ALL businesses will be affected directly or indirectly by the significant expansion of the Sales and Service Tax (SST) regime which will become effective from July 1. This will flow through to the businesses either through the removal of about 3,400 items from the sales tax exemption list to the 5% and 10% categories, and through the introduction of six new taxable services.
Unless the businesses are the final consumers of these goods and services, theoretically the role of the businesses would be to act as tax collectors for the government. In practice, inevitably some portion of the tax collected will be borne by the businesses as they will not be able to pass on the cost.
Since services such as construction, finance and rental are integral to almost every industry sector, the tax increase in these areas will percolate or spread throughout the business ecosystem.
What are the steps businesses should now undertake?
Before July 1, businesses should review their supply chain and look at the impact of the SST changes on all the inputs and outputs of the business. This step will immediately give you an idea of the increased cost to doing business which will then lead you to determine whether you can increase and pass on the cost to customers. At this stage, you will be looking at reducing the cost through substitution with products and services that are not affected by the changes, or reduce the consumption of the taxable products and services.
The next step to keep your costs at the same level would be to identify all the possible exemptions and deductions in the sales tax regime and similarly identify the exclusions and exemptions for service tax regime. Here, the focus should be to take advantage of the business-to-business exemption for services, and to benefit from the exemptions available for goods.
In the bigger picture when you are looking at managing the overall cost to the business, you should take into account exclusions, deductions and group reliefs.
For businesses that are not registered, you need to quickly assess whether the thresholds stated for the different services will be exceeded within the next 12 months to be calculated from July 1. The thresholds vary for different services from nil to RM500,000 and to RM1.5 million.
Similarly, for sales tax purposes, new registrants should qualify as a manufacturer and exceed the sales threshold of RM500,000 for the next 12 months. Broadly speaking, manufacturing involves the transformation of materials or products from one state to another. Businesses should carefully assess whether their activities fall within the definition of “manufacturing” under the Sales Tax Act.
Importation of goods and services will attract imported sales tax and imported service tax. This is often ignored by the taxpayers largely because they are not registered for SST. A frequently used imported service could be financial services provided in the course of arranging financing for Malaysian companies. Another example would be leasing of assets by a foreign company to a Malaysian entity.
Businesses should also review their contracts spanning July 1 to determine whether they are non-reviewable, in which case, they will be eligible for a 12 months’ exemption from charging service tax.
You need to identify SME lessees whose turnover will be less than RM500,000 and therefore exempted from paying service tax on their rental. This can be done by checking the portal that will be available next week where such SMEs will need to register.
Businesses should ensure they do not breach the Price Control and Anti-Profiteering Act. For example, if you have leftover stock which has not been subjected to sales tax, you cannot increase your prices to reflect the increase that will be triggered from July 1.
The final advice is that if you are unclear on the definitions or any issues surrounding your transactions, it will be best to seek the views of the Royal Malaysian Customs Department in writing to avoid future disputes with them. This should be done before July 1 or as soon as possible.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
