The State of The Nation: The mystery of the missing GST refunds — all RM18 billion of it

This article first appeared in The Edge Malaysia Weekly, on August 13, 2018 - August 19, 2018.
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THE Goods and Services Tax was meant to put more money into the government’s coffers. But lo and behold, some RM18 billion in input tax refunds have gone “missing”, Finance Minister Lim Guan Eng declared last week.

The details are unclear at this juncture but, essentially, the Ministry of Finance (MoF) surmises that since only RM1.48 billion out of a total of RM19.4 billion in input tax credits owed to companies throughout the GST regime (April 1, 2015 to May 31, 2018) were found in the Trust Account, some RM18 billion in refunds appears to have disappeared.

With fingers pointed at him, former MoF secretary-general Tan Sri Mohd Irwan Serigar Abdullah insisted that the money is not missing, but can be found in the Federal Government’s Consolidated Fund.

However, customs director-general T Subromaniam maintains that his department never received the full amount it requested for refunds.

“The Customs Department had requested RM82.9 billion from the monthly trust fund for the purpose of GST refunds from April 1, 2015, to May 31 2018, but the full amount was not transferred (from the government’s consolidated accounts) to the trust fund.

“As such, as of May 31, 2018, the trust fund still needs and is experiencing shortages to pay back RM19.4 billion in GST refund arrears,” Subromaniam said in a statement last Friday.

Amid the astounding revelation of the missing funds and the accusations and denials, businesses are wondering when or if at all they will see any of the refunds owed to them.

Tax consultants say the GST Act does provide for a refund account and that the government allocates the input tax monies into that refund account, which is then used to refund businesses.

“It is similar to how the Inland Revenue Board administers its refunds, where the funds in the refund account are topped up periodically in order for IRB to refund the amount required. But the exact administration behind how this all works is not known to us,” says a tax consultant.

Irwan was also quoted by the media as saying that Customs Department refunds under GST are channelled to a trust account every month, and that the amount allocated to the trust account is decided at a monthly federal government cash flow management meeting.

Wherever the refunds are hiding, businesses would like to be refunded ASAP.

According to a survey in July by the Federation of Malaysian Manufacturers (FMM), more than RM220 million in input tax refunds are still owed to 100 of its members.

Averaged out, it suggests that each company is waiting for RM2.2 million in refunds.

“If FMM’s 3,000 direct member companies are taken into consideration, the amount of refunds overdue to manufacturers could be much bigger. The delay in refunds has caused serious cash flow issues for our members, especially small and medium enterprises, and continues to hurt exporters,” the federation said in a statement last Friday.

Another tax consultant says that one of his clients, who is building a factory and has paid some RM50 million in input tax credits has yet to receive his refund.

Businesses and tax consultants know that new businesses that have a long gestation period before initiating production or sales would find it a challenge to recover the GST incurred during start-up.

“The Customs Department says you need to make a taxable supply within the next 12 months and you are not allowed to recover the GST until that happens. Their reasoning for this stems from concerns over possible fraud,” says one tax consultant.

Axelasia Inc group chairman Dr Veerinderjeet Singh says the GST refunds are due primarily to exporters and adds that delays in payment cause cash flow concerns.

Exporters do not collect GST on their exports as they are zero-rated, however, they are allowed to recover the GST incurred.

“There are many GST registrants who have yet to receive the refunds as the customs authorities have still not finalised the GST audits. From what we know, many audits have still not been finalised for many reasons, including manpower resources,” he says, adding that the authorities have been trying to clear the GST audits but it was never indicated that the refund delays were due to a lack of funds. What was clear, was that the authorities had been slowly improving the period taken to make those refunds.

Grant Thornton Malaysia head of indirect tax Alan Chung says that the revelation of the RM19.5 billion in refunds owing has confirmed his suspicions about the late refunds that have plagued businesses during the GST regime.

He believes late refunds on that scale have partly contributed to the increase in prices during the GST period. “If businesses cannot get their refunds, some would resort to increasing the prices of goods in order to make sure they can stay afloat while waiting for their refunds to come in.”

Chung adds this may also be a cause for concern for foreign businesses investing in Malaysia. “For a company that is investing in million dollar projects, 6% can be quite a substantial amount,” he observes.

Legally speaking, Chung says, businesses are still entitled to the refunds, but how long it will take before they receive them remains a question mark.

Lim has urged businesses to be patient and give the ministry until next year to make the refunds as the government looks for solutions.

However, FMM is hoping for the approved refunds to be channelled back to its members as soon as possible.

“We would also like to urge the government to ensure that all pending cases of special sales tax refunds dating back to the GST era since 2015 are reviewed and closed before the Sales and Services Tax 2.0 is implemented. We urge the Ministry of Finance to have a dialogue with stakeholders affected by the outstanding GST-related refunds to determine practical solutions to resolve this critical issue. We also require the government’s assurance that there will be no offset of GST credit for future SST payments,” the federation said in its statement.

SST 2.0 is scheduled to come into force on Sept 1.

Veerinderjeet says the disclosures last week certainly paint a bleak picture of the country’s financial situation.

“Notwithstanding who caused this problem, it is essential and it is the responsibility of the government to process the refunds in as quick a timeframe as possible. Attempting to delay the refunds to the following year is not advisable unless the government is willing to pay more to compensate for the extensive delay faced by the taxpayers.

“The government will have to manage its operational expenditure — which is part of what it is doing, I believe, in terms of spending only what is essential — and use part of the savings to make the GST refunds,” he says. 

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