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Reintroduction of Sales and Service Tax (SST)
“…to hope, till Hope creates from its own wreck the thing it contemplates...”
--Percy Bysshe Shelley from "Prometheus Unbound"
The existing multi-stage, broad-based goods and service tax (GST) regime which was implemented by Malaysia on 1 May 2015 and adopted by over 160 countries worldwide, has been announced by the new Government to be repealed and replaced by a single-stage sales tax and service tax (collectively, “SST”). The move of zeroing GST rate during the transition period from June to August 2018, paves the way for the reintroduction of SST.
The bills were passed in the Parliament on 7 and 8 August 2018 and the date of implementation of SST is targeted at 1 September 2018. This dynamic turn has served as a timely call for all companies operating in Malaysia to wake up and review their business operations.
Sales tax is governed by the Sales Tax Act 2018, slated to be enforced on 1 September 2018. Sales tax is a single-stage tax charged and levied on all taxable goods that are:
manufactured in Malaysia and sold, used or disposed of by a registered manufacturer to a person other than any person who is exempted to acquire such goods without payment of tax under Sales Tax (Goods Exempted from Sales Tax) Order;
imported into Malaysia.
Taxable goods means goods of a class or kind not for the time being exempted from sales tax. The Government will collect sales tax at the manufacturer’s level only while the element of sales tax will be embedded into the selling price and paid by consumers.
Sales tax is an ad valorem tax and its applicable rates are determined based on the tariff classification of the goods. Most goods attract a tax rate in the range of 5% to 10%, although fruits, certain food stuffs, cigarettes and tobacco, liquor and alcoholic drinks are set at 5% rate. Some categories are specifically exempted such as tailoring, installation incorporation of goods into building, goldsmiths, jewelers and opticians. However petroleum products are separately charged at their own rates.
Except for those goods specifically prescribed, special designated areas such as Langkawi Island, Tioman Island and Labuan Island are exempted from Sales Tax. All exports are exempted from sales tax.
Service tax is governed by the Service Tax Act 2018, slated to be enforced on 1 September 2018. Service Tax is a form of indirect tax levied and charged on any provision of taxable services made in the course or furtherance of business nature by a taxable person in Malaysia.
Taxable services include Hotel , Insurance and Takaful, Service of food and beverage preparation , Club, Gaming, Telecommunication, Pay-TV, Forwarding agents, Legal, Accounting, Surveying, Architectural, Valuer, Engineering, Employment agency, Security, Management services, Parking, Motor vehicle service or repair, Courier, Hire and drive car, Advertising, Domestic flight except Rural Air Services, Credit or charge card, IT services; and Electricity.
Taxable service means service of a class or kind not for the time being exempted from service tax. The Government will collect tax at the service provider’s level only while the element of service tax will be embedded in the service charge and paid by consumers.
The rate of service tax is generally 6% except for charge or credit cards, which incurs RM25 each year for principal card and its supplementary.
Special designated areas such as Langkawi Island, Tioman Island and Labuan Island are exempted from the Service Tax. Service tax is not chargeable on imported services and exported services.
Salient Features of SST
The threshold to be registered as a taxable person is a person who manufactures taxable goods or provides taxable services, whose sales value has exceeded RM500,000 (except RM1,000,000 for service of food and beverage sector) for a period of 12 months.
Registration and Final GST Return
Once the GST Act, 2014 is repealed, the existing GST registered persons will automatically become the registered persons with no application for deregistration is required. However, the registered persons are required to submit their Final GST return within 120 days of the date the GST Act is being repealed which means latest by 31 December 2018.
GST registered persons who have fulfilled the required criteria but not registered by 1 September 2018, have to apply for SST registration through the MySST system within 30 days from the date of commencement. Registration is automatically approved within 24 hour for a GST registrant. If a verification process is required, it will take a longer processing time.
Implementation and GST Closure Audit
From 1 September 2018 (the date of commencement) onward, all manufacturers or services providers registered under SST regime will have to charge SST and submit their returns accordingly while the Customs Department will carry out the GST Closure Audit on GST registered persons.
The accounting bases for Sales Tax and Service Tax are as follows:
Registered persons shall prepare their Sales Tax returns on an accrual basis. Sales tax has to be accounted for at the point of time when the goods is sold, disposed or first used.
Registered persons shall prepare their Service Tax return on payment basis. Service Tax is required to be accounted for at the time when the payments are received or on the day following period of 12 months when any whole or part of the payment is not received from the date of the invoice for the taxable service provided.
Registered person who sells taxable goods or provides taxable service shall issue invoices containing the prescribed particulars. The invoices can be in hardcopy or electronically, either in Malaysia language (BM) or English. Any credit notes and debit notes issued have to be accounted for with an adjustment to be made in their SST returns.
The registered persons are required to submit their SST returns (SST-01) every 2 months (bi-monthly basis) according to their respective taxable periods. SST returns have to be submitted latest by the last day of the following month after the taxable periods ended.
Bad debts can be claimed by a registered manufacturer or service provider or a person having ceased to be a registered person. Such claim has to be made within 6 years period from the date the taxable goods is sold or the taxable service is provided and subject to conditions and satisfaction of the Director General (“DG”) of the Customs Department. For bad debts recovered from the debtor after bad debts refund has been claimed and received, the registered person must repay the bad debts refund to DG in his SST return.
Keeping of Records
Registered persons have to keep their SST records in Malaysia for a period of 7 years. It is subjected to the DG’s approval for keeping those records overseas. The records can be kept in softcopy or hardcopy.
In short, both GST and SST are consumption taxes, the main difference being GST is imposed at every level of supply from manufacturer, wholesaler, retailer to consumer while SST is a single stage of consumption tax imposed at the manufacturer or importer level only.
However, under the GST regime, the input tax is claimable at each level of purchase or acquisition and the tax is finally borne and paid by consumer whereas SST is imposed at the level of purchase or acquisition, which is not recoverable and generally has to be absorbed as a cost to business.
The impact of reintroduction of SST remains uncertain, but the people’s primary concern is whether the reintroduction of SST will result in the retail prices of goods to spike or to fall. The answer will be largely dependent on a number of factors such as the range of products or services covered, the types of tax exemptions granted, the mitigation measures to be taken by the government to regularize these adverse effects and the business strategy adopted by businesses whether to include it as a cost or ‘pass on’ to consumers.
Now, we should wait for the SST legislations to be passed in the Upper House and gazetted, so that SST can be implemented on time. If successful, Malaysia will be the first country in the world to retract the GST regime. The transition from GST to SST, within a relatively short time frame, will require careful management. Nevertheless, the business community needs focus and resources to put their billing and accounting systems well ready in place to ensure SST compliance as well as a smooth transition.
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