Sales and Services Tax (SST) Mechanism

The article was written by TraTax, a firm of independent tax advisors ranked within Top 10 in Malaysia for transactional taxation. The article was first published in TraTax's e-Alert on 19th July 2018.

Background

As stated in our previous e-Alert, Malaysia has announced that Sales and Services Tax ("SST") would be implemented effective 1st September 2018. Today, the key information on the mechanics of SST has been revealed by the Government. In this e-Alert, we analyse the information, and make recommendations on actions that businesses should take.

Diagram One: Evolution of
consumption taxes in Malaysia

As an introduction, SST is a single-tier tax system that replaces the multi-tier Goods and Services Tax (“GST”) that was imposed at 6 percent until 31st May 2018. An overview of the history pattern on the SST-GST-SST is depicted in Diagram One.
In general, the design of the 2018 SST is broadly similar to the characteristics of the SST repealed on 31st March 2015. SST comprises Sales Tax and Services Tax, both of which are single-tier taxation – i.e. taxed only at a single point in the supply chain.

Sales tax applies on goods. If goods are manufactured locally, sales tax is generally 10 percent of the factory price. If goods are imported from outside Malaysia, sales tax is generally imposed at 10 percent of the value of goods (plus Customs' duties) at the point of importation. Some (limited) goods are subject to 5 percent sales tax, rather than 10 percent.

Services tax generally applies at 6 percent on prescribed services. At this juncture, it has been announced that the following services would be subject to the 6% service tax:

• Hotel (including service apartment and homestay)
• Insurance and Takaful (all B2B and certain B2C)
• Service of food and beverage preparation (restaurant, hawkers, catering, etc.)
• Club (night club, golf club, etc.)
• Gaming, (casino, gaming machines, lottery, etc.)
• Telecommunication
• Pay-TV
• Forwarding agents
• Legal
• Accounting
• Surveying
• Architectural
• Surveying
• Valuer
• Engineering
• Employment agency
• Security
• Management services
• Parking
• Motor vehicle service or repair
• Courier
• Hire and drive car
• Advertising
• Domestic flight (except for rural air services in East Malaysia)
• IT services
• Electricity.

Both imported services and exported services are not charged with service tax. The meaning of ‘exported services’ is yet to be known.

Many industries that were previously subject to GST registration would not be required to be SST-registered. Based on the information publicly available at this juncture, here are some examples of industries that are likely to be excluded from the SST-registration:

1. Distributors and retailers
2. Commercial property developers
3. Construction service providers (commercial and residential)
4. Goldsmith.

The mechanics of SST

Only manufacturers and importers are subject to sales tax. Distributors and retailers are not required to register for SST but the 10 percent sales tax charged by manufacturer would be incorporated into their inventory cost.

Unlike GST, only providers of prescribed services are required to be SST-registered and charge 6 percent services tax – see list above.

Smaller businesses are exempt from having to register for SST. The threshold for this is RM500,000 of turnover in any 12-month period, consistent with GST. Branch registration is allowed for services tax but not sales tax. Neither sales tax nor service tax permits group registration.

It has been announced that sales tax will be on accrual basis, while services tax would be on payment basis.

Both sales tax and services tax would have bi-monthly taxable periods, and businesses are required to submit the relevant SST returns and pay tax within one month from the end of the respective taxable periods. Compliance timeline for the first taxable period of SST is depicted in Diagram Two below.

Diagram Two: Illustration on first taxable period of SST, etc.

Both submission of SST return and payment of tax can be made electronically or by post. Penalty for late payment is similar to that of GST.

Table One below compares the features of the 2018 SST with the SST as at 31^st March 2015, and with GST.

Table One: Comparison of the three tax regimes

Aspect	SST as at 31st March 2015	Proposed 2018 SST	GST
Design	Single-tier tax, i.e. only one intended point of taxation, and generally no input credit mechanism.	Single-tier tax, i.e. only one intended point of taxation, and generally no input credit mechanism.	Multi-tier tax, i.e. all businesses in the value chain are subject to GST but are also entitled for input tax credit on acquisitions.
Tax rate – Goods	10% of factory price or import value. (Some items at 5%) Petrol: RM0.5862 per litre. Diesel: RM0.40 per litre.	10% of factory price or import value. (Some items at 5%) It has been announced that sales tax for petroleum products will be a ‘specific rate’.	6% (imposed at all levels, and is effectively at 6% of the final/retail price).
Tax rate – Services	General rate: 6% Credit Card: RM50 for principal and RM25 for supplementary card (per annum).	General rate: 6% Credit Card: Both principal and supplementary cards are taxed RM25 each (per annum).	6%
Scope of registrants – Goods	All manufacturers & sub-contractors, except those of exempt products.	All manufacturers & sub-contractors. Categories of exemptions: 1. Exemption for goods 2. Exemption for persons 3. Exemption from registration.	All businesses (including distributors and retailers), except businesses that wholly make exempt supplies.
Scope of registrants – Services	Prescribed service providers.	Prescribed service providers – see list above.	All businesses, except businesses that wholly make exempt supplies.
Registration threshold for business – Goods (12 months turnover)	RM100,000 for manufacturers. RM20,000 for sub-contractors.	RM500,000	RM500,000
Registration threshold for business – Services (12 months turnover)	Varies from zero to RM3 million (Note: RM300,000 was most commonly used)	RM500,000	RM500,000
Basis of tax – Goods	Accrual basis	Accrual basis	Put simply, earlier of accrual and receipt of payment
Basis of tax – Services	Upon receipt of payment	Upon receipt of payment	Put simply, earlier of accrual and receipt of payment
Taxable periods	Bi-Monthly	Bi-Monthly	Quarterly / Monthly
Due date to submit tax return and pay tax	28 days from the end of the respective taxable period	One month from the end of the respective taxable period	One month from the end of the respective taxable period
Method of submission of tax return & payment of tax	Manual	Choice of Electronic and Manual	Choice of Electronic and Manual
Late payment penalty	First 30 days: 10%. Each 30-day period thereafter: 10% Maximum: 50% (150 days)	First 30 days: 10%. Each 30-day period thereafter: 15% Maximum: 40% (90 days)	First 30 days: 10%. Each 30-day period thereafter: 15% Maximum: 40% (90 days)

