Malaysia’s Goods and Services Tax: Lessons for CFOs One Year On

At around this time in Malaysia last year, CFOs were wondering whether the measures and processes they have put in place were enough for the implementation of the Goods and Services Tax (GST) on April 1, 2015. Will they be able to comply with all the requirements, and more importantly, will there be a hit to their bottom line?

One year on, the business wheels have not fallen off. Indeed, from the macro-economic perspective, GST in Malaysia is being touted as a success. According to the Royal Malaysian Customs Department (RMCD), GST collection has exceeded the RM27 billion (US$6.9 billion) target set by the government, although the final figure has not yet been released.

“The current economic conditions continue to put pressure on government revenues. We are seeing a greater emphasis on taking actions to increase GST receipts while reducing refunds”

But RMCD Deputy Director-General Subromaniam Tholasy says that “thousands of companies out there” are still outside the net. He adds that the department is launching new initiatives on compliance and will be sending audit teams to verify the GST reports. In March, the RMCD embarked on a four-day ‘Ops Kesan’ operation in the state of Sabah that resulted in penalties on 14 companies.

That’s a harbinger of things to come for enterprises in Malaysia and those planning to set up there. It would be helpful for them to learn the lessons of the past 12 months in order to enhance the systems they have in place, as well as the way they deal with the Customs Department. The aim is not only compliance and avoiding penalties, but also qualifying for and receiving tax refunds in a timely fashion.   

Basic steps

One lesson is the uncertainty in the interpretation and application of the GST regulations. An illustrative example: the definition of the term “exclusively for business purpose.” The GST Act allows companies to claim input tax credit on such an expense, but the RMCD has wide discretion to decide whether they will be granted the tax credit or not.

The Customs Department is expected to opt for a strict – some say overly strict – interpretation rather than a more relaxed position favorable to business. “The current economic conditions continue to put pressure on government revenues,” writes Tan Eng Yew, GST and Customs Country Leader at accounting firm Deloitte Malaysia, in a report. “We are seeing a greater emphasis on taking actions to increase GST receipts while reducing refunds.”

One of those initiatives is the ‘Ops Kesan’ audit. “As there is no amnesty on penalties, taxpayers need to take greater focus towards achieving compliance,” says Tan. Warns Allan Yoon Associates, another accounting firm: “Failure to account for output tax or over claiming of input taxes will lead to a penalty  . . . in addition to the [unpaid] GST taxes.”

All this highlights the need for the CFO and the finance function to make sure that the right processes are in place and working smoothly, compliance is tracked continuously, including accounting for output GST and remittance of GST taxes to the government, and systems optimized such that practices are easily changed in response to the latest GST interpretations and other developments, including a tax audit.

By now, companies that have registered with the RMCD should already have GST compliance systems and processes in place. Typically, they would have done the following:

  • identified the products and services requiring GST
  • created the appropriate tax invoice forms as required by RMCD
  • set up a bank account for GST purposes
  • incorporated GST in the accounting system
  • trained their people in complying with GST

Specialist software

Are document scanning, specialist accounting software that incorporates GST, automation, and straight-through-processing essential? In the run-up to GST implementation, numerous providers had come calling on CFOs with GST solutions that included these features, along with consultants promising to help fix systems and train staff.

Digitizing paper documents and straight-through processing are helpful, said the CFO of a plantation company at a CFO Innovation roundtable discussion last year. This is particularly so for his corporation, whose revenues far exceed the minimum RM500,000 in annual turnover that makes a company subject to GST. The conglomerate also has operations in many places inside and outside Malaysia.

“The target GST collection for 2016 has been set at RM39 billion, and Customs has announced it would be sending its audit team into the field soon as one of the initiatives to meet the target”

But while the Customs Department allows tax invoices, receipts, credit or debit notes to be issued electronically, documents that are issued manually and subsequently scanned and converted into electronic form must still be retained. Thus, if the company’s sales are not that large and the tax documents issued and received are in paper form, digitization and automation may not make sense.

Similarly, smaller businesses may not need to invest in new (and expensive) accounting software for GST, particularly if they do not issue or receive electronic tax invoices and other documents. Manually extracting information from paper documents and inputting the data into extra columns in accounting spreadsheets may be sufficient.

That’s not the case for large enterprises like the plantation conglomerate, however. In some cases, the approach has been to append the GST software module to the enterprise resource planning (ERP) system and the treasury management system (TMS) for automatic GST calculations and generation of GST reports. In others, a standalone Software-as-a-Service solution enables GST calculations and reporting.

The software should be able to automatically:

  • map the transactions to the tax codes provided by the Customs Department
  • calculate and capture the output tax and input tax owed and paid
  • print out completed forms for submission of GST returns
  • generate a GST Audit File (although the GAF is not yet required by the Customs Department)

Be ready for audits

Regardless of the GST systems put in place, the real test is the company’s compliance with the GST regulations in terms of the accuracy of the payments, reports and documentation. This is becoming very important one year after implementation as the Customs Department intensifies tax audits.

“The target GST collection for 2016 has been set at RM39 billion, and Customs has announced it would be sending its audit team into the field soon as one of the initiatives to meet the target,” notes law firm Wong & Partners in a recent report. “Further, during the 2016 Budget recalibration speech made by the Prime Minister in January 2106, one of the new measures to be implemented includes an increase in tax compliance and auditing efforts.”

