Cover Story: Six questions arising from the PAC report

This article first appeared in The Edge Malaysia Weekly, on July 22, 2019 - July 28, 2019.
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AFTER 10 proceedings over nine months, the Public Accounts Committee (PAC) has finally come to a close in its inquiry into RM19.4 billion in Goods and Services Tax (GST) refunds that Finance Minister Lim Guan Eng alleged had been stolen. Lim also claimed that the GST Trust Fund, or GST refund account, had only RM140 million, which was insufficient to repay the RM19.4 billion owed to businesses.

The publication of the PAC’s 484-page report last week — which included hearing transcripts, presentation slides and other documents submitted to it — came nearly a year after Lim’s statement made during a parliament session last August.

Lim was then the newly minted finance minister following the change of government after the 14th general election.

Much has transpired since the “stolen” remark was made, including former Treasury secretary-general Tan Sri Mohd Irwan Serigar Abdullah’s police report and a change in the PAC committee’s chairman.

But the most significant of all was a commitment by national oil company Petroliam Nasional Bhd to pay a RM30 billion special dividend to the government to settle not only the RM19.4 billion GST refunds but also the outstanding income tax refunds.

Through the PAC proceedings, it was revealed that all GST revenue collected was first credited into the Consolidated Revenue Account before it was transferred at a rate of 35%, or more when necessary, to the GST Trust Fund.

This resulted in part of the GST revenue collected that was not transferred to the GST Trust Fund being used to fund part of the operating expenses of the country. That said, the PAC concluded that the GST revenue collected was not stolen, as alleged by Lim.

Nevertheless, there is still a big question mark over whether the amount of GST to be refunded is RM19.4 billion, as claimed by Lim, or the lesser amount of RM14.62 billion, as put forth by the auditor-general.

How the RM19.4 billion saga is viewed would depend on which side of the divide one is on. Some parties would firmly maintain their stand, saying that no money was stolen and it is a matter of cash flow management while others would insist that the previous government had breached the law when it transferred GST funds to the Consolidated Revenue Account.

But for the business community, ultimately, the question is when they will receive the GST refunds owed to them.

In six questions, The Edge attempts to break the matter down to help readers understand better what transpired during the PAC proceedings.


Should the money have been credited to the Consolidated Revenue Account first?

Short answer: No.

According to Section 54(2) of the GST Act, all collections from GST should be credited into the GST Trust Fund. Meanwhile, Section 54(5) gives the finance minister the power to transfer all or part of the GST revenue collection to the Consolidated Revenue Account.

The attorney-general opines that the previous government’s actions of directly crediting all of the GST revenue collected into the Consolidated Revenue Account first is against the fundamental principles of trust law and trust accounting requirements.

It also contradicts the Financial Procedure Act 1957 and Section 54 of the GST Act 2014, says the attorney-general in his letter to the PAC.

The right procedure, concludes the PAC, should have been for the GST revenue to be first credited into the GST Trust Fund and any surplus should then be transferred to the Consolidated Revenue Fund. This is to ensure that refunds can be made within 14 working days, if filed electronically according to Regulation 67(1) of the GST Regulation 2014.

In the proceedings, former prime minister and finance minister Datuk Seri Najib Razak said the step taken to credit the GST revenue directly into the Consolidated Revenue Account was done upon the advice of the accountant-general. He emphasised repeatedly that it was a cash flow management issue and a matter of priority.

Likewise, Irwan also shared the same view, saying that the operating expenditure of the country had to be met first.

“If the revenue is not enough to cover the expenditure, then we will have to postpone certain payments because our key thing is to pay the salary, the running of the machinery of the government. So, management of cash flow is important. If we pay all the claims, then we are going to have an operating deficit,” he said.


So, why is there an issue with cash flow?

Short answer: Overspending. Revenue not rising fast enough to cover expenses.

The PAC says in its report that the previous government had overestimated the net amount of GST revenue collected by 65%. (See main story for more.)


Given the use of the GST revenue collection for cash flow management, was there a deliberate delay in the giving of refunds?

Short answer: Yes.

