Return of SST: Analysis of the new sales tax mechanism

By S. Saravana Kumar and Jason Tan

This article was first published in the Malay Mail website on 20 July 2018.

Malaysians are now so used to the term “SST,” as it has dominated headlines over the past few weeks. During a debate session in Parliament on July 18, 2018, the finance minister stated that on a full-year scale, SST collection will be RM21 billion, which is almost half of that collected from GST in 2017.

After much intense speculation in respect of the scope and mechanism of SST, the Royal Malaysian Customs Department (Customs) finally shed light on this matter by publishing a draft on July 19 (Proposed Mechanism). It turns out that the Proposed Mechanism mirrors that of the SST regime pre-April 2015.

In essence, although coined as SST, both sales tax and services tax are actually governed and charged independently by separate legislations, and therefore, the term could be misleading.

Although both are single-layer consumption-based taxes, one of the major differences is that sales tax operates on a negative list, where all goods manufactured or imported to Malaysia are taxable unless exempted.

On the contrary, services tax operates on a positive list, where only the specific and exhaustive list of services are taxable. This article focuses on the issues concerning sales tax.

Sales Tax

Based on the information provided by the Customs on July 19. Sales tax will be levied on all goods manufactured in Malaysia or imported unless exempted. The persons liable to collect such sales tax will be the manufacturer and the importer respectively. This is the exact same structure as the previous sales tax regime.

1st Issue: Registration

It is stated in the Proposed Mechanism that: “Manufacturers of taxable goods are liable to be registered when sales value of taxable goods has exceeded RM500,000.00.”

The first issue that arises from this statement is whether goods that are listed under the proposed Sales Tax Exemption Order (Proposed Exemption Order) are deemed to be “taxable goods” notwithstanding that they are exempted.

Section 2(1) of the previous legislation i.e. the Sales Tax Act 1972 sheds light on this as it defines “taxable goods” to exclude goods that are exempted.

If this provision is similarly adopted in the new legislation, manufacturers whose goods are exempted will not be required to register. However, as we are certain that the Proposed Exemption Order will be amended continuously in the years to come, where goods could be included or excluded from the list, manufacturers need to keep a close eye on such amendments.

2nd Issue: Exemptions

One of the clear benefits of GST is that it is simplified, where only a handful of goods or services are zero-rated or exempted respectively. However, the Proposed Exemption Order contains a list of exempted goods that runs up to almost 300 pages and they are classified by tariff codes.

By reverting to the SST regime, businesses will scramble to determine whether goods that they manufacture or import are exempted. We will also revert back to an era where tariff classification becomes imperative, not only from an exemption standpoint, but also for the purposes of identifying the rate of tax.

This is on the premise that the finance minister has also announced that rates of tax will differ based on product.

Nevertheless, having compared the Proposed Exemption Order and the Exemption Order under the previous sales tax regime, we found that they are roughly 95 per cent the same. In other words, goods previously taxable or exempted will remain status quo, save for the following items:

Goods previously exempted but now taxable includes:

1. Oils such as soya-bean, ground-nut, olive, sunflower-seed and mustard oils;
2. Seafood products such as lobster, scallops, mussels, clams, sea cucumbers and sea urchins;
3. Hard rubber;
4. Cellular wood panels, panels, boards, tiles and blocks;
5. Printing machinery such as printers and fax machines;
6. Laptops, desktop computers, monitors, projectors and hard disk drives;
7. Sound recording decides;
8. Digital cameras; and
9. Wrist watches, video game consoles, pens and lighters.

Goods previously taxable but now exempted:

1. Hot-rolled steel bars and wire rods for producing soldering sticks and rebars; and
2. Hand tools such as hammers, screwdrivers and other household tools.

3rd Issue: Valuation

Sales tax is charged at the point of manufacturing and importation. This is starkly different from the GST regime, which is a multi-layer tax, and ultimately charged at the point of consumption and borne by the end consumer.

Being charged at the point of manufacturing, the issue of whether costs incurred post-manufacturing should be included in the value for sales tax purposes is often debated. In fact, during the previous SST era, it is common-place for manufacturers to have both a manufacturing and trading arm, where sales tax is charged on the ex-factory price.

This matter received judicial pronouncement by the Court of Appeal and the High Court in Ketua Pengarah Kastam vs X Sdn Bhd recently. In the said case, the Director General of Customs had uplifted the value of the goods manufactured by the taxpayer by adding advertising and promotional expenses incurred by another company.

The taxpayer successfully argued that valuation for sales tax shall be based on the Sales Tax (Rules of Valuation) Regulations 2002, which prescribes that the value to be used is the transaction value. As the transaction value of goods sold by the taxpayer does not include advertising and promotion expenses, therefore, the same could not be included for the purposes of the computation of sales tax.

As such, with sales tax back in the picture, we could well see manufacturers reverting to having both a manufacturing and a trading arm, where the value declared for sales tax purposes will be the transaction value of goods sold by the manufacturing to the trading arm.

This form of trading was ruled to be valid by the High Court in Pioneer Technology Sdn Bhd vs Royal Malaysian Customs Department. Although it is legal for businesses to restructure their transactions in such manner in anticipation of the reintroduction of sales tax, it should be done with upmost caution as there are obviously transfer pricing risks involved.

4th Issue: Exemptions for LMW

Another issue that is bound to be a point for discussion will be the availability of exemption of sales tax for licensed manufacturers. Previously, holders of licensed manufacturing warehouses are exempted from the payment of sales tax for raw materials provided that 80 per cent of the finished goods are exported.

However, based on industry feedback, manufacturers found that the need to have perfect records of raw materials usage and K2 Export forms as an administrative difficulty and extremely cumbersome. As such, a more simplified and uniform system ought to be in place to track raw materials usage.

Conclusion

The finance minister has stated that the sales tax and services tax bills will be tabled in Parliament in August this year. At the same time, the government also stated that sales and service tax will be implemented from September 1, 2018 onwards.

This allows businesses and companies a meagre 1 month to adapt, register and implement the new tax structure. Therefore, we are of the view that those potentially affected should immediately take steps to prepare themselves for this transition.

For further information, please contact:

S. Saravana Kumar

Email : sks@lh-ag.com | Telephone : +603 6208 5813 | Fax : +603 6201 0122

Jason Tan Jia Xin

Email: tjx@lh-ag.com | Tel: +603-6208 5873 | Fax: +603-6201 0122

www.lh-ag.com

Lee Hishammuddin Allen & Gledhill

Level 6, Menara 1 Dutamas, Solaris Dutamas, No. 1, Jalan Dutamas 1

50480 Kuala Lumpur

Tel      : +603 6208 5888

Fax     : +603 6201 0122

Email : enquiry@lh-ag.com

© Lee Hishammuddin Allen & Gledhill. All rights reserved. The views and opinions attributable to the authors or editor of this publication are not to be imputed to the firm, Lee Hishammuddin Allen & Gledhill. The contents of this publication are intended for purposes of general information and academic discussion only. It should not be construed as legal advice or legal opinion on any fact or circumstance.