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Tax Planning on SST
26.2.2019
S. Saravana Kumar
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Tax planning for sales and service tax• Risk areas for sales and service tax:
(a) Classification of Harmonised System Codes (HS Code) - may result in different tax rates beingapplied
(b) Categorisation of service which are taxable and non-taxable
(c) Failure to keep abreast with new changes in the law
(d) Failure to keep proper records and documents
(e) For sales tax, non-compliance on the conditions stated in the Sales Tax Exemption Order
(f) For service tax, non-compliance on the conditions imposed for “intra-group exemption” mayresult in exemption being revoked.
• Exemption Order should be interpreted strictly.
High Court in Syarikat Pendidikan Staffield v Ketua Pengarah Hasil Dalam Negeri [2011] 5 CLJ916 observed that:
“under our law, taxation is the rule and tax exemption is the exception……Statutes granting taxexemptions must be strictly construed in favour of taxation and courts have not power to createexemption from taxation by judicial construction.”
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Scope of Sales Tax• Section 8- Sales tax is a tax charged and levied on all taxable goods:
(a) Manufactured in Malaysia by a registered manufacturer and sold, used ordisposed by him; or
(b) Imported into Malaysia by any person.
• No sales tax is charged on:
(a) Goods listed under the Sales Tax (Goods Exempted from Sales Tax) Order 2018;
(b) Certain manufacturing activities that are exempted by the Minister of Financethrough the Sales Tax (Exemption from Registration) Order 2018.
• Rate: 5%, 10% and specific rates for petroleum, oil and gas
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ExemptionsSales Tax (Goods Exempted from Tax) Order 2018
• Goods such as live animals, unprocessed food, vegetables, medicines, machinery,chemical etc.
Sales Tax (Person Exempted from Payment of Tax) Order 2018
• Schedule A: Class of persons
Rulers, Federal or State Government Department, Local Authority, InlandClearance Depot and Duty Free Shops etc.
• Schedule B: Manufacturer of specific non-taxable goods
Exemption of sales tax on acquisition of raw materials, components, packagingetc. for manufacturers of controlled articles, certain pharmaceutical products,certain milk products and manufacturers who export exempted goods.
• Schedule C: Registered manufacturer
Exemption of sales tax on acquisition of raw materials, components, packagingetc. to be used in the manufacturing of taxable goods (replacing CJ5, CJ5A, CJ5B)
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Recent amendments to the Sales Tax
Act
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Changes announced in Budget 2019During the tabling of the Malaysian Budget 2019, the Finance Minister proposed the following
reforms for sales and service tax (SST) from 1.1.2019 onwards:
1. Introduce a credit system for sales tax deduction to prevent compounded taxation and in
turn lower the cost of doing business for small manufacturers who purchase their products
from importers instead of registered manufacturers.
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Finance Act 2018• The Finance Bill 2018 received royal assent on 26.12.2018 and was gazetted on 27.12.2018.
• The amendments to the current Sales Tax Act 2018 are as follows:
Sales Tax Act 2018
Valuation method for contract manufacturer
– Pursuant to Section 9(3) of the Sales Tax Act 2018, the sales value in the case of a registered contract manufacturerfor taxable goods, subject to the approval of the Director General of Customs (DG), shall be the amount charged forwork performed. Section 9(3) is amended for such valuation method to be extended to contract manufacturers whoare not registered.
A credit system for sales tax
– Section 41A is inserted to allow the Minister to make regulations prescribing the form and manner, the condition andthe amount of sales tax to be deducted, in respect of taxable goods purchased by any registered manufacturer.
– Such deduction is only allowed for taxable goods consisting of raw materials, components or packaging material usedsolely in the manufacturing of taxable goods. Should any registered manufacturer fail to comply with any of theconditions, sales tax that has been deducted shall be deemed to become due and payable by the registeredmanufacturer on the date on which any of the conditions has not been complied with.
– It is an offence for any person to improperly obtain a deduction of sales tax.
