Unlisted & Unlimited: Much ado about GST

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THE Goods and Services Tax (GST) will come into force on April 1, 2015. Businesses have until the end of this year to register, but many of the small and medium enterprises (SMEs) are still unprepared. SME Association Malaysia says only 50,000 of the 300,000 companies required to register for the GST have complied as at October.

“Medium enterprises have been getting ready for the most part. They have gone through seminars and have some knowledge of it, even though they might not know how to go about implementing the GST,” says Poon Yew Hoe, managing partner at accounting firm Crowe Horwath. “It’s the small businesses that are not prepared.”

Poon advises those who have not done anything about the GST to first examine their business turnover, then determine the nature of their principal activity. “Are you taxable in both regards? If yes, go for GST registration immediately,” he says.

“If you are already doing RM500,000 or more [in sales] this year, you have to register by Dec 31. If you aren’t sure if you have reached that mark, you don’t have to register until you have reached it. But if historically you have been going over RM500,000, you should register.”

Once SMEs have registered, there are three elements they should have — GST-endorsed accounting software, an implementation plan and advice of a tax expert.

“If you want the government’s e-voucher subsidy (worth RM1,000) on GST-enabled accounting software, it must be government-endorsed software,” says Poon. “For small businesses, which are usually simple, they will have fairly straightforward business transactions.”

For the businesses, he adds, getting their accounting documents in order is half the battle won. The main thing about being GST-compliant is being able to invoice your customers and record your purchases from creditors.

“But when the company gets bigger, you will need the advice of a tax consultant for more than just your accounting system. You don’t need a full-blown consulting service. Just check two things with your tax accountant or consultant — how to charge the GST and how to claim input tax,” he says.

“If an SME cannot afford a consultant’s service, the best thing to do in the initial stage of implementing GST is to outsource its bookkeeping to an accounting firm, even if it has an in-house bookkeeper. This is to ensure its accuracy and the entries are in order.”

SMEs should also engage accounting services more often, as they have to file tax returns every quarter. “At the moment, many SMEs only engage their accountant once a year to do what we call shoebox accounting,” says Poon. “Now they have to do their accounting more frequently.”

Let me count the ways

Many SMEs are worried about the cost of implementing the GST, especially in terms of hiring a tax consultant who will analyse the business and give advice.

“The tax consultant has to examine which part of your business needs to be changed to become GST-compliant and design the implementation system,” says Tan Chee Hoe, director of accountancy services firm Tan Chee Hoe & Co.

“What changes must be made in the billings and invoices? What do you claim input tax for? When should you submit taxes? All these aspects of a business have to be compliant with the law. Once you design the system and implement it, you must continuously monitor it.”

As consulting services for the GST are still relatively new, Tan says there are no standard market rates. For the most part, accountants will rely on existing costing formulas, as they too are new to this.

“It will differ on a case-to-case basis. Each business is different and accountants have to consider every single part of it, from when invoices are issued to how suppliers deliver goods and get paid,” he says. “The more work there is, the more costly this service will be. Small businesses will have fewer areas of consideration, so costs should be lower for them as there are fewer areas of study and research required.”

What if you are unsure what a reasonable rate is and don’t want to be ripped off? Tan’s advice is to go back to your existing tax consultant for help. And if you don’t have one?

“Pick somebody endorsed by the Royal Malaysian Customs Department (RMCD) if you want to be safe. Everyone claims they know the law, but the endorsement is a certification,” he says. “You can ask the tax consultant to show you his certificate, which is issued by the RMCD.”

An additional suggestion by Poon is SMEs can seek advice from the help desk of the RMCD. Its website lists all the certified tax agents in Malaysia according to state.

Get in the driver’s seat

While SMEs can attend seminars by the RMCD or seek external consultation, it is equally important for business owners to understand their respective operations, says Koong Lin Loong, who is Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) national council member and chairman of SMEs, as well as managing partner at Reanda LLKG International Chartered Accountants.

“The GST seminars by the RMCD are too general, but you can’t blame them because their participants range from small to medium and vary in industry. So it won’t be specific to your business,” he adds.

“The issue is we don’t have enough industry experts to talk about the GST. A lot of the people [who give these talks] aren’t in business and don’t understand the structure of your industry. Neither does your tax consultant. Industry players will understand their respective issues, but they have limitations in understanding the GST. So, where is the bridge?”

Koong’s advice for SMEs is to study their business operations, products and resources. “Focus on your industry, your products, for instance. Are they standard, zero-rated or exempt supplies? Software won’t help you determine this,” he says. “If you run a business selling all kinds of supplies, like a grocery shop, and you apportion them wrongly, it will be difficult.”

According to several sources, the RMCD made unofficial announcements during its seminars that leniency will be granted to businesses if “unintentional errors” are made during the first two years of GST implementation. However, it will perform audits on businesses if they find intentional errors.

Penalties may be imposed on GST-compliant businesses if no GST return is made, or is submitted with either no or insufficient payment, if there is a deficiency on the net tax payable, or if they fail to register. Failing to register can incur fines of between RM1,500 and RM20,000.

If this is true, Koong opines that the RMCD should be clearer in its audit purposes. “How can you tell if an SME files something intentionally or unintentionally? This is subjective. If it grants leniency, to what extent?” he asks.

