TAXPAYERS have a tendency to pay greater attention to direct tax matters such as income tax. This is because taxpayers have difficulty in disassociating themselves as individuals and the responsibilities of the corporates that they represent.
The sad thing is that, at the end of the day, it is the consumer who ultimate pays the indirect tax but is unaware of bearing it because the indirect tax is usually not segregated from the product price.
Most taxpayers believe that they have no control over indirect taxes. Corporates make the same mistake on the assumption that they are merely intermediaries or collectors and consequently they do not bear the cost of indirect taxes. This is again untrue because if intermediaries do not comply with the myriad of rules, they must bear the indirect taxes and any consequential penalties.
Although corporates are acting as tax collectors for the government, they should be careful in performing their compliance functions. In the supply chain, indirect taxes are present at different levels, and if errors are made, it will affect the ultimate pricing. An example would be whether the correct tariff codes have been used on the importation or exportation of products. Is the correct rate of tax used by the service providers or manufacturers?
Most corporates usually outsource the compliance requirement on the import and export of goods to freight forwarders and assume that the agents would have complied with the relevant laws and regulations. For internal taxes such as sales tax and service tax, the corporates assume their accounting system will generate the correct information for filing purposes.
Although the freight forwarders are knowledgeable on the practices adopted by customs and the law, there is a tendency to follow customs procedures without questioning whether it is correct or not. This is where corporates should start taking greater responsibility in overseeing the compliance and reviewing the data generated from the software.
In practice what is happening is the goods are cleared from customs but, subsequently when the customs audit team comes in later, they may find discrepancies in the compliance. Such discrepancies become a cost to the intermediaries which cannot be collected from their customers.
Consequence of ignoring indirect taxes
There are frequent changes, announcements and directives issued by the Royal Malaysian Customs Department (RMCD) and in 2024 a number of new taxes have been and will be introduced, such as high value goods tax, low value goods tax, etc. If corporates do not pay attention to the changes in the indirect tax regime, it can be expensive. An example will be if corporates do not understand how to implement the change in the increase in service tax rate from March 1, any errors will be a cost to them, and this will be a problem especially for those who have long-term contracts or where cash has been received prior to March 1 and services being received after that day.
Another area not fully understood by corporates is the use of exemptions on importation of goods from customs duties and sales tax because they may not be aware of the internal practices adopted by customs. When it comes to sales tax and service tax for local sales there are B2B exemptions. To avail yourself of these exemptions, there are strict conditions to comply with. It is common for the RMCD to pick up such non-compliance.
Benefits of paying attention to indirect taxes
If the correct indirect taxes are paid and all the relevant exemptions and concessions given to the taxpayers are understood by corporates or intermediaries, everyone will gain: consumers, intermediaries/collectors and the RMCD. The ultimate pricing to the consumer could be reduced.
It is high time corporates took greater responsibility in managing their indirect tax affairs.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