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• Section 7, service tax is charged and levied on:
a) Any taxable service provided in Malaysia by a registered person in carrying onhis business;
b) Any imported taxable service.
• Registration if taxable service exceeds RM500,000 (historical and future method).
• Rate at 6% (provision of service or charge card at RM25)
Scope of Service Tax
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Changes announced in Budget 2019During the tabling of the Malaysian Budget 2019, the Finance Minister proposed the following
reforms for sales and service tax (SST) from 1.1.2019 onwards:
1. Grant exemptions for specific business-to-business service tax for registered service tax
entities to prevent an increase in the cost of doing business as a result of compounded
taxation and protect the competitiveness of our local service industry.
2. Subject imported services to service tax to ensure local service providers are not unfairly
disadvantaged against foreign competitors.
The Finance Minister also proposed during Budget 2019 that online services such as the
downloading of software, music, and videos or digital advertising be subject to service tax from
1.1.2020 onwards.
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Finance Act 2018• The amendments to the current Sales Tax Act 2018 are as follows:
Service Tax Act 2018
Service tax on imported taxable services– Section 7 of the Service Tax Act 2018 is amended so that service tax is also imposed on any imported taxable service.
– “Imported taxable service” is defined as any taxable service acquired by any person in Malaysia from any personwho is outside Malaysia and the value of imported service is to be prescribed by the Minister later.
Timing– As opposed to service tax on taxable services which is due on a payment basis, it has been proposed that service tax
on imported taxable services is due at the time when:
a) Payment is made; or
b) Invoice is received for the service
whichever is the earlier.
Accounting method– A new Section 26A has been inserted into the Service Tax Act 2018 for businesses that acquire imported taxable services to
account and pay for service tax due in a prescribed declaration. The prescribed declaration shall be furnished and the servicetax on imported taxable services shall be paid to Customs by the last day of the following month in which service tax is due.
– Form SST-02A for non registered business; &
– Form SST-02 for registered business.
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Service Tax Regulations 2018Valuation rules on imported taxable services• Not connected parties:
Insurance policy premium or takaful contribution: the actual premium or contribution paid;
Others imported taxable services: actual value of the imported taxable service
• Connected parties:
Value of imported services which would have acquired in the ordinary course of business
• Connected persons as defined under Regulation 4.
Para 3A of the Service Tax Regulations 2018:
• Intra-group relief does not apply to any imported taxable services acquired by a company in Malaysia fromany company within the same group of companies outside Malaysia.
• However, we understand ministerial exemption has been given to imported taxable service in Group G(Professionals).
• Such exemption will be applicable to any company in Malaysia who acquires taxable services of Group G item(a)-(i) from any company within the same group of companies outside Malaysia.
Source: Customs’ Guide on Imported Services (link) , Notice on Service Tax Amendments 2018 (link).
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Source: Customs’ Guide on Imported Services (link)
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Source: Notice on Service Tax Amendments 2018 (link).
Service Tax Regulations 2018New taxable services:
Group I• Amusement park services;• Brokerage and underwriting services;• Cleaning services
Group G• Training or coaching services- added to consultancy services• Provision of management services being defined:
– Project management services, full or part of the project;– Tourism management services;– Logistic management services;– Maintenance management services;– Warehousing management services;– Collection and debt management services;– Car park management services;– Sport facilities management services– Secretarial management services;– Any management services other than specified in (i) to (ix) made on behalf of another person,
Excluding the provision of such services in connection with-– Goods or land situated outside Malaysia; or – Matters outside Malaysia other then matter specified in (xi).
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Minister’s exemptionService Tax (Person Exempted from Payment of Tax) Order 2018:
Exemption is given to recipient of service where:(a) The recipient is registered for service tax;(b) Acquires taxable services under Group items (a)-(i);&(c) From another service tax registered person in Group G; Or(d) Group I, Item (8) registered person acquires advertising service from another
Group I, Item (8) registered person.
Rule• The recipient must acquire and provide the same prescribed service to qualify for
exemption .
