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Goods & Services Tax (“GST”)GST Implementation: A Practical Viewpoint

Renuka BhupalanManaging Director Taxand Malaysia

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The Long and Winding Road to GST

2005 Budget Proposals: GST to be implemented in 2007 …

February 2006: Postponement of GST…

December 2009: GST Bill released…

March 2010: Postponement of 2nd reading of GST Bill…

Educational initiatives/Courses for GST tax agents/Setting up of GST portal/Issuance of guidelines …

OCT 2013 Budget Proposals

10.5 months to

go

GST BILL 2014: GST from 1.4.2015

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A broad-based consumption tax or value added tax

Imposed on the supply of goods and services

Transaction based, multi stage tax imposed at each stage of business transaction (i.e. from production to distribution of products and services)

Collection and payment is on self-assessment basis – monthly, quarterly, half yearly GST returns

Collected through a credit system where GST incurred on inputs is offset against GST charged on outputs

Will replace the existing Sales Tax and Service Tax

To cover all sectors of the economy with limited exemptions and zero rating

GST rate – 6%

What is GST?

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Value: RM20GST: RM 1.20

GST remitted to Government

Retailer

Value: RM60GST: RM 3.60

Value: RM70GST: RM 4.20

GST @ 6%

Multi-Stage Collection and Payment of GST

Total amount remitted =

= RM4.20

1 2 3+ +

GST paid by consumer = RM4.20

Output tax RM 1.20 1

2

Output tax RM 3.60Input tax (RM 1.20)

RM 2.40

Output tax RM 4.20Input tax (RM 3.60)

RM 0.60 3

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All supplies fall within 4 categories:

Standard rated Taxable Supplies claim input tax*

Zero rated Taxable Supplies claim input tax*

Exempt No GST input tax lost

Out-of-Scope No GST

Types of Supplies

* Excluding blocked input tax

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Helpful to think of GST as two taxes:

“Two Taxes”

BusinessEntity

Supplies - In Supplies - Out

Raw materials & components

Utilities

Consultancy services

Stationery & office supplies

Computer equipment, Fixed assets

Sales of finished goods

Management services

Rental

Sale of fixed assets

Deemed supplies

GST on Inputs = INPUT TAX

GST on Outputs = OUTPUT TAX

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Mapping the application and incidence of GST

BusinessEntity

Supplies - In Supplies - Out

Local

Imported

ISSUES:

any costs incurred for exempt supplies?

Input tax blocked items?

Reverse charge on imported services?

Proper tax invoice/import documents?

Local – 6%Export – 0%Exempt

ISSUES:

ToS rules Deemed supplies? Inter-co

transactions Documentation –

Tax invoice, records, etc.

Special Schemes? Relief orders? Designated areas?

Compliance obligations:Timely filing of GST returnsAccurate reporting of output and input taxReadiness for audit

Transitional Issues: Contracts, Sales Tax Refund, Progressive Supplies, Construction payments, Retention Payments, etc.

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REGULATORY

Legislation – GST Act and Regulations, GST Relief Orders

Clear and precise guides

Guidance from the Customs authorities

Avenue for dialogue with Customs authorities

ORGANISATIONAL

Buy in from top down for effective GST implementation

GST knowledge

Detailed understanding of types of supplies made, including deemed supplies

Detailed understanding of incidence of input tax/blocked input tax

Proper documentation

GST compliance systems

Pre-requisites to facilitate GST compliance

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REGULATORY

Where are we at from a regulatory perspective?

GST Bill, Regulations, GST Orders/Relief Orders

Guides:

General Guide

36 Industry Guides

16 Specific Guides

Accounting Software Guide

Guidance from the Customs authorities

Avenue for dialogue with Customs authorities

Pre-requisites to facilitate GST compliance

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Fully Taxable Suppliers:

Time of Supply issues

Payment schedules v. invoices – property rental, equipment rental

Requirement for debit and credit notes to adjust output/input tax

Deemed supply situations

Blocked input tax – segregation for entertainment

Inter-co transactions and GST implications

Practical Issues

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Mixed Suppliers, e.g. Private Hospitals, Property Developers:

Clear guidance needed on GST classification of supplies - there remains uncertainty

Identification of input tax directly in relation to taxable and exempt supplies and residual input tax – practical difficulties involved

Inter-co transactions and GST implications – exempt suppliers not eligible for group registration, and any inter-co charges will be subject to GST

Practical Issues

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Time of Supply / Tax pointBusinesses have to account for GST based on the time of supply rule

In general, the time of supply is the date the goods are removed (or made available) OR services are performed

However, if:

the invoice issued before the basic tax point; or

payment is received before the basic tax point

THEN the earlier of those two dates will be the actual time of supply – Section 11(4), GST Bill

Section 11(5), GST Bill - 21-day rule :

If the invoice is issued within 21 days of the basic tax point then the time of supply is the date of the invoice PROVIDED payment has not been received before the basic tax point.

Basic tax point

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21-day Rule –

Not always feasible in certain supplies:

.

