The obfuscation of GST refunds in Malaysia

Dave Ananth looks at the controversy of “missing” GST refunds in Malaysia.

by Dave Ananth

Dave Ananth is a senior lawyer, a former Magistrate and advocate in Malaysia before taking up a position with the Inland Revenue Department in New Zealand as a Prosecutor. He now practises as a Tax Barrister, based in Auckland. He is an expert in taxation and tax policy.  He also writes extensively on direct and indirect tax issues in Malaysia and New Zealand.  He is a consultant for Wolters Kluwer Malaysia. He can be reached at davetaxnz@gmail.com.

Introduction

GST refunds are part and parcel of any GST regime, like any other tax regime. A GST refund is usually triggered when the output tax remitted to the Royal Malaysian Customs Department (RMCD) exceeds the amount of input tax paid.

The GST Regulations 2014 provides, under normal circumstances, GST refunds are to be made within 14 working days from submission of online GST returns or 28 working days from submission of manual GST returns, or within a time that is practicable. However, it is common for GST refunds to be withheld for reasons such as incorrect calculations, suspected fraud, etc. while RMCD verifies the GST returns filed, by way of audits and investigations. In cases where further information is required, the GST Regulations 2014 provides that the refund be made within 90 days of receipt of all information. The audit or investigation usually involves a request for further information and supporting documents, typically communicated via the Taxpayer Access Point (“TAP”) or via a letter, an email or a phone call.

Overdue GST refunds

In April 2018, it was reported that while businesses were getting used to GST, a common grouse was the issue of late refund of GST credit. The RMCD director-general Datuk Seri T. Subromaniam admitted that it was a persistent issue but pointed out that 70% – 75% of the refunds were paid out promptly[1]. A survey conducted in July 2018 by the Federation of Malaysian Manufacturers (FMM) showed that more than RM220 million in input tax refunds are still owed to 100 of its members. In another case, a tax consultant says that one of his clients, who is building a factory and paid some RM50 million in input tax credits has yet to receive his refund[2].

Missing GST refunds

Then, in August 2018, Finance Minister Lim Guan Eng declared that about RM19 billion of GST refunds were not returned to taxpayers. This declaration was confirmed by RMCD director-general Datuk Seri T. Subromaniam, who informed that RMCD had requested from the monthly Trust Fund committee meetings, for RM82.9 billion be transferred to the GST Refunds Trust Account but only received RM63.5 billion, giving rise to the shortfall of RM19.25 billion. This amount was based on the GST-03 form, the refund form.

The finger pointing and blame shifting began while reassurances were made that the funds were not missing but were still in the Consolidated Fund.

What is the Federal Consolidated Fund?

Based on Article 97(1) of the Federal Constitution and s 7 of the Financial Procedure Act 1957 (FPA 1957)[3], all revenues and moneys raised or received shall be paid into the Federal Consolidated Fund which consists of a Consolidated Revenue Account, Consolidated Loan Account and Consolidated Trust Account.

Applicable laws

Section 54 of the GST Act 2014 provided for an establishment of fund for GST refunds as follows (emphasis added):

“54. (1) A fund to be known as the Fund for Goods and Services Tax Refund (in this section referred to as “the Fund”) is established which shall be specified in and incorporated into the Second Schedule to the Financial Procedure Act 1957 [Act 61].

 (2) There shall be paid into the Fund the amount of tax collected under this Act as may be authorized by the Minister.

(3) The moneys of the Fund shall be applied for the making of any refund under section 38 and Part VII. 

(4) The Fund shall be administered by the Accountant General of Malaysia.

(5) Notwithstanding subsection (2) and the provisions of the Financial Procedure Act 1957, the Minister may authorize the payment into the Consolidated Revenue Account in the Federal Consolidated Fund of all or part of the moneys of the Fund.”

A GST Refunds Trust Account was established and incorporated in the Second Schedule to the FPA 1957. Therefore, this trust fund is considered a government trust fund which is governed by s 10 of the FPA 1957.

“10. (1) (a) There shall be paid from the Federal Consolidated Fund into each of the funds specified in the Second Schedule such sums as may from time to time be appropriated for the purposes of the fund by federal law.

…

(2) The Minister in the case of a fund specified in the Second Schedule …may apply the fund for the general purposes thereof or, subject to any written law, for such particular purposes as may from time to time be specified by resolution of the Legislature.

