Our 14th general election is over and the exciting smell of reform is in the air.
Prime Minister Tun Dr Mahathir Mohamad has said “there were individuals and business people who were forced to pay more taxes than they were required to by the previous government. Pakatan Harapan [will] try to retrieve the money but it [needs] more information from the victims”. There is a concern that opposition-friendly businesses have been targeted.
On the Goods and Services Tax (GST), Mahathir said that there is no rolling back — it will be cancelled. At the time of writing, it had been announced that GST will be zero-rated with effect from June 1. The full strategy for the removal of GST is expected to be announced within the first 100 days of the election.
Things are moving already. There will be tax reforms, and not a moment too soon too. But tax reform is not simply about changing tax laws. It is also about how the tax laws are administered.
To say that these are challenging times for taxpayers would be putting it mildly. We have been seeing mega additional tax assessments at an unprecedented rate.
A much broader group than those with perceived political affiliations has been affected. Even government-linked companies have been hit with mega assessments.
The numbers are staggering, some even in the billions of ringgit — RM2.07 billion against TNB; RM80.77 million against an MK Land Holdings Bhd subsidiary;
RM476.56 million against Magnum Bhd and its subsidiary; and RM96.82 million against Aeon Credit Service (M) Bhd, to name a few.
This kind of tax drive has created an environment of fear. At the National Tax Conference several years ago, the then director-general of Inland Revenue walked onto the stage with Queen’s We Will Rock You blaring out. Taxpayers were not entirely amused. They haven’t buckled though, and so we are seeing a record number of cases being litigated.
Today, typically, if you don’t agree with an additional tax assessment by the IRB, you can lodge an appeal with the Special Commissioners of Income Tax (SCIT) by submitting Form Q. The SCIT is the specialist tax court that hears income tax and real property gains tax appeals. Because of the number of cases going before the SCIT, there is a growing backlog and the time it takes to get your dispute heard is getting shockingly long.
In fact, from the day you file your Form Q, it may take three to four years to get a decision. Add appeals to the High Court and the Court of Appeal and you are looking at another two to three years. It could get worse. I have seen Forms Q being rejected by the IRB for unimaginable reasons. In one case, the use of a stapler to bind the documents being submitted was enough to create an issue that required legal threats to be invoked to aid the taxpayer. Hole punchers are apparently strongly disliked as well. Maybe we should try rubber bands the next time.
In the meantime, the IRB takes the view that the provisions of the Income Tax Act, 1967, and the Real Property Gains Tax Act, 1976, require a taxpayer to pay up all taxes first, whether or not there is an appeal. The courts have not always agreed with this.
In any event, where taxes are unpaid, the IRB will initiate debt recovery proceedings in the courts. Because this does not need to go through the SCIT, this can move quickly. In too many cases, the taxpayer has been made to fork out the taxes first and wait for years for the appeal before the SCIT to be finally resolved. Where the taxpayer is successful, a refund is available but the wait for the refund can be equally excruciating.
An alternative form of redress when a taxpayer is aggrieved by an additional tax assessment is for judicial review to be brought to the High Court. This process is certainly faster as one does not need to go through the SCIT. It does, however, require leave of the court. The IRB regularly challenges the use of this procedure and many taxpayers have failed to get leave of the court. The courts have been reluctant to grant leave for judicial review unless there are exceptional circumstances. The courts seem more willing to grant leave only where there is blatant illegality or irrationality.
Clearly, dispute resolution in tax matters needs to be speeded up. We need to clear the backlog before the SCIT. In the short term, the answer is to have more panel members on the SCIT so cases can be disposed of quickly. There are currently just four Tax Commissioners handling cases for the entire country. They hear cases as a panel of three commissioners. There is a woeful and obvious shortfall in the number of Tax Commissioners. This should have been addressed long before the backlog started to build up. For the longer term, we need to reconsider the whole tax appeal system. Perhaps all cases should go up on judicial review. Let the High Court decide at the same time whether a reprieve should be given on tax payment pending the determination by the court of the substantive issues. This area is ripe for review and reform.
But it is not just the appeal process we should be concerned with. We should ask why there is a need for so many appeals? Are all parties being too aggressive?
Clearly, there will always be disputes between the IRB and taxpayers. Tax law, particularly the provisions that apply to businesses, have a certain level of sophistication. Interpretation will differ and the courts need to step in. Those areas do not need immediate reform. What is worrying is the aggressive position being taken by the IRB — untenable interpretations, retrospective changes in positions, heavy penalties, travel bans and assessments raised outside the statutory limitation. This is where we need immediate attention.
The courts have not been blind to this. The warning sounded by the High Court in the case of The Government of Malaysia v Datuk Haji Kadir Mohamad Mastan and another case are often repeated before the courts by tax lawyers today: “The Court should also bear in mind the possibility of arbitrary or incorrect assessments brought about by fallible officers who have to fulfil the collection of a certain publicly declared targeted amount of taxes and whose assessments, as a result, may be influenced by the target to be achieved rather than the correctness of the assessment.”
It is time we see a more progressive approach to the administration of taxes. Perhaps it is time for greater participation by the private sector and eminent individuals.
