 6 read with s 8, GST (Repeal) Act 2018]
Tax invoices, credit notes and debit notes issued on or after 1 September 2018 must be reflected in the August tax return, taking note that all input tax claimed on this return shall be final. Once the GST return is submitted, input tax discovered in subsequent periods is nullified.
RMC verification, audit and investigation
The RMC will verify the input tax claimed, carry out GST audit or investigation if required to ensure the GST registrant fully complies with the GST Act 2014. The input tax claimed will be refunded within six years, from 1 September 2018. [s 8(2), GST (Repeal) Act 2018]
RMC prosecution, GST registrant appeal
It is expressly stated in s 4 of the GST (Repeal) Act 2018 that prosecution will continue notwithstanding the repeal of the act. Likewise, GST registrants have the right to seek RMC review or appeal to the Customs Appeal Tribunal for any disagreements during the GST audit for any adjustments and penalties.
RMC has a statutory responsibility to ensure GST is duly paid, GST refund is justified and supported by documentation, and the GST Act 2014 has been fully complied with. Since GST audits cover the period between 1 April 2015 and 31 August 2018, with a focus on GST transition from 6% to 0% during the period of 1 June 2018 to 31 August 2018, it is vital that accountants dealing with GST audits are fully aware of the three Finance Acts amendments to the GST Act 2014.
The GST Act is technical and contentious in many aspects. It is common to have differing opinions between the GST registrant and the RMC. The remedy to address grievances and to support GST input tax refunds may eventually be adjudication at the Customs Appeal Tribunal. Appeal procedures and compliance guidelines as governed by the GST (Review and Appeal) Regulations 2014 are an essential requirement for accountants advising companies.
Retention of records for a period of seven years is mandatory to facilitate audits and to support a claim for input tax refund. S 8 of the GST (Repeal) Act 2018 empowers the RMC to carrying out verification, audit and investigation within six years prior to any refund of GST.
Failure to retain records for seven years attracts penalties as follows:
- fine ≤ RM50,000
- imprisonment ≤ three years
[s 36(7), GST Act 2014]
Progressive, periodic supply
GST is divided into two phases: 1.4.2015–31.5.2018 and 1.6.2018–31.8.2018. SST takes effect on 1.9.2018. For sales tax purposes, in the event that an agreement is entered into taking effect prior 1.6.2018, but ended on or after 1.9.2018, the goods delivered during the GST regime would be accountable for GST 6% or 0%. Similarly, goods delivered on or after 1.9.2018 would be subject to sales tax at 10%. [s 108, Sales Tax Act 2018]
For service tax, in the event that an agreement is entered into taking effect prior to 1.6.2018, but ended on or after 1.9.2018, the service performed during the GST regime would be accountable for GST 6% or 0%; likewise, service performed on or after 1.9.2018 would be subject to service tax at 6%. [s 93, Service Tax Act 2018]
In the event that full or part payment has been received during the GST era, in particular, prior to 1.6.2018 where GST has been paid, a credit note needs to be issued for goods delivered or service performed on or after 1.9.2018. A debit note would be issued to account for sales tax of 10% or service tax of 6%, depending on circumstances.
Choong Kwai Fatt FCCA is an advocate, solicitor and tax specialist
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Comparison between sales tax and service tax
|Sales tax Service tax||Sales tax Service tax|
|1. Features||One-stage output tax||√||√|
|Pricing methodology||Price-exclusive sales tax (add-on concept)||Price-exclusive service tax with add-on service charge (++ concept)|
|2. Deductions||Inventory cost based on matching principles||Business expenditure [s 33 read with s 39]|
|3. Registration threshold
(annual turnover of ≥ RM500,000)
|4. Taxable period Bi-monthly (two calendar months)||√||√|
|5. Scope and basis||Manufacturing
* Accrual basis based on invoice issued
|Prescribed service industries
* Exclude export services and imported services * Payment received from customers
|6. Tax rate||10%||6%|
|7. Branch registration||No||Yes|
|8. Group registration||No||No|
|9. Non-application||(a) Designated area1
(b) Special area2
|(a) Designated area
(b) Special area
|10. Legislation||Sales Tax Act 2018||Service Tax Act 2018|
"It is vital that accountants are fully aware of the three Finance Acts amendments to the GST Act 2014"