Following the Budget 2014 announcement, Malaysia's GST will come into effect on 1 April 2015 at the rate of 6% based on a "taxable turnover' threshold
of RM500,000 per annum. Businesses below the threshold do not need to be registered (and by extension, do not need to charge GST) although voluntary
registration is allowed. GST in a nutshell is a consumption tax or value added tax (VAT) that is levied on the supply of taxable goods and services made in the
course or furtherance of any business by a taxable person in Malaysia and the importation of goods and services into Malaysia. It is called value added as the
tax is charged at stages by the intermediaries in the production and distribution process (value added) and ultimately,will pass on to the final consumer. GST
is a replacement for the existing Sales Tax and Service Tax which is administered by the Royal Malaysian Customs Department.
TYPES OF SUPPLY
In describing GST, the mass media has frequently referred to "taxable" items and "exempt" items. While these choice of terms allow for easy reading and comprehension, they do not aptly reveal the technical operations of GST.
In general. Malaysia's GST model mainly comprises three types of supply:
a) "standard rated" supply which carries 6% GST:
b) "zero-rated" supply which carries 0% GST: and
c) "exempt" supply which does not attract GST.
Both "standard-rated" and "zero-rated" supplies are collectively termed as "taxable supply" (ostensibly, this seems a misnomer, since the term "zero-rated"
implies no GST, but there are technical reasons for this apparently-misplaced classification).
Figure 1 (presents a list of "zero-rated" and "exempt" items summarised from the Budget 2014 announcement and grouped into broad categories).
Most goods and services will fall into the "standard-rated" category where suppliers who are GST-registered will collect 6% GST from customers, In order to
reduce the risk of GST-driven inflation, certain items are prescribed as either "zero-rated" or "exempt" supplies that do not attract any GST.
"Zero-rated" and "exempt" supplies have markedly different technical applications in the operations of GST law. Thus, their separate identification and treatment is of paramount importance.
GENERAL OBSERVATIONS :
GOODS VS SERVICES
Most items under the "zero-rated" list are goods such as basic food and utilities (Schedule 1 of the GST Bill 2009 defines water and electricity as goods).
The notable exception in the "zero-rated" list is exported goods/services whose inclusion in the list is to encourage an export-driven economy.
On the other hand, the "exempt" list contains mostly essential services involving public transport, healthcare, education and other basic services - the
odd exceptions are residential, agriculture and general purpose land which are goods, not services.
In Singapore, the list of "zero-rated" items is woefully limited to: "providing international services"; and "exporting goods out of Singapore".
Meanwhile, Singapore's "exempt" items are limited to "financial services", "sale and lease of residential properties" and "investment gold, silver, platinum or
investment precious metals'".
By contrast, Malaysia's list of "zero-rated" and "exempt" supplies cavers a wider spread of essential goods and services, and even a neutral party in the GST
debate would concede that Malaysia's model has, on paper, more steps towards reducing GST-driven price inflation.
CONVERSION OF ITEMS
Given the nature of "zero-rated" items (which are mostly goods), it is not difficult to imagine that many "zero-rated" items can be readily converted into other
goods or value added. Upon conversion, "zero-rated" items may not retain their "zero-rated" status, but may be converted into "standard-rated" items. For
instance, raw chicken meat ("zero-rated" item) acquired from the market, upon cooking and being served in a restaurant, gets converted to a cooked meal
("standard-rated" item). Similarly, sugar and eggs are "zero-rated" but once processed and transformed into a cake, the latter becomes "standard-rated". On the other hand, a cake ("standard-rated") may be converted into a "zero-rated" item if exported (since export of goods and services arc "zero-rated").
However, "exempt" supplies (apart from land) are mostly services and so being, do not directly undergo a conversion, but instead, gets consumed in the
business. Even residential land, when converted into a house, still retains its "exempt" status when sold by a property developer to the end-consumer.
END-CONSUMER'S VIEW POINT
For all our initial preparation and exposure to GST literature, our first real contact with GST is likely to be a rather hand son affair at the supermarket or
convenience store - this is unsurprising as all of us are consumers.
Towards this end, sufficient awareness of "zero-rated" items and "exempt" items are essential to prevent being wrongly charged GST by unscrupulous
traders. For all practical intent, there is no difference to the end-consumer between "zero-rated" and "exempt" supply as both are free from GST.
Nonetheless, the classification rules for what constitutes "zerorated" and "exempt" supples are very specific, so much so that hair-splitting distinctions are not uncommon. Anything not foiling squarely within the "zerorated" and "exempt" categories will be subject to the full 6% GST.
CLASSIFICATION RULES ARE SPECIFIC
Poultry and eggs are "zero-rated", but are limited to chicken and duck only. Goose meat or turkey meat (despiteboth resembling oversized chickens) are
excluded from the "zero-rated" list and hence, carry GST at 65k. Given the visual similarities of such items, it remains to be seen whether creative re-labeling will become rampant
Another tricky example is cooking oil. Quite understandably, palm oil, coconutoil and groundnut oil (which are commonly consumed by the populace) are
"zero-rated". However, other cooking oils such as corn oil are not zero-rated, but will carry 6% GST. Such distinctions may be a triumph of technicality over intuition, but are unlikely to win praise from the segment of the populace bred on corn oil.