Time of Supply

Company A provides IT related services to Company B in relation to the design, delivery, installation and commissioning of a new IT system.Company A renders a statement of work done to Company B at the end of each phase of the project. For Phase 1, the statement of work done is submitted on 1 May 2015.Company B only verifies the statement and confirms acceptance on 15 June 2015. Company A is only able to issue the invoice thereafter.

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21-day Rule –

Not always feasible in certain supplies:

.

Time of Supply

Manufacturer B supplies widgets to Customer X continuously based on P.Os received every few days. Customer X only confirms delivery and acceptance via a ‘master invoice’ at the end of each month.Manufacturer B issues the tax invoice at the start of the following month. Goods delivered between the 1st to 9th or10th of the month will have ToS based on delivery rather than invoice date

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Upfront cash payment

.

Is greater flexibility required to allow businesses to function efficiently?

Time of Supply

For many businesses, delivery of goods is only made after cash is collected. Where this happens in the same month – no issue (in the case of monthly GST reporting).Where cash is paid at the end of the month, say 30th May, and goods are delivered within 2-3 days, say 2nd June. ToS will be on 30th May.

Sometimes, payments may be banked directly by customers – for both current and future supplies. The finance department may only become aware of this a day or two later upon doing the bank reconciliation or for larger organisations, where the Treasury department has vetted this.

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Date of posting to GL

.

Will Customs grant a dispensation to allow a taxable period to coincide with the accounts closing date?

Time of Supply

Company X may issue an invoice on the 29th or 30th of the month. This may only get posted to the GL on the 1st of the following month. This is not uncommon in very large organisations. How should this be handled from a systems perspective – should report be generated based on posting date or invoice date? For voluminous transactions, closing date for accounts could be before the end of the month, e.g. 28th. For invoices that come in on the last 2-3 days, these will be picked up in the following month – this has a GST impact

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Important to ensure that deemed supplies are accounted for:

Transfers or goods forming part of business assets whether or not for consideration.

Exceptions:

Gift rule – value of RM500 per person per year – practical difficulties in keeping track of this.

Gifts of industrial or commercial samples to actual or potential customers - not in a form ordinarily for sale, e.g. marked as sample in a reduced size, or replica within limited function

Deemed Supply Situations

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Important to ensure that deemed supplies are accounted for:

Business assets put to private use or made available to any person whether or not for consideration

Example

Company A ‘lends’ some raw materials to Company B. Company B subsequently returns the same quantity of raw materials 2 separate supplies

Company A ‘lends’ some tools to Company B on a short term basis

Services provided to connected persons for no consideration

Deemed Supply Situations

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Important to ensure have proper tax invoices from supplier

Invoice must be issued to the taxable person (i.e. in the company name and not in employees’ names)

Restaurants, retail outlets, etc.

If there is a clear company policy in place to only allow a claim for business expenses, would Customs be willing to accept this and allow the input tax credit?

Input Tax

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Several items – primarily related to HR benefits:

the supply to or importation of a passenger motor car;

the hiring of a passenger motor car;

club subscription fee;

medical and personal accident insurance premium;

medical expenses;

family benefits; and

entertainment expenses to a person other than employees or existing customers

- Practical difficulties – segregation of entertainment costs between employees, existing customers, potential customers, suppliers, employee family members, etc.

Blocked Input Tax

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Subject to GST – input and output tax set off – cash flow considerations

Centralised/management services – subject to GST – to consider group registration so that supplies between members are disregarded for GST purposes

Limitations of group registration – criteria:

Prior registration for individual company is necessary

Each member must make taxable supplies

Elect a representative member for the group

Representative member to account for taxable supplies made by or to a member of the group

Not GST efficient to have centralised group services provided to tax exempt suppliers

Inter-company transactions

Group services company

Mixed Property Developer

IT, HR, accounting services

Management fees +6% GST No ITC

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Segregation between taxable and exempt supplies

Many exempt supplies in Malaysia:

In reality, many of these will be mixed suppliers

Need to segregate between taxable and exempt supplies - difficulty in identifying input tax credits

Partial exemption for residual input tax

Capital goods adjustment (RM100k+)

Hotels – 28 days

Mixed Suppliers

Financial Services Public Transport Services

Private Education Services Tolled highways or bridges

Childcare Services Funeral, Burial and Cremation Services

Private Healthcare Services Supplies made by Societies and Similar Organisations

Residential Land or Building, Agriculture Land and General Use Land

Accommodation – hotels, service apartments, etc. used as a residence for a duration of 28 days

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Taxable supplier which provides some exempt services could become a mixed supplier subject to De Minimis Rules:

value of the exempt supplies < average of RM5,000 per month AND

value of the exempt supplies < 5% of the total value of supplies made in that period

Where De Minimis Rules apply, then the ITC related to the exempt supplies is claimable

–RM5,000 threshold is very low and can potentially push many taxable persons to become mixed suppliers

Example:

A manufacturing company provides hostel accommodation for its employees and charges them a minimum cost per month, say RM30. If it has 200 employees, it will derive RM6,000 per month it will become a mixed supplier

Mixed Suppliers

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Taxable supplier (i.e. not a financial institution) which undertakes the following financial supplies will still be entitled to claim back ITCs:

Deposit of money

Exchange of currency

Holding of bonds, debentures, etc. representing indebtedness

Transfer of ownership of securities or derivatives relating to securities

Provision of any loan, advance, credit or other similar facility to his employee or between connected persons

Holding or redemption of units trusts, etc

Hedging of interest, currency, commodity, etc. price risk

ISSUE: Late payment interest charged to creditors (third party customers) is not covered in the incidental exempt financial supplies and hence could be viewed as an exempt supply.

