THE Royal Malaysian Customs Department (RMCD) is undertaking a special operation to identify businesses which have not registered for service tax purposes.
This exercise is “unearthing” businesses which have failed to register either intentionally or unintentionally. The businesses try avoiding registration so that their prices can remain lower than that of their competitors who charge service tax.
Failure to register at the correct time can warrant three types of penalties: late payment penalties up to 40% of the unpaid taxes, upon conviction, fine for non-filing of the returns due to the delay in registration up to RM50,000 or imprisonment up to three years or both. In addition, there will also be a general penalty on conviction for non-registration up to RM30,000, or imprisonment up to two years or both. In the event the matter is not brought to court, the taxpayer can be subject to compounds not exceeding 50% of the maximum fine.
What are the problems faced by businesses?
At first glance, the requirement to register for service tax appears straightforward: registration becomes mandatory once a business exceeds the relevant threshold of RM500,000 for most taxable services, RM1.5 million for the food and beverage industry, and zero threshold for credit card providers and customs agents, where registration is automatic.
In practice, registration is not always straightforward due to challenges in determining which services are taxable. Overlapping definitions, such as between marketing (non-taxable) and advertising (taxable), create confusion. Similarly, businesses providing mixed services to residential and commercial properties often struggle with segregating taxable from non-taxable components.
There is often confusion in determining the threshold based on the backward and forward 12-month rules. Using the past 12 months is more straightforward, as actual revenue figures are available. In contrast, the forward 12-month projection is more subjective, as it involves forecasting future income. However, if there is a reasonable basis to believe the threshold will be exceeded in the coming 12 months, registration must be done in advance.
During a future RMCD audit, with the benefit of hindsight, the authorities may allege non-compliance. In such cases, it will be the taxpayer’s responsibility to justify the reasonableness of their original forecast.
The export of services is not subject to service tax. However, businesses exporting services often struggle to determine if their services qualify as relating to a subject matter outside Malaysia. A common grey area is when a foreign company, with no presence in Malaysia, seeks advice from a Malaysian consultant on Malaysian matters for use in its global operations.
The RMCD is aware that some businesses try to artificially fragment their business to avoid registration threshold by operating through many separate businesses. This is specifically discouraged in the legislation which will effectively disregard the separate businesses and treat them as a single business for service tax registration purposes. Added to that will be the consequential penalty mentioned above will apply and it could be regarded as tax evasion which will incur severe penalties.
Once you have started any business, monitoring the threshold and determining the time in which you should register is an ongoing exercise to avoid any non-registration penalties. If your mistake is realised after the due date, the cost of the non-registration is high and equally importantly is the loss of the opportunity to benefit from the business-to-business exemption.
It will be better for taxpayers to approach the RMCD on a voluntary basis before an audit is commenced. The RMCD is welcoming voluntary disclosure where you have not fulfilled your compliance responsibilities. It is willing to exercise leniency in the imposition of fines and penalties.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
