The recently announced business-to-business (B2B) services tax exemption and sales tax credit mechanism was welcomed by Ernst and Young Tax Consultants Sdn Bhd (EY) indirect tax leader Yeoh Cheng Guan. The moves were announced in Parliament last week by Finance Minister Lim Guan Eng at the Pakatan Harapan government’s inaugural national budget.
In an earlier interview with Enterprise, Yeoh had called on the government to introduce a tax credit mechanism in the new Sales and Services Tax (SST) regime. Under the previous Goods and Services Tax (GST) regime, those who qualified for GST were required to charge the tax on their output of taxable supply of goods and services to customers. However, they were allowed to claim as credit any GST incurred on their purchases that were inputs to their business. This helped to avoid multiple layers of taxation and only the value-added at each stage was taxed.
Effective Jan 1, 2019, however, the government will grant services tax exemptions in certain B2B relationships, with a view of curbing cost increases resulting from compounded taxation. In addition, small manufacturers that purchase products from importers instead of other SST-registered manufacturers will be eligible for a sales tax credit.
“The [sales tax] credit system could potentially be an efficient facility as it would allow small manufacturers to source their manufacturing inputs from local importers or traders, rather than importing directly. This would streamline the sales tax treatment of imported and locally sourced materials,” Yeoh tells Enterprise.
“Any sales tax embedded into the price of goods purchased from these importers can be claimed as a credit by the manufacturers. This, in turn, would result in a more tax-efficient environment within the manufacturing sector.
“We still need to wait for the government to provide the specifics of how such a credit system is to be implemented. It may be similar to the credit system available under the previous Sales Tax Act 1972. Any proposed credit system, however, should not be limited to small manufacturers only but be opened to the entire manufacturing sector. This will result in higher tax savings.”
He believes that the authorities should also provide a mechanism to monitor the availment of the tax credit system for goods that are already exempt from sales tax. He previously argued that an input tax credit was necessary because even though the SST is meant to be a single-tier tax at source, the single-tier advantage is lost in industries where subcontracting is a common practice.
Taxes end up being charged at multiple points in the B2B supply chain, forcing businesses to figure these costs in their mark-ups. All this creates a compounding effect and results in end users footing the bill for the multiple SST charges.
“Due to the absence of an input tax credit mechanism, there is nowhere in this supply chain for the businesses to externalise these service taxes and claim a refund from the government. This goes against the concept of a single-tier tax system,” Yeoh had said earlier.
In addition, imported services will now be subject to services tax so as to not unfairly disadvantage local providers of architecture, graphic design, IT and engineering design services.
Foreign providers of online services will also be required to register with the Royal Malaysian Customs Department and be responsible for charging and remitting the relevant service tax on transactions. The move to rope in online service providers will come into effect on Jan 1, 2020.