IMPACT: Need to apportion input tax credits

Incidental Exempt Financial Supplies

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Sales tax refund – for goods held on hand as at 1 April 2015 which have been subject to sales tax

Transitional Rules

Claimant must be mandatorily required to register for GST and goods held on hand as at 1 April 2015 are for the purposes of making taxable supplies

The goods are subject to sales tax and sales tax has been paid as at 1 April 2015

Claimant must hold suppliers invoice showing that claimant is recipient of goods on which sales tax has been paid

For imported goods, claimant must show that he is the importer/consignee

If claimant is unable to show proof of sales tax paid for goods held on hand as at 1 April 2015, then special refund will be computed:

Claimant must perform a stock count – if amount of sales tax is:

more than RM10,000, claimant is required to furnish an audit certificate signed by an approved auditor to certify the amount of sales tax

less than RM10,000, claimant is required to furnish a certificate signed by a chartered accountant

Claimant must submit application for refund on-line within 6 months from 1 April 2015,i.e. by 30 Sept 2015

20% of the purchase price (x sales tax rate)

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Transitional Rules

Manufacturer Distributor 1 Distributor 2 Distributor 3 Retailer

Retailer – how will the retailer be able to show that the goods purchased have been subject to sales tax?

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Need for invoicing

Agreements may set out payment schedules, e.g. for rental, hire of photocopiers/printers, etc. – Invoices now required

Tax invoice required to claim input tax – although simplified tax invoices allowed, input tax claim limited to RM30 – Why?

Issuance of statement of account at the end of each month – will this suffice? Internally, invoices may be issued, but Customer only wants a monthly statement

Debit and Credit notes – common practice

Required to make adjustments to invoice

To adjust output/input tax claims

Increased documentation, e.g. for volume sales discounts

Contra practices – not acceptable for GST

Quotations/Proposals

Prices to be GST inclusive, unless approval obtained from DG

Documentation & Record Keeping

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Manual records

Based on the GST Bill 2014, there is a need to maintain manual records although all records are uploaded electronically – onerous obligation

Runs contrary to initiatives to become a ‘paperless’ or ‘digital’ economy

Space and cost constraints.

Documentation & Record Keeping

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Strategy for Transition to GST

GOODS & SERVICES TAX

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Mapping -Upfront

preparation

Identify areas to be impacted

by GST

GST Law/Guides

Review the entire procurement and supply chain - clear understanding of types of supplies made and bought

Assess place of supply and time of supply

Tax implications under the current tax regime - taxes to be subsumed in GST

Understand impact on pricing

Identify claimable inputs and cash-flow impact

Employee benefits

Review systems

Developing appropriate processes – flow charts, operational steps, key GST trigger points and other processes required for seamless transition

Understand GST technical issues/grey areas

Consider restructuring options

Systems requirements GST compatibility requirements

Troubleshooting

Identifying any particular areas that impact your business

Group registration?

Reverse charge mechanism?

Specific schemes? E.g. approved toll manufacturer, approved trader, warehousing?, etc

Industry guides

1 2 3

Strategy for Transition to GST

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Industry Issues/Issues with Customs

Highlighting industry issues through industry associations and other appropriate forums

Dealing with Customs

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Staff knowledge

Ensure general GST knowledge

Develop training modules for compliance with the procedures prescribed under the GST legislation

Conduct trainings for staff for the implementation of GST

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Kick-off at appointed date & Compliance

Ensure processes and systems are all in place

Timely registration

Trial run – tracking of inputs, generation of invoices, appropriate reports

ComplianceTimely invoicingInvoice details – both your invoice and your suppliers’ invoices Timely filingAppropriate record-keeping

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Strategy for Transition to GST

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Challenges During ImplementationLead time to meet GST requirements – 10+ months to go

Upgrade current accounting systems to accommodate the GST regime

Mapping of transactions taking place within the company

Review contracts spanning GST and understand impact – both for supplies in and out

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Insufficient allocation of internal resources for GST implementation

Restructuring of business functions within the group of companies, if required

Personnel have insufficient GST knowledge

GST required documentation

Clarity and certainty as to interpretation and implementation of the law

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Thank YouTAXAND MALAYSIA SDN BHDSuite 13A.05 Level 13AWisma Goldhill, 67 Jalan Raja Chulan50200 Kuala LumpurT: +603 - 2032 2799F: +603 - 2032 3799 www.taxand.com.my

Renuka BhupalanE: rb@taxand.com.my

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