The PAC did not explicitly answer this. However, in its findings, it said the delays in the transfer of monies from the Consolidated Revenue Account to the GST Trust Fund was to maintain the cash flow position of the country, so as to avoid falling into an operating deficit.

Perhaps what would have been most telling was the testimony by former Customs Director General Datuk Seri T Subromaniam. He said Customs did not accelerate the refund process because of the lack of money available for refunds in the trust fund.

“I admit [that] there was a delay. We did not want to process [the claims] quickly because if we processed it quickly and approved the claims, the taxpayer can see in the system. Our [system] is very transparent. They can see it [and say]: ‘Ha, Customs has approved. Where is the money?’ In fact, the money was not there,” he said.

Some of the refund claims have been overdue for two years.

“Businesses have been choking. Some of them did not get their refunds for two years and this is very, very serious. That is why we have RM19.4 billion outstanding. This [amount] was supposed to [be] put into a fund, but it was not there,” he said.


Does the act of dipping into the GST revenue collection that was not transferred to the trust fund amount to stealing?

Short answer: It depends who you ask.

The PAC’s conclusion is that the money was not “stolen” from the national coffers. Instead, the GST revenue not transferred to the trust fund was used for the purpose of operating and development expenditure. This was partly a result of the overestimation of the net GST contribution to the country.

However, what was made clear is that the GST refunds not paid out had been used for other purposes, namely to cover the country’s operating expenses.

During a hearing on Sept 13, 2018, PAC member Wong Hon Wai questioned Irwan on the matter.

“So, can I say that the government had consistently used the money that was supposed to be returned to the rakyat to fulfil operating expenditure?”

Irwan responded: “The estimated figure is RM44 billion [net GST]. Now, we already estimated it for operating expenditure. Now, [if] you want to take out from that RM44 billion to pay refunds, then we are going to have a shortfall …”

That said, there is another way to look at it.

For example, a company deducts contributions from its employees’ pay but fails to transfer the money immediately to the Employees Provident Fund. Instead, the company transfers the money to EPF only months later because it used the money for its operations to relieve cash flow issues. Does this mean the company stole from its employees?

Note that in some countries, late payment of GST refunds would incur interest on the part of the government.


So, is the amount of GST refunds due RM19.4 billion or less?

Short answer: It depends on who is answering the question.

According to Customs, the amount of refunds due is RM19.4 billion, as furnished to the Finance Minister. The RM19.4 billion comprises:

i.     GST claims approved but not paid —RM1.5 billion (7%)

ii.     Approval for refund under review —RM9.6 billion (50%)

iii.     Non-taxable supply — RM3.9 billion (20%)

iv.     Relief issues — RM0.9 billion (5%)

v.     Investigation — RM3.5 billion (18%)


The Customs’ stance is that the bulk of the claims would pass its risk management system (RMS).

“No problem, RM18 billion lah. The remainder, 7%, RM1.4 billion will be red-flagged. When red-flagged, it doesn’t mean it is not a good claim, ya. In [our] system, the officer has to check again. When verification officers checked, we found 6.7% of the 7% is still good, [so] go back for processing by the refund officer. So the problematic [ones are] only 0.3%. That also I would not say [is a] problem lah, [just] in terms of documentation [it] is not complete and the officer called them up, he [they] didn’t answer. So there are issues like this that will take time before we resolve them. So based on this, 99.7% of RM19.4 billion is good to pay. That is why I issued a statement and I informed the Minister of Finance … these are good claims,” said the PAC report.

However, the auditor-general, in his report to the PAC, had a different view. The claim that RM19.4 billion of GST refunds are due is inaccurate because the RM19.47 billion in contention had passed only the RMS process but had not moved to the next review phase.

The audit verification found that only RM1.41 billion were claims that had been approved by the Customs Department but not paid.

The National Audit Department is of the view that there was insufficient funds in the GST Trust Fund because the accumulated amount was not reported during the GST Refund Committee meeting. It added that although Customs applied for refunds periodically, it did not state the accumulated amount of GST due because its verification process had not been completed. This resulted in the Ministry of Finance’s failure to prepare sufficient funds for the refunds.