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Voluntary disclosure for SST
On 5.12.2018, the Customs released Borang VD, a form for taxpayers to make any voluntarydisclosure for sales tax and service tax under the following scenarios:
a) Taxpayer collected sales tax before registration with the Customs;
b) Taxpayer wrongfully collected sales tax on non-taxable goods;
c) Taxpayer collected service tax before registration with the Customs; and
d) Taxpayer wrongfully collected service tax on non-taxable services.
However, it is clearly stated in the Borang VD that once an audit or investigation hascommenced by the Customs, voluntary disclosure will not be allowed.
Source: https://mysst.customs.gov.my/assets/document/SST%20Form/BORANG%20VOLUNTARY%20DISCLOSURE.pdf
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GST Closure Audit- What is in store?
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Strategies to manage Customs
- the do’s and don’ts when responding
GST Closure Audit- risk areas
• Proper declaration of importation- K1 Forms
• Refund position- input tax credits claims
• Group registration- any exempt supplies
• Open market value
• Time of supply
• Output tax
• Proper documentations
The Do’s
• First things first: stay calm and do not panic
• Be ready: For field audit, taxpayer will be informed through a notificationletter before the field audit commences
• Be co-operative, well mannered, fair and honest
• Give full co-operation to the audit officer, including providing all the relevantinformation pertaining to the issue at hand
• Provide reasonable facilities and assistance to enable the audit officer to carryout his duties
• Provide responses to the queries posed by the audit officer
The Do’s (cont’d)
• Taxpayer can request for tax agent to be present during an interview
• If there are tax adjustments to be made, the taxpayer will receive anotification and will be given 14 days to state his view on the findings
– If no objection is made within 14 days, the taxpayer is deemed to haveagreed to the proposed tax adjustments.
Also, do..
• Clarify areas of uncertainty with the Customs
• Strengthen internal controls
• Focus on common risk areas (e.g. documentation, accounts payable, etc)
• When in doubt, consult your tax agent or legal advisor
The Don’ts
• Do not obstruct the audit officer from performing his duties. Suchobstruction is an offence under Section 92 of the GST Act 2014
• Do not give any form of gifts to the audit officer
• Do not transact any business with the audit officer during the audit process
• Do not make any form of payments to the audit officer
• Unless provided by law e.g. under AMLA or Section 83 of GST Act 2014,proper notice or search warrant must be provided.
• Even if raids are conducted under AMLA etc, authorities must satisfy thestatutory conditions laid down in such provisions.
• Similarly, for orders issued to freeze banks accounts of companies, authoritieshave reasonable grounds to suspect the commission of AMLA offences
• Understand your legal rights.
• Appreciating legal consequences especially in making incriminatingstatements.
Transitional issues:
GST to SST
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Issuance of tax invoice after 1.9.2018
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Payment of retention sum in last GST return
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The Amendments to DG’s Decision
SST Appeal Process
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Appeal process for SST
Application for review to the
DG
(within 30 days)
Customs Appeal
Tribunal
(within 30 days)
Judicial Review
(within 3 months)
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SST and Customs Cases
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ABC Sdn Bhd v DG of CustomsIssue: Customs valuation for sales tax
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Customs’ position
For sales tax valuation,
Customs used the excise duty
valuation method under the Excise Act to value goods
Excise method includes A&P
expenses
By using the excise method, A&P expenses were added to
the value of goods
Upon adjustment of value, Customs issued a bill of
demand
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Our view
• Sales tax valuation is governed by the Sales Tax (Rules of Valuation) Regulationsand the method is “transaction value of the goods”, not the excise method. Ifthe transaction value could not be used, there are other methods under theRegulations to be used i.e. value of identical goods and similar goods.
• The Regulations require Customs to give an opportunity to the taxpayer toshow that the value is correct. Customs is also required to give its groundswhen adjusting the value, which was not performed by Customs.
• The existence of domestic remedies does not preclude the taxpayer from filinga judicial review, due to the operation of Section 141N of the Customs Act andSection 67 of the Sales Tax Act.