The IRB is a board established under the Inland Revenue Board of Malaysia Act, 1995. Its functions include acting as an agent of the government and providing services in administering, assessing, collecting and enforcing payment of, among others, income tax, real property gains tax and stamp duty.
The chief executive officer is a member of the Board. Under the Income Tax Act, 1967, the CEO shall be the director-general of Inland Revenue.
But there are more members of the Board. Section 6(1)(e) of the Inland Revenue Board of Malaysia Act, 1995, provides that the Board shall also include not more than three persons appointed by the Minister of Finance who shall be from among persons of standing and experience in financial, commercial, tax or legal matters. Section 12 of the Inland Revenue Board of Malaysia Act, 1995, provides for the appointment of committees. There is scope here to expand on these to help create a tax administration that strives towards the bigger picture. A fair tax administration that is business-friendly is a great plus point to growing the economy. Fairness is not weakness.
Reforming the IRB may also deal with what was becoming a worrying trend. Under the previous administration, there was a tendency to go running to the Minister of Finance 1 and 2 whenever someone was dissatisfied with a tax issue. The minister cannot be stepping in every time there is an issue with tax administration. The minister is there to give general directions and make policy.
We need the system to be reformed. If it works properly, there would be less need for the minister to get involved. Ministerial involvement can also create the perception of favouritism so it does need to be limited to industry-wide issues or issues of national or strategic importance.
On the GST, the people have spoken. They don’t want it. The government has committed to removing it. It doesn’t seem useful to discuss whether we should keep GST, albeit in a new form, so the question now is how do we get rid of it?
It can be done but there are so many transitional issues to think of. What will happen to outstanding GST refunds? GST was not supposed to affect registered businesses as input tax can be claimed but delays in refunds have occurred, much to the dismay of such businesses. What will happen to stock held at hand on the date of the repeal of GST, or to contracts that straddle pre-GST, GST and post-GST? How about ongoing appeals before the GST Appeal Tribunal?
On May 16, Mahathir issued a gazette order under Section 10(2) of the Goods & Services Tax Act, 2014. What this means is that there will be no charge of GST on goods and services that previously carried GST at 6%. This is effective June 1. This is an ideal way of starting the process of removing GST. With zero-rating, there will be no payment of GST but the GST system and laws will remain in place. Because of this, there should not be transitional problems at this stage since everything else remains the same. Refunds will have to be paid and input credit incurred can still be claimed by registered businesses. We will be able to end the GST cycle in an orderly manner.
The zero-rating can be done immediately. It can be issued by the minister who is charged with the responsibility for finance. At the moment and until the minister of finance has been officially appointed and designated with that function by an order issued pursuant to the Ministerial Functions Act, 1969, the order should be issued by the prime minister, as it has been.
The gazette order will have to be laid before the Dewan Rakyat at its next meeting and will cease to have effect if not confirmed by the Dewan Rakyat within 120 days of that meeting. Practically speaking, this won’t be a problem.
With the zero-rating, prices should come down. Under Section 9(5) of the Goods & Services Tax Act, 2014, any price displayed, advertised, published or quoted must be GST inclusive. From June 1, the 6% element should be taken out.
What happens if a vendor doesn’t reduce prices? The Ministry of Finance media release on the zero-rating reminds businesses to comply with the Price Control and Anti-Profiteering Act, 2011. Further to amendments effective Jan 1, 2017, the anti-profiteering provisions only apply to food and beverages and non-durable household goods and personal care products (excluding cosmetics).
Clearly, not all goods are covered by this. It is also important to note that GST is only one element in the price. Other increases in costs, such as those brought about by foreign exchange fluctuations, could negate the GST saving. Therefore, price reduction across the board is not a given. Given the new-found kebangkitan rakyat, Malaysian consumers are not going to stand for retailers who profiteer. The issue of price reduction is likely to be driven more by consumerism rather than by the law.
The zero-rating of GST is not the end of it. The long-term plan, as has been announced, is to repeal GST and reintroduce Sales & Service Tax (SST).
Is there going to be a period in which GST is zero-rated and there is no SST? Shoppers would love this and it would be a great Hari Raya gift to all. The government does need to be pragmatic, though, and work out the numbers. It does not seem fiscally possible to indefinitely zero-rate GST and have no SST.
It was not clear at the time of writing when and in what form SST will be introduced. We have been told that the full plan will be announced during the first 100 days.
This is where the transitional issues will become important as there will still be outstanding GST issues and the point of its repeal. It is comforting to note that Mahathir has said that those who have overpaid GST will get a refund. The repeal of GST should not, therefore, affect this. It should not affect any vested rights.
Repealing GST will require legislation to be passed by parliament. Drafting that legislation will take time as it will need to contain carefully thought through detailed transitional provisions.
Reintroducing SST will also require legislation. We will need to think of what form we want to bring it back in. While the SST system worked in the past, it wasn’t perfect either and there are still some outstanding legal disputes today on SST matters. Working on this will also take time.
And so the devil is certainly in the details. There is certainly much to think about. Tax reform is only one area but if we get this one right, it will contribute greatly to what is already looking like a superb flying start.
Vijey M Krishnan is an advocate and solicitor. He heads the tax practice group at Messrs Raja, Darryl & Loh.