So, what happens now?

While the PAC has concluded its report, the question remains as to whether anyone will be held accountable for the whole debacle.

The PAC is silent on this front. Meanwhile, the attorney-general said in his letter to the PAC that the act to directly credit the GST revenue collection into the Consolidated Revenue Account is against the law. “The question, whether criminal liability attaches to the breach of trust is not addressed here, but must be further considered. Apparently, they are the subject matter of criminal investigations by the police,” said the attorney-general.




Findings and issues raised

1.     Failure to credit all GST monies to the GST Trust Fund

l     The Goods and Services Tax (GST) Act 2014 and the trust deed on GST refunds (dated March 13, 2015) require all GST revenue collected to be credited to the GST trust fund first — Section 54(2) — and the finance minister has the power under Section 54(5) to transfer all or part of the GST revenue to the consolidated revenue account.

l    This was not done. Instead, all GST collection was credited directly to the consolidated revenue account first before it was transferred in stages to the GST Trust Fund on a need basis, according to the decisions made by the GST refund committee.


2.     Use of the finance minister’s power under Section 54(5) of the Act

l     The Act explicitly states that the power to transfer funds from the trust to the consolidated revenue account lies only with the finance minister.

l     The Public Accounts Committee (PAC) was not furnished with any document or written proof of that authorisation. But both Tan Sri Mohd Irwan Serigar Abdullah (the then Treasury secretary-general) and Datuk Seri Najib Razak (the then finance minister) agreed that the finance minister had exercised his power under Section 54(5).


3.     The allocation of 35% of GST revenue collected to the GST Trust Fund

l    The GST refund committee had made the decision on May 27, 2015, to transfer 35% of the total GST revenue collected to the GST Trust Fund. The committee also agreed that if the 35% fell short, additional transfers could be requested on a need basis.

l    The 35% rate is according to a tax review paper prepared by the Ministry of Finance (MoF).

l    Nevertheless, the transfer of GST revenue to the GST Trust Fund needed to take into consideration the country’s cash flow position and deficit.


4.     GST refund period

l    Under Regulation 67(1) of the GST Regulations 2014, GST refunds that have been filed electronically will be returned within 14 working days or within a practical time period.

l    Studies show that in 65 countries implementing GST, the average time period required for a refund to be completed is 56 days from its filing.

l    However, the 14-working-day regulation was not complied with and the Act does not provide for the power to extend the period of refund for any reason, including an audit.


5.     The government’s ability to repay RM19.4 billion in refunds claimed  by taxpayers

l     The PAC was informed by the Royal Malaysian Customs Department (Customs) that the balance in the GST Trust Fund stood at RM152 million as at May 31 last year, which was insufficient for the accumulated refund claims of RM19.4 billion.


6.     The country’s cash flow management

l    The PAC was informed by the previous MoF that it had taken into account the cash flow situation of the country when deciding on the amount of GST refunds to be transferred from the consolidated revenue account to the GST Trust Fund.


7. The application for the transfer of GST refunds amounting to RM19.4 billion from the consolidated revenue account to the GST Trust Fund

l     Information furnished by Customs to the PAC detailed the amount of GST refunds application and amount transferred between April 1, 2015, and May 31, 2018. The RM19.4 billion represented the accumulated GST refunds claimed over three years.

l     The application for GST refunds and transfer was done during the GST refund committee meetings, which were held concurrently with the cash flow committee meetings. Both were chaired by the Treasury secretary-general.


8.    Status of GST claims not paid

l     Former Customs director-general Datuk Seri T Subromaniam informed the PAC of the status of the RM19.4 billion GST claims not paid and in contention as at May 31 last year, which he broke down into five categories:

    i. GST claims approved but not paid

    — RM1.5 billion (7%)

    ii. Approval for refund under review

     — RM9.6 billion (50%)

    iii. Non-taxable supply

     — RM3.9 billion (20%)

    iv. Relief issues — RM0.9 bill (5%)

    v. Investigation — RM3.5 billion (18%)



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