It is true that Customs has indicated that the audits that will be conducted in the two years after GST implementation will be “advisory” in nature. They are intended to help business understand compliance requirements and penalties are not expected to be imposed. “That said,” cautions Wong & Partners, “this verbal concession is not codified in law.” The Customs Department can still decide to impose penalties.

One sensitive area is the differing interpretations by the Customs Department and other government bodies, particularly the Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC). For example, the GST Act’s transitional rules allow companies to claim refunds on sales taxes paid on goods in stock as of April 1, 2015. Many companies sought to take advantage of this concession, notes Deloitte, but “obtaining RMCD approval on these applications is proving to be a difficult exercise.”

That’s because the Customs Department seems to be taking the view that if a business did not immediately make adjustments to its prices to factor in the refund after the introduction of the GST, then it is not eligible for the refund. However, the MDTCC, which administers the Anti-Profiteering Regulations 2014 issued to prevent profiteering, has said that a business needs to factor the refund into their pricing once it has become aware of the amount to be claimed or once that claim has been granted.

“In our view,” says Deloitte, “the use of the Regulations in order to justify the denial of refund is legally incorrect. The GST Act does not require business to adjust their price as per part of the formula set out in the Regulations in order to be eligible to claim SSTR [Special Sales Tax Refund]. In addition, the business would only be in breach of the Regulations if its Net Profit Margin, in ringgit terms, has been increased by doing so.”

If your company is in a refund position for two or more consecutive taxable periods, there is a high likelihood you will receive a verification/review notice from the Customs Department

Unfortunately, Customs Department decisions in respect of the STTR cannot be appealed before the GST Appeal Tribunal. There are some steps that businesses can take, says Deloitte. “One possible option is that businesses may apply to the RMCD for the decision to be reviewed, even though it is unlikely that this will be successful.” There are other alternatives, but “these need to be commenced within a short period of time after the RMCD rejects the refund claim.”

The worry is that the Customs Department appears to be unwilling to provide clear reasons for its decisions because applicants in this particular case have no further legal recourse. “This leaves the impression that the decisions being taken may be arbitrary and without due regard for the facts in the situation, merely because there is no prospect of an appeal,” warns Deloitte.

Input tax credit refunds

It is important for companies to make sure to calculate and collect the correct output tax on the goods and services they sell to other businesses and consumers (which is paid by those parties and remitted by the business to the Customs Department). But it is equally important that they check the accuracy of the input tax their own suppliers charge them – and also compute the input tax credit that they can ask the Customs Department to reimburse to them.

If the input tax paid is for “goods and services acquired in the course or furtherance of business,” according to the GST Guide issued by the Customs Department, the business is eligible for input tax credit refunds. The regulations say the Customs Department must remit the refund within 14 working days for online submissions and within 28 working days for filings made manually.

In the first few months after implementation, however, it took up to three months for the Customs Department to make the refunds, even for online applications. But by end 2015, it now claims, 70% of refund claims have been processed and refunded within the 14-day period. CFOs can only hope that the improvement continues, but the significant number of applicants not getting refunds on time is still a problem.

It is not uncommon for Customs to request additional information such as tax invoices and customs declaration forms, says Wong & Partners. “Such requests and verification procedures often lengthen the processing time of the GST refund.” And if your company is in a refund position for two or more consecutive taxable periods, there is “a higher likelihood of receiving a verification/review notice,” it adds.

The lesson: Be ready at all times with all supporting documents to back up your claim. And be aware that some claims have a high burden of proof. For example, the purchase of motor cars purely for business use is eligible for input tax refund. But the RMCD requires that the vehicles be parked on the business premises at night, not brought home by the executives or employees to whom they are assigned.  

An increase in the GST rate has been ruled out, but it remains to be seen whether this will change if Malaysia’s economic conditions do not improve. At 6%, Malaysia’s rate is lower than the 10% GST in Cambodia, Indonesia, Laos and Vietnam

What lies ahead

What can CFOs expect in the coming years? “We are likely to see more comprehensive and specific issue audits,” predicts Deloitte. “These can cover areas such as long adjustments, claiming residual input tax, zero-rating of transactions and the claiming of relief.”

Going forward, companies may see their own systems and processes examined “to assess whether GST is being paid or claimed in the right month and whether the appropriate documentation is in place,” says Deloitte. The generation of a GST Audit File may also be mandated eventually, allowing Customs to conduct e-audits and real-time analysis of transaction data.

What is not on the immediate horizon is an increase in the GST rate, despite Malaysia’s uncertain economic climate as crude oil prices remain low and a political scandal involving Prime Minister Najib Razak percolates. Najib said in January that the current GST rate will remain where it is.

But, says Wong & Partners, “it remains to be seen if this position will change if economic conditions do not improve.” The law firm notes that Malaysia’s GST rate is one of the lowest in Southeast Asia at 6% – GST in Cambodia, Indonesia, Laos and Vietnam is at 10%, and 7% in Singapore and Thailand.

For now, as GST in Malaysia moves into its second year, companies should prepare for more audits and more stringent documentation requirements. It is also not a bad idea for enterprises to collectively engage with Customs as an industry. As Wong & Partners points out, the important issues going forward would be issues of interpretation, which in a perfect world should be informed by the realities of doing commerce in Malaysia and beyond.

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