This article first appeared in Forum, The Edge Malaysia Weekly, on October 19 - October 25, 2015.
Oct 1 marks the sixth month of the Goods and Services Tax (GST). We have come a long way, mobilising enormous resources from the public and private sectors to make this national tax reform initiative a success.
While looking back with a great sense of relief at clearing some critical hurdles in crossing over to the GST era, businesses should realise that there is still plenty of work to be done in the months ahead to stay ahead of the curve. The following are some of the key focus areas:
Addressing outstanding issues
Businesses are sophisticated and evolving. No single set of laws, no matter how comprehensively conceived, can cater for all kinds of business scenarios and transactions. It is encouraging to note that the authorities, businesses and the professionals have been working so closely together to apply the GST law to various business models and transactions.
One typical example is the GST treatment of a joint venture scheme between a property developer and landowner. It took immense deliberation to determine whether the landowner, who is the legal owner, or the developer, who is the seller in commercial reality, is the supplier of the completed properties. It is critical to ascertain this because the supplier has to account for the output tax for the sales and is allowed input tax credit on purchases generally.
Responding to the numerous requests for clarification from businesses, collectively through the associations as well as individually, hundreds of guides and clarifications have been issued by the Customs Department. While there are precedents overseas that one can refer to, our GST law has its own uniqueness, which complicates the application of the law.
Unsurprisingly, there are still many technical issues to be resolved and everyone is on a learning curve. Patience should be exercised, and the tax authorities (Ministry of Finance and Customs Department) should be given sufficient time to deliberate complex issues and express their stance on grey areas. But business never stops and pending Customs clarification, businesses that adopt a reasonable GST treatment with sound justification for their ongoing GST filings should not be penalised if their treatment happens to contradict the eventual stance taken by Customs.
Seeking timely GST refunds
GST refunds arise when in a particular taxable period of a business, the input tax incurred on purchases is higher than the output tax charged on sales. One of the biggest concerns for all businesses is when the refund of GST will be received.
Among others, export-oriented businesses and suppliers of zero-rated products are regularly exposed to a high refund position, and not getting refunds for three to six consecutive taxable periods may disrupt their businesses completely due to the loss of cash flow.
Before April 1, 2015, it was much publicised that refunds could be expected within 14 working days for electronic filings and 28 working days for manual filings. However, the fine print of the GST law allows the withholding of refunds in the event there are reasonable grounds to believe the amount is not due to the taxpayer.
Businesses caught in such a predicament should be made aware that once the mechanism to delay the refund is activated, the law stipulates the refund shall be made to them within 90 days after either the filing of the GST return or Customs receiving all the information requested from the taxpayer.
Earlier on, there were many complaints from businesses that the refund was taking too long, but the number of complaints has gradually decreased after Customs resolved the initial teething issues. Often, the problem lay with the business as it had not given Customs all the information required. This may also be attributed to businesses being better informed now on the correct way to file a GST return, as well as being more proactive in speaking to the officer in charge.
In this regard, the key is maintaining a complete set of accounting records with readily available supporting documents, such as valid tax invoices for sales and purchases, debit and credit notes, official receipts for payments and collections and so on.
Instead of fearing the dreaded potential GST audit by Customs, taxpayers should proactively engage with the authority on the information required, even to the extent of inviting the officers to visit their premises and review their records. Initiating a telephone call to the officer in charge of your file, followed with a written request, may go a long way to expedite a refund.
Special sales tax refund not to be missed
To avoid double taxation, businesses that purchased trading goods prior to the introduction of the GST, and paid sales tax, may apply for a special sales tax refund if the goods remained in stock as at April 1, 2015. However, strict conditions have to be fulfilled. Stock counts must be performed to arrive at stock balances as at April 1 and certification from external auditors is required for large claims.
Each business can file only a single claim for the refund no later than six months after April 1. As the deadline to submit the claim for the refund has already passed, those who have submitted an application for a sales tax refund must keep proper records, as before a refund is processed, Customs will likely carry out a desk audit or field audit depending on the quantum of the claim.
Avoiding anti-profiteering pitfalls
Businesses that need to undertake any re-pricing of goods and services must comply with the anti-profiteering rules enforced by the Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC). These rules are intended to prevent businesses from taking the opportunity arising from the introduction of the GST to inflate prices and profiteer therefrom.
The rules are valid for 18 months commencing from Jan 1, 2015 until June 30, 2016. Any business considered to be making an unreasonably high net profit margin on any product during this period has to justify any price change that could lead to an increase in that net profit margin by responding to the MDTCC’s Notice 21, failing which penalties may be imposed.
As at Sept 3, some 1,653 Notice 21s have been issued, 2,765 cases investigated and more than 108 cases are making their way through the courts. Having seen the reputational damage court actions can bring, businesses are generally becoming more aware of their obligations, but in many instances could do more to ensure that they are in compliance, particularly if they are intending to increase prices.
The rules are not easy to apply as the net profit margin of a single kit unit of a business is examined rather than the net profit margin of the business as a whole, and most businesses do not maintain such records. Hence, before a decision is made on a price revision, a thorough consideration of the rules is essential.
This has become critically important due to the loss in the value of the ringgit. Many businesses wish to increase prices to recover the loss in profit from increased costs of foreign goods and services. Businesses still need to have a strong case to justify an increase in the prices of their goods and proper documentation needs to be maintained to justify this increase.
It is advisable that those businesses consider starting an active dialogue with the MDTCC before increasing their prices. This way, they can ensure that the price increase is within the terms of the law. It is always better to speak to the MDTCC first, rather than wait for a Notice 21 as the result of a complaint.
Keeping up with changes
As businesses evolve, tax law changes too. Already, we are hearing that more goods and services may be added to the zero-rated and exempt lists. A change in business model, for instance, from direct sale to consignment sale by a home appliance supplier may compel a complete system reconfiguration as the GST treatment for the two business models is completely dissimilar.
It is absolutely important that the GST system of a business that has been up and running since April 1, 2015 be reviewed regularly. Continuous training to keep existing and new human resources up to date with GST compliance responsibilities is imperative.
Tan Eng Yew is a GST partner and Wong Poh Geng is a GST director with Deloitte Malaysia. The views expressed in this article are the personal views of the writers and do not necessarily represent the views of Deloitte.