(3) All moneys not applied in accordance with subsection (2) shall be paid by the Minister or the State financial authority, as the case may be, into the Consolidated Fund and shall be accounted in a separate account in the Consolidated Trust Account to be applied in the manner provided in subsection (2).

…”

As such, s 54 of the GST Act 2014 must be read together with s 10 of the FPA 1957.

Section 10(1) of the FPA 1957 provides that money in the Federal Consolidated Fund may be appropriated for the GST trust fund which is to make GST refunds. However, s 54(2) of the GST Act 2014 provides that the amount GST collected is to be transferred into the GST refund account, as authorised by the Minister of Finance.

It is trite law in statutory interpretation, that if, there is a conflict between the general legislation (FPA 1957) and specific legislation (GST Act 2014), the specific legislation should usually prevail. There are, however, exceptions and this intention of this article is not to look at various methods of statutory interpretation and the intention of parliament. That will take another chapter. Therefore, in my opinion, the GST Act 2014 should be referred to first when dealing with the GST refund account, and the GST collected to be dealt with accordingly.

What does it all mean?

Consequences
The delay in returning GST refunds can have a negative impact on the cash flow of a company. As mentioned earlier, the refunds involved can be especially large. One can imagine what the financial directors of such companies go through. GST was never meant to be a cost to businesses (which can be seen from the input tax credit mechanism) but the delay in refunds broke that mechanism. Businesses, unexpectedly faced with a cash flow issue, would have had to seek alternative temporary funding or engage professionals to follow up with the RMCD. Such actions have increased the cost of doing business and to maintain profit margins, some costs would have been passed to the consumers.

GST Refunds Trust Account
As such, in my view, the GST collected must be transferred to the GST Refunds Trust Account first. Adequate provision must be made for refund purposes. Only then the balance (which should be actual GST collected) is transferred to the Consolidated Revenue Account to be accounted as revenue and be available as money to be spent. Clearly, the precondition to any movement of money is subject to the Minister of Finance’s consent and authorisation, as seen by s 54(2) and 54(5) of the GST Act 2014.

The Accountant-General
Amid the cacophony of finger-pointing, a key figure, I believe, has remained very quiet. He is the Accountant General of Malaysia, i.e. the gatekeeper. He is appointed by statute[4] to oversee the administration of the GST Refunds Trust Account. By administering the fund, I envision that it means advising the Minister on how much should be transferred to the consolidated fund and how much should remain.

This administration of the funds should not fall under the purview of the Treasury Secretary-General[5] or any other officer. If at all they can provide an advisory role.

My question would be – What is the Accountant General’s role in this matter? Was he was acting on the instructions of the then Minister of Finance? Even if so, it does not change the fact that no one but the Accountant General can administer the fund.

Conclusion

In my opinion, if Mr Lim’s declarations hold, then I think that the withholding of genuine GST refunds is not only legally wrong but also morally and ethically unfair to the business community. The goal post cannot be simply changed to suit the needs of the country, punishing business who are only complying with the law passed by the Government.  On top of the consequences discussed above, such actions could erode business confidence, especially when safeguards built into the law to ensure accountability and integrity fail. Perhaps, this is an issue for the gatekeeper to ponder upon.

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[1] Ho, S. & Lee, E., 2018. Cover Story: An accepted reality three years on. [Online]

Available at: http://www.theedgemarkets.com/article/cover-story-accepted-reality-three-years [Accessed 30 September 2018].

[2] Lee, E., 2018. The State of The Nation: The mystery of the missing GST refunds — all RM18 billion of it. [Online]
Available at: http://www.theedgemarkets.com/article/state-nation-mystery-missing-gst-refunds-%E2%80%94-all-rm18-billion-it [Accessed 26 September 2018].

[3] The FPA, to put it very briefly, governs the management of public finances and public properties of Malaysia. It covers, among others, the financial and accounting procedure as well as the procedure for collection, custody and payment of public moneys.

[4] Section 54(4) of the GST Act 2014.

[5] Lee, E., 2018. The State of The Nation: The mystery of the missing GST refunds — all RM18 billion of it. [Online]
Available at: http://www.theedgemarkets.com/article/state-nation-mystery-missing-gst-refunds-%E2%80%94-all-rm18-billion-it [Accessed 26 September 2018].