Another complication arises from foods that have undergone minor processing. meats that have been cleaned and cut still retain their "zero-rated" status, but meats that have been marinated (with sauce and seasoning) will become "standard-rated". As there is little visual distinction between the former and latter,
the uninformed shopper will take some convincing that GST has been rightfully charged. These are, unavoidably, the initial quirks of GST implementation.
SUPPLIER'S VIEW POINT
However, upon stepping into the shoes of a supplier, the differences between "zero-rated" and "exempt" supplies become more pronounced and profound.
Businesses whose revenues exceed the annual threshold of RM500.000 are required to register for GST. However, in determining the "taxable turnover"
to be compared against the RM500.000 threshold, only "standard-rated" and "zero-rated" supplies are taken into account. "Exempt" supplies do not count towards the RM500,000 threshold. Hence, "exempt* supplies do not play a role in triggering GST registration, but "zero-rated" supplies do. Suppliers of
"zero-rated* items must be aware of this technicality.
Once a business is registered, the GST return form needs to be submitted for every taxable period, which could be "monthly" for businesses with annual
revenue exceeding RM5m, or "quarterly" for businesses with annual revenue below RM5m.
"EXEMPT" SUPPLIES AND INPUT TAX CREDIT
The biggest difference between "zero-rated" and "exempt" supplies is the availability or denial of input tax credit claimed by a supplier. A GST-registered supplier of "taxable supplies" is allowed to claim input tax credit on GST incurred on purchases, capital goods and overheads. Because "zero-rated" supplies are technically regarded as a "taxable supply', they qualify the supplier for input tax credit recovery. Conversely, a supplier making an entirety "exempt" supply is not allowed to claim input tax credit on its purchases, capital goods or overheads.
As a result, any GST incurred by a suppler of "entirely exempt" supplies is not recoverable but will become part of the "exempt" supplier's cost base and will most likely be "marked-up" into the final selling price to the end-consumer. It is possible that the price of "exempt" supplies may potentially increase (marginally) due to the embedded GST.
THE "EXEMPT* CLASSIFICATION
This line of thought may evolve a natural question: To avoid "embedding" GST into the selling price of "exempt" supplies, why doesn't the government zero-rate all items destined for "exempt" status?
The most likely explanation is that "zero-rated" supplies represent a loss of GST-revenue to the government. Having too many "zero-rated" items will effectively reduce governmental GST-revenues and compel the government to raise the GST rate (higher than the current 6%), as the remaining "standard-rated" items must make up for the loss of GST from the "zero-rated" list.
In contrast, "exempt" suppliers suffer the GST on behalf of end-consumers since the former cannot recover GST incurred on their purchases, coital goods and overheads. Thus, the "exempt" status allows the government to provide relief to end-consumers while still collecting part of the GST along the supply chain.
The term "muted supplier" is used to describe a business which supplies both taxable supplies ("standard-rated" and/or "zero-rated) and "exempt" supplies.
A mixed supplier, as the name implies, will have to apportion and part-claim its input tax credits based on an agreed formula (usually based on sales value of "taxable" supplies as a proportion of the total of "exempt" and "taxable" supplies). The portion of input tax credits attributable to "exempt" supplies is not
allowed to be claimed, while the remaining portion attributable to "taxable" supplies is claimable.
There are specific rules such as "Partial Exemption" and "Capital Goods Adjustment" rules that govern the apportionment of input tax credits of mixed suppliers; however, they are beyond the scope of this article.
For a mixed supplier, detailed tracking of its "zero-rated" and "exempt" supplies is critical in order to correctly compute its net GST position.
The culmination of all the above is that the initial joy evoked from the term "Exempt" gives way to an inescapable sensation of GST-trap, whereby input tax credits are denied and GST compliance becomes a complicated affair.
Like income tax self assessment once was. GST is, to the public, an unknown element As yet, it is difficult for general businesses to get truly enthusiastic about the new GST system because of the little that is known: more taxes and more compliance cost.
But given the inevitability of GST. public awareness and early preparation wfll be the cornerstones of a successful transition to the GST era come 1 April 2015.
Moving beyond this is Malaysia's aspiration to reduce its dependency on direct taxes (eg. income taxes) and petroleum taxes to consumption-driven tax (ie, GST) which is theoretically a more stable stream of tax revenue. Undeniably, this replacement tax system is here to stay. Let us get ready and make use of
the transitional period to understand and demystify GST instead of lamenting over it.
To ensure minimal disruption to the consumer pricing mechanism, the proper selection and application of "zero-rated" and "exempt" supplies is crucial.
SOURCE : MIA ACCOUNTANTS TODAY| JANUARY / FEBRUARY 2014