SALES and Service Tax (SST) is administered by the Royal Malaysian Customs Department (RMCD). Sales tax is applied on goods manufactured by registered manufacturers and on importation of taxable goods. Service tax is charged on taxable services specified in the Service Tax Regulations 2018.
Under the Good and Services Tax (GST) regime, the final 6% tax due to the government was only collected at the end point of sale and borne by the ultimate consumer, although, the goods and services may have gone through different various stages of value addition by different parties. During the intermediate stages, the GST would be accumulated and passed on to the next level.
However, under the SST regime, being a single stage tax, there will be a cascading tax-on-tax effect as the goods and services pass through the supply chain to the ultimate customer.
To ease the burden on the ultimate consumer and to minimise the cash flow of the intermediaries, the Sales Tax and Service Tax Acts contain exemptions.
In the service tax area, there are exemptions for services provided between groups of companies under common control. Another example is where a business provides the same type of services to another business which then on-sells to the ultimate consumer.
In the sales tax area, there are more than 75 different exemptions. An example is where a trader buys goods from a manufacturer and exports the goods and provided certain conditions have been met, the manufacturer can sell to the trader without imposing sales tax.
Where can it go wrong?
All exemptions specify the persons exempted, the goods or services to be exempted and the conditions that need to be complied with.
Failure to understand the conditions, failure to monitor, or failure to comply with the conditions is common.
The reason being in the service tax arena, the responsibility to comply and monitor is left to operational people, and there is a lack of oversight by senior management.
As for sales tax, a similar behaviour exists for locally manufactured goods, and with regard to importation, the responsibility of complying with the sales tax exemption conditions often delegated to freight forwarders.
All these exemptions must be constantly monitored. For example, if a trader buys goods and does not export within the six-month deadline, he will have to pay the sales tax and a penalty up to a maximum of 40%.
Another common troubled area is the failure to obtain a certificate of exemption and its renewal from the director-general.
Taxpayers have difficulty in interpreting the conditions attached to the exemption orders. An example would be the difference between spare parts and components where one is exempted and the other is not.
What is RMCD doing?
Since manufacturers and service providers believe that once they have passed the responsibility to freight forwarders or submitted their bimonthly returns, their responsibilities have been discharged.
In the current climate where RMCD is attempting to increase its tax collection to RM64 billion or more, the frequency of audits has increased, and the level of scrutiny is now much deeper, and different types of audits such as post importation audits, compliance audits, advisory audits, etc, are being carried out.
Taxable persons should start paying equal attention to indirect tax matters rather than focusing their attention to only income tax matters as the government is moving to increase the indirect tax collection either through greater compliance and enforcement, and through the introduction of new indirect taxes such as luxury tax, sugar tax and vape tax.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
This article was originally published on the Sun daily.