Indirect Tax Alert | 31 October 2013
Introduction of goods and services tax in Malaysia
The implementation of the Goods and Services Tax (GST) at the rate of 6% has been announced by the Honorable Minister of Finance in the 2014 Budget and will come into operation on 1 April 2015.
What is it?
GST is a broad-based consumption tax applied at each stage of the supply chain. A GST registered business, in the main, can offset the GST incurred in making its supplies against GST charged on the supplies it makes. This credit mechanism means that GST is levied on the value added at each stage of production, and it can be cost neutral to a business with the burden falling on the final consumer who cannot recover the GST. GST becomes due when a sale is made and not necessarily when payment is received. This is a move away from the present single-stage sales tax and service tax system.
What does it apply to?
GST is charged on any taxable supply of goods and services made in the furtherance of any business by a GST-registered person in Malaysia. It is also charged on the importation of goods and services into Malaysia. As a broad based tax, the default position is for GST to be applied at the standard rate unless there is a provision that states that it can be treated differently. This means there is no list of what is treated as standard rated; instead, there are some limited reliefs and exemptions for certain specific goods and services:
Zero rated: This is a taxable supply, meaning GST incurred on the supply can be recovered and the onward supply GST is levied at 0%. If you make wholly zero-rated supplies, then it is likely that you will be in a refund position with Customs. Examples include certain agricultural products, foodstuff, water to domestic consumers, electricity supply (with limits) to domestic users, export of goods and international services.
Exempt: This supply means no GST is charged on the supply, but this does not mean that you are GST-free. It also means that there is no entitlement to recover GST incurred in making those exempt supplies. If you make wholly exempt supplies, then you will not be able to register for GST, and GST would become a cost to the business. Examples include residential property, private healthcare and private education and certain financial services.
Out of scope: These supplies are outside the GST system. Examples are limited but include transfer of going concerns and supplies made by the Government, such as issuance of passports and licenses, except some supplies of services prescribed by the Minister of Finance.
Who will be affected?
Everyone in Malaysia who consumes goods or services will be affected upon implementation of GST. In particular, businesses that are registered for GST will need to account for GST on their business activities on a regular basis and pay the GST due to the Customs Department. The threshold to become GST registered is RM500,000 in a 12-month rolling period or where there is an expectation that this threshold will be breached.
What is the impact on other taxes?
The Government is abolishing the current sales tax of 5% and 10% and service tax of 6%. These taxes will come to an end when GST starts. In addition, it was stated in the 2014. Budget that some assistance will be given to individuals and businesses to assist them with the introduction of GST.
Assistance from the Government
The following measures will be effective from 2015:
- • One-off cash assistance of RM300 to households that receive Bantuan Rakyat 1Malaysia (BR1M).
- • Individual income tax rates to be reduced by 1% to 3%.
- • Individual income tax structure to be reviewed to ensure a more progressive tax structure, including increasing the chargeable income subject to the maximum rate from in excess of RM100,000 to in excess of RM400,000.
The following measures will be effective from 2015:
- • Corporate income tax will be reduced by 1% from 25% to 24%. Income tax rate for small and medium enterprises (SMEs) will be reduced by 1% from 20% to 19%. Both reductions will take effect in the year of assessment 2016.
- • Cooperative income tax rate will be reduced by 1% to 2% from the year of assessment 2015.
- • Secretarial and tax filing fees (subject to limits) are allowed as tax deductions from the year of assessment 2015.
- • Accelerated capital allowances on the cost of information and communications technology (ICT) equipment and software are extended to the year of assessment 2016.
- • Expenses incurred for training in accounting and ICT relating to GST are to be given a further tax deduction for the years of assessment 2014 and 2015.
- • Grants for GST training of employees in 2013 and 2014 and financial assistance to SMEs for the purchase of accounting software in 2014 and 2015 will be provided.
How to implement GST in 17 months
The following business decisions need to be considered:
- • Budget for cost of implementing GST, e.g. consultant fees, configuration of accounting systems, training expenses, hiring of additional finance support
- • Manage cash flow as GST is paid on accrual basis
- • Analyze the capabilities of existing accounting system
- • Review accounts payable process to ensure tracking and posting of expenses are done in a timely manner
- • Review employees benefits and the process of approving claims
- • Determine the necessary changes required for existing documentation
- • Analyze and understand transitional issues on supply of goods and services spanning the GST implementation period
- • Evaluate the impact on pricing of sales and suppliers spanning the GST implementation period
- • Train employees to appreciate the impact of GST
- • Identify the legal implications of existing long-term contracts spanning the GST implementation period
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Consultants Sdn Bhd, Kuala Lumpur
- • Dr. Lydia Shalani Thiagarajah
+60 3 7495 8250
EYG no. CM3925