INSIGHT: Malaysian Sales Tax and Service Tax Make a Comeback

In line with the new Malaysian government’s pledge to abolish the goods and service tax regime within 100 days of coming into power, the Minister of Finance announced that a new sales tax and service tax framework will be introduced with effect from September 1, 2018 to replace the existing goods and services tax regime.

The changes were affected pursuant to the following Acts of Parliaments, together with the relevant subsidiary legislation:

• Goods and Services Tax (Repeal) Act 2018;
• Sales Tax Act 2018; and
• Service Tax Act 2018.

Sales Tax

Under the new sales tax and service tax (“SST”) framework announced on July 16, 2018, sales tax is chargeable on the manufacture of taxable goods in Malaysia and the importation of taxable goods into Malaysia, at the rate of 5 percent or 10 percent or a specified rate depending on the category of goods.

Unlike the existing goods and services tax (“GST”), which was imposed on multiple levels in a supply chain, sales tax is a single-tiered tax that is typically imposed only once in a supply chain.

To address the potential cascading effect in the imposition of sales tax, registered manufacturers are eligible to import and acquire raw materials, components and packaging materials on a tax-free basis provided that these materials are used for the manufacture of taxable goods in Malaysia.

There are also specific exemptions applicable with respect to sub-contractor manufacturing arrangements, so that sales tax is not imposed more than once in the manufacturing supply chain.

The sales tax regime has a sales tax drawback mechanism, which allows a person to apply to the Royal Malaysian Customs (“Customs”) for a drawback of sales tax paid in respect of taxable goods which are subsequently exported.

Service Tax

Service tax is imposed at 6 percent on the provision of taxable services by a registered person in the course or furtherance of a business in Malaysia. The scope of taxable services include the provision of accommodation services, food and beverage preparation services, consultancy and management services, courier services, information technology (“IT”) services and advertising services, among others.

It is worth noting that the new service tax regime expressly includes “IT services” as a taxable service, in contrast to the list of taxable services under the previous service tax regime in force until March 31, 2015 which did not include IT services.

Under the new regime, the provision of all types of IT services is subject to service tax, except for the sale of goods relating to the IT services. Given the broad scope of IT services, it is possible that electronically-supplied services such as software, applications and cloud services would also be regarded as IT services which are subject to service tax.

Unlike the previous GST regime which specifically clarified that the place of supply of a service would be based on the location of the service provider, the current service tax legislation does not prescribe the test to be applied to determine whether a service is provided “in Malaysia” or “outside Malaysia.”

Guidelines issued by Customs make some reference to the fact that “imported services” are not subject to service tax, which could potentially be interpreted to indicate that Customs will determine the place of supply of a service based on the location of the service provider.

The absence of an express clarification or guidance on the matter may give rise to be some ambiguity and uncertainty surrounding the service tax treatment for services provided by foreign service providers to Malaysian customers.

In the context of intercompany transactions, the service tax regime provides a special relief for certain services (including consultancy services, management services and IT services) which are provided between companies within a same group of companies. Where the conditions for the relief are met, the service provider will not be required to charge service tax on the provision of the services to another company within the same group.

Planning Points

Some of the key considerations for businesses in transitioning from the GST to the SST regime include the following:

Determining the SST Registration Requirements

One of the crucial first steps for businesses in implementing the SST regime is to ascertain whether SST is applicable to their business operations. Given that the scope of SST is narrower than the previous GST regime, not all businesses which were previously registered for GST would be required to be registered for SST. For example, retailers and wholesalers which were previously liable to register for GST will generally not be required to register for SST.

Supplies Spanning September 1, 2018

Businesses will also need to pay special attention to the transitional rules applicable, particularly with respect to supplies spanning the effective date of September 1, 2018. Ongoing contracts or long-term contracts with vendors and customers which span the effective date should be reviewed to determine the appropriate SST treatment. Existing indirect tax clauses in ongoing contracts may also impact the ability to charge SST and pass on the SST burden to customers.

As there is no mechanism for registered businesses to claim input tax credits in respect of SST incurred, any SST incurred will become a business cost. Financial budgets and contracts may need to be re-considered or re-negotiated to take into account the additional cost.

Anti-profiteering Concerns

Businesses will need to careful in implementing any price adjustments arising as a result of increased business costs following the implementation of SST. It is expected that anti-profiteering enforcement will increase with the implementation of SST in view that SST was introduced to address the public’s perception that GST increased the costs of living. As such, any price adjustments made during this period should be managed carefully to ensure compliance with anti-profiteering laws.

GST Obligations

Following the repeal of the GST regime, GST-registered persons are required to file a final GST return within 120 days (i.e., by December 29, 2018). All GST liabilities will still remain and any pending audits or disputes will still continue.

Customs has indicated that GST closing audits will be conducted from September 1, 2018 onwards, and businesses are advised to carry out a GST review or health check to determine any potential non-compliance or audit issues in advance of the audits.

Further coverage of value added tax in Malaysia is provided in the Value-Added Tax Navigator.

Yvonne Beh is a Partner and Tan Yi Lyn is a Senior Associate at Wong & Partners, Malaysia