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High Court and Court of Appeal’s view
• It is Customs’ internal practice to apply the excise value method in uplifting the price of goods for sales tax purposes.
• Uplift of value of goods for sales tax purposes by incorporating advertising andmarketing expenses is without legal basis.
• Sales tax valuation must be based on the Sales Tax Regulations, and not the Excise Act.
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Levi Strauss and U Sdn Bhd v DG of Customs
Issue: Royalty- Customs valuation for sales tax purpose
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Customs’ stance
Royalty paid by licensees to
foreign license holders to be
added to transaction value.
Even if there is a separate sale
agreement and royalty agreement, royalty is seen as a condition of sale
If there is a reference to sale of goods in the
royalty agreement, the royalty must be incorporated
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Our view and Court’s view
• Even if the royalty agreement makes references to sale of goods, it does notmean royalty should be added
• Royalty must be directly paid in consideration for the sale of the goods
• In Levi Strauss v Customs and U v Customs, our Courts held that:
The royalties paid by the taxpayer were not a condition to sell the products inMalaysia but to enable the exploitation of the trademarks and licensing rightsgranted to the taxpayer. Additionally, the taxpayer had no contractualrequirement to appoint related parties to manufacture the products.Procurement was the taxpayer’s sole discretion based on commercial reasons.
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Decision of the High Court
• Our courts recognise that “condition of sale” has a settled legal meaning and that
the words are unambiguous. In its usual meaning, a condition is a term which,
without being the fundamental obligation imposed by the contract, is still of such
vital importance that it goes to the root of the transaction.
• Rather than creating a complex series of tests, courts preferred, on the common
law and sales of goods law, to determine whether royalties are paid as a condition
of sale. Hence, the courts have rejected the economic realities test advanced by
Customs in the previous cases.
• Transaction value can be adjusted by adding royalties paid in respect of goods
imported, if it forms the condition of the sale of the goods to Malaysia.
• Customs’ allegation that the royalties were a condition of the sale of the products
was not supported by evidence.
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Power Root (M) Sdn Bhd v Director General of Customs
Issue: Tariff classification
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FACTS
The Applicants manufacturedcertain drinks ('the goods')which the Respondent classifiedas attracting a sales tax of 10%.The Applicants were of the viewthat the goods were only liable
to a 5% sales tax.
However, in view of theRespondent's decision, theApplicants paid the sales tax atthe rate of 10% and thenappealed against theRespondent's decision to theCustoms Appeal Tribunal whichdismissed its appeal.
The Applicants then
appealed to the High
Court which found in
their favour. The Court
of Appeal unanimously
dismissed the
Respondent's appeal
against the High Court's
decision.
The Applicants wrote to the
Respondent requesting for the
extra 5% sales tax it had
collected to be refunded to
them. The Respondent
refused the request saying
there was no order of court
directing the refund to be
made.
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ISSUE
Whether the Applicants were entitled to a
refund pursuant to the High Court’s and Court of
Appeal’s orders?
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DECISION
HC: “Sales tax is charged on the manufacturer,which are the Applicants. The Respondent allegesthat the sales tax overpaid by the Applicants was'passed on' to the consumers and therefore if theywere to refund the sums to the Applicants, theApplicants would be unjustly enriched.”
“On the contrary, it is the Respondent who will be unjustlyenriched if they were permitted to retain the ultra virestax. Once the law is declared ultra vires, the Respondenthas no right to retain such taxes collected. Article 96 of theFederal Constitution of Malaysia states that no tax or rateshall be levied by or for the purposes of the Federationexcept, by or under the authority of federal law…”
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DECISION
“The Respondent's assertion that for the reason theillegally collected taxes are 'passed on' to the end userstherefore relieves them of their obligation for restitution,is simply unfounded. In the first place, the Respondent hasno right to retain illegally collected taxes and theApplicants should have recourse to restitution as of right.It would be a breach of fundamental constitutionalprinciples to permit the respondent to retain illegallycollected taxes.”
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