AN abrupt change in tax rules has left property developers in a quandary. They are confused over a change in the recovery of input tax deduction for the Goods and Services Tax (GST) incurred on the infrastructure component of residential projects.

According to half-a-dozen property players with operations across the peninsula, they can no longer claim a refund of the GST incurred on infrastructure built for residential property developments, known as input tax.

“This is apparently being implemented across the board,” says one developer who requested anonymity. “It is essentially changing the rules.”

It is understood that some developers have seen their applications for recovery of this input tax rejected as a result. The developers The Edge spoke to are also unaware of any request for consultation on the apparent change.

The input tax was previously claimable despite residential property being an exempt-rated supply, meaning the end-buyer is not charged GST. That would have meant that developers would not be able to claim input tax incurred, but property players were nevertheless allowed to claim a refund under the Goods and Services Tax (Relief) Order 2014.

According to the GST (Relief) Order, a developer is entitled to relief from charging GST for the infrastructure component since it is supplied to the relevant state authority for the purpose of providing public amenities and public utilities to the public. In other words, the infrastructure component is deemed as a taxable supply that is given relief, meaning the input tax incurred for the infrastructure is reclaimable in full.

The equivalent input tax for commercial property developments remains claimable, property players say.

When contacted, senior tax consultants say they were unaware of the change.

However, one tax consultant notes that such relief falls under the finance minister’s direct authority, meaning any changes would not require parliamentary vote.

“The collective amount of the input tax at stake here could be huge, considering the structures we are talking about — roads and other public structures,” the tax consultant adds.

The infrastructure component of residential property developments encompasses the surrender of land to state authorities for public amenities such as roads, traffic lights and other structures.

Some developers estimate the cost of this component to typically range from 5% to 15% of total project cost, depending on the type of terrain and other factors.

At press time, senior Royal Malaysian Customs Department officials had not responded to queries sent via email and text. Attempts to reach them by phone were also unsuccessful. Ministry of Finance officials also did not respond to queries via email and text on whether the GST (Relief) Order had been withdrawn.

The change of treatment for input cost resonates with amendments contained in the Finance Bill 2016, which was first read in Parliament on Oct 25. However, the Bill had not been passed into law by the House, according to the Parliament’s website.

If gazetted, the Bill would carry some amendments to several existing legislation concerning taxation, namely the Income Tax Act 1967, the Petroleum (Income) Tax Act 1967, the Real Property Gains Tax Act 1976, the Labuan Business Activity Tax Act 1990 and the Goods and Services Tax Act 2014.

Clause 63 of the Bill, specifically on how input tax is treated for the infrastructure related to residential property projects, seeks to amend the GST (Relief) Order to provide that the surrender of the infrastructure to state authorities is treated as neither a supply of goods nor a supply of services.

The net effect would be that developers would no longer be able to claim the input tax incurred on such infrastructure in full. This scenario reflects what some industry players say is apparently happening now, despite the Bill not yet been passed into law.

However, the same scenario may also unfold if the GST (Relief) Order is withdrawn before the Bill passes into law, a tax consultant told The Edge.

There are two sides to the coin on the debate of whether input tax refund should be allowed to developers for residential property projects, according to another senior tax consultant.

On one hand, providing the refund would relieve developers of some cost pressure since residential properties are GST-exempt and the infrastructure is for public use.

“The counter-argument is that if the input tax on infrastructure is already priced into the final selling price to end-buyers, a refund would essentially be equivalent to additional income for the developer,” the tax consultant says, adding that this may not be desirable unless the developer can somehow carve out this particular cost component of the pricing to the end-buyer.

If the industry is significantly hurt by the change, the industry body should argue their case with a clear breakdown of the numbers involved, the tax consultant opines.

In any case, removing the input tax refund for infrastructure related to residential property will bring additional pressure to the developers’ bottom line as it is another addition to their cost of compliance.

“Cost of compliance is going up every year,” says one developer who declined to be identified. “Ultimately, higher costs will have to be passed on to buyers, but of course we would be the ones getting the flak for it.”

According to a survey by the Real Estate and Housing Developers’ Association (Rehda), about 26% of 157 respondents reported an increase in overall costs of doing business in the first half of 2016.

Cost of compliance is a major component of developers’ costs of doing business, usually incurred when surrendering land for social and community infrastructure. Another major component is contribution cost, which typically includes land premium and infrastructure development costs.

When presenting the association’s survey findings in mid-September, Rehda president Datuk Seri FD Iskandar cited rising compliance costs as a hurdle in providing affordable housing products, claiming it has risen from 8% seven years ago to up to 25% of total costs today.

When contacted, National House Buyers Association (HBA) honorary secretary-general Chang Kim Loong maintains that the government should not add to the costs of doing business, especially in the housing segment.

“Wasn’t the aspiration of the government towards a reduction of house prices?” he tells The Edge via text.

“Already, the costs of building houses are escalating … [the government should not] add to ‘bumping up’ house prices,” he adds.

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