“Furthermore, what is the purpose of the audit? Is it an educational exercise or is it a means of discovering fraud? Will the Inland Revenue Board be involved as well?”

Although several details regarding the GST remain unclear, tax consultants such as Tan and Poon recommend playing it safe and getting a head start.

“When faced with grey areas, I tell my clients that it is better to be compliant so you don’t get challenged. Start as soon as possible because the comprehensive study of the business will take time,” Tan says. “Furthermore, as we get closer to the compliance deadline, tax consultants and accountants will be very busy.”

Poon suggests that businesses implement the GST about two months before the deadline as this would give them ample time to work out the kinks. “You’ll need time to learn about the GST and educate the rest in your company. It won’t involve just the finance department, but everything from purchasing to sales as well. There’s some understanding required from all parties, or else there will be extensive confusion in the country. Don’t wait.”

Challenges up ahead

Businesses have brought up several complications that arise in the implementation of the Goods and Services Tax (GST). Poon Yew Hoe of Crowe Horwath, Tan Chee Hoe of Tan Chee Hoe & Co, and Koong Lin Loong of Reanda LLKG International Chartered Accountants share their views.

Determining what exactly is taxable

Koong Lin Loong: Besides the classification of standard, zero-rated and exempt supplies, what if you are a restaurateur that takes restaurant bookings? Once I’m paid a reservation deposit, do I charge GST for this? The customer has yet to consume the product and I have yet to sell it. Is it considered GST taxable?

If your deposit is non-refundable, meaning it is part of future sales, you have to account for GST. If the deposit is refundable, then I don’t have to account for GST because it does not form part of sales in the future. The Royal Malaysian Customs Department (RMCD) will advise you to go with refundable deposits, but business operations will be harder this way.

Cash-flow problems

Poon Yew Hoe: You will definitely face cash-flow problems. GST works on the basis where regardless of whether your customers pay you, you will still need to pay the RMCD. Businesses in Malaysia can have up to a six-month credit period. When GST is implemented though, you have to file your tax returns every quarter. So if you tend to give your customers a long credit period, it’s your call [if you want to keep doing so].

Balance sheet affected

Koong: While GST is based on daily transactions, the ins and outs of your purchases, it will also affect your balance sheet and this is something many SMEs have not picked up on. Let’s say you buy a photocopy machine and are charged 6% GST for it. Can you claim this? Yes, you have to and this means GST also affects your balance sheet items. The idea is that you implement and claim GST on both your trading goods and assets.

When you want to sell this photocopy machine, do you need to incur this 6% GST on it? Yes. If not, there is a penalty because it is a business good.

Mixed business and supplies

Tan Chee Hoe: What do you do when you are a company offering GST-exempt and taxable products? For example, a developer may build residential houses, which are tax exempt, and commercial buildings which aren’t, on the same tract. This makes claiming your input tax very difficult. If you source all your material from the same supplier, how are you going to define which bag of cement is for the commercial project and which is for the residential? You don’t want to lose out in claiming input tax, but the RMCD is not going to lose out on you over-claiming.

In this instance, you cannot split your supplies, so you’ll be advised to split your company, whereby you use company A to build residential houses, where you don’t claim input tax, and company B to build commercial properties, which is GST-compliant. But this incurs a lot more costs and may not be practical.

One party is not GST-compliant

Poon: If you are a non-GST compliant supplier to a company that is, the manufacturer will pass on the 6% GST to you. If you register for GST voluntarily, this is better because you can pass on the burden to the company, which is your customer, in the form of output tax. Yes, the end cost [of the product] will be higher, but if you don’t register for GST in this case, you cannot claim input tax and the 6% will become sunk costs for you, which will increase your cost. So will you bear it, or inflate your prices? If you want to remain competitive, you can go with a smaller profit margin and not inflate it. If you are a retailer supplying to a big company, registering for GST will give you a lower cost because you can claim input tax. You won’t be passing the sunk costs on to the big company. So you should consider voluntary registration.

But if you are not a supplier to a GST-compliant company, it is not really necessary for you to voluntarily register for GST. Let’s say your turnover is RM200,000, and your cost price is RM120,000. The 6% GST is only RM7,200. For the sake of claiming this back, is it worth taking on the registration? Maybe not. You would just up your price to recover it. Turnover is one indication [to pay GST], but cost is another because if my recovery of the input tax is too low, what’s the point?

Tan: The GST exemption area includes hospitals, education providers and developers of residential housing. I have clients that are suppliers to hospitals, and hospitals cannot charge GST to the public, neither can they claim input tax [from the government]. If I cannot charge my customers GST as a hospital, how can my suppliers charge me? What if my suppliers are GST-registered?

You have to distinguish between the SMEs that are suppliers to the exempted business and the exempted business itself.

In this case, the hospital has to carry the burden. While they may be eligible for subsidies, what about residential property developers? I don’t think they will absorb the cost. Instead, they will inflate the price. So grey areas like this will cause inflation. It will depend on whether or not the business is willing to absorb the cost of GST if they cannot claim input tax.

Koong: Suppliers should study their input. If they buy a lot of products that are subject to GST, they might as well go for voluntary registration to claim back the input tax. If the input isn’t, then there is no need to.

This article first appeared in Unlisted & Unlimited, The Edge Malaysia Weekly, on November 10 - 16, 2014.