GST to SST: What's the impact on prices?

When SST is introduced on 1st September 2018, the price of the affected goods and services would certainly be higher than the prices during the tax holiday period (1st June to 31st August 2018). The point to ponder upon is how the prices on or after 1st September 2018 compare to those during the GST regime (say, in May 2018). For this rather complex issue, a simplified overview is depicted in Diagram Three below (adapted and amended from the previous e-Alert on 17th May 2018).

Note that for simplicity, Diagram Three does not include items that were previously not subjected to GST (for example, medicines). Also note that the price comparisons stated in Diagram Three is based on the 'perfect market assumption', i.e. on the assumption that all businesses are rational and fully comply with the Anti-Profiteering Regulations.

Diagram Three: Comparison of prices during GST and SST regime

If we take the example of a non-essential product (e.g. shampoo or television), it would have been subjected to 6 percent GST if purchased before 1^st June 2018. In the SST regime, these items are not subject to any tax at the retail level but there would be sales tax on the factory price or the import value – which eventually forms part of the retailer’s inventory cost. As such, consumers should not expect the retail price of these non-essential items in the SST regime to be 6 percent lower than the prices during the GST regime. The extent to which the prices in the SST regime would be lower or higher than that of the GST regime depends on two key factors: (1) the ratio of the distributor’s and retailer’s margin to the factory price of the product; and (2) the extent to which businesses comply with Price Control and Anti-Profiteering (Mechanism to Determine Unreasonably High Profit for Goods) Regulations 2018 (hereinafter “Anti-Profiteering Regulations”).

Transitional matters

SST registration - It appears that Customs would rely on its existing data to automatically register businesses for SST (given that the registration threshold is RM500,000 for both GST and SST). However, businesses that are not automatically registered are required to apply for registration within 30 days from the commencement if the registration criteria is fulfilled.

Advances - Where payment is received from customer prior to 1st September 2018 in respect of goods delivered or service performed on or after 1st September 2018, the Customs' guidelines require SST to be accounted on the value of goods delivered or services performed on or after 1st September 2018. However, the fixed service tax of RM25 on credit cards seems to be an exception to this principle.

Cancellation of GST registration - When the GST Act 2014 is repealed, businesses would be automatically ceased to be GST-registered (without having to make any application to cancel the GST registration). However, businesses are required to submit the final GST return within 120 days from the date the GST Act is repealed.

GST audits - The Customs has stated that GST audits will be carried out on GST-registered entities for closure purposes.

Claiming of GST input tax credit - Should there be any GST input tax on which input tax credit is yet to be claimed, the same may be claimed not later than 29th December 2018.

What should be businesses do immediately?

1. Assess the impact of the proposed SST on costs, prices and compliance requirements. Some industries (for example, manufacturers) are impacted more directly than other industries (for example, retailers).
2. Ensure compliance to Anti-Profiteering Regulation 2018. Until 5^th June 2018, Anti-Profiteering Regulations was applicable only on food and beverages and non-durable household goods. Effective 6^th June 2018, the same applies to all goods and services. Hence all businesses, including distributors and retailers who are not SST-registered, must comply with the requirements of the Anti-Profiteering Regulations.
3. Any quotation generated or contracts entered into now must incorporate appropriate clauses to allow price revision in light of SST should the delivery be anticipated to be on or after 1^st September 2018.
4. Review the policy on collection of advances, given that Customs has expressed SST would be applicable on any advance collected for delivery of goods or provision of services on or after 1^st September 2018.
5. Prepare the people for SST compliance by conducting awareness talks for finance as well non-finance personnel, particularly sales and marketing personnel.
6. Ensure accounting software would facilitate SST compliance.
7. Review the tax-efficiency of the value chain and group structure.
8. Conduct post-mortem of GST compliance to minimise disputes during Customs’ closure audit, and to prevent compliance gaps during the transitional period.

© Thenesh, Renga & Associates (TraTax Malaysia)

The information in this e-Alert are written based on information available in public domain at the time of writing. We do not assume the responsibility to update you should further information be made available that makes the contents of this e-Alert wholly or partly obsolete. The contents on this e-Alert are generic in nature and are meant for academic purposes. Views expressed herein are our interpretation of the relevant law and guidelines. Strictly no liability assumed. Kindly seek case-specific consultation.