THE Royal Malaysian Customs Department (RMCD) issued a draft guideline on the transition of service tax rates on Feb 7. The general assumption is that the change in service tax rate from 6% to 8% from March 1 2024 is a straightforward affair, and many may think that it is based on when you issue the invoices. However, that is not the case.
Service tax registrants which include companies, LLPs, trusts and any business enterprises providing taxable services which exceed the relevant thresholds are mere collectors of taxes for the government. If these tax collectors impose the lower rate of tax of 6% as opposed to 8%, the additional 2% will be borne by the tax collectors and they cannot collect the additional 2% at a later date.
Key parameters to watch out for
Service tax is imposed on local services that fall within the list of taxable services and on imported taxable services. Companies registered under the digital service tax regime are also affected by this change in tax rate and this includes foreign companies providing digital services.
The basic principle here is that the tax rate applied will be based on the date the taxable service is provided. However, this principle is compromised by two other factors: the date the invoice is received, or the date the payment for the taxable services is received.
In the case of imported services, the principle used to determine the rate of tax would be: when the taxable services are obtained, when the invoices are received, and when the payments for the services are made.
Issuing invoices at 8% before March 1 is illegal
Some service tax registrants are wrongly issuing invoices to their customers and imposing service tax at a rate of 8% for services that will be provided currently and beyond March 1 on a continuous basis, or even services to be provided fully after March 1.
The danger here is the recipient of such invoices is not under any obligation to pay the service tax since the service tax applied is incorrect. Secondly the service tax registrants can be charged by RMCD for incorrectly imposing the service tax rate.
Contracts that straddle March 1
Ongoing continuous contracts that straddle March 1 will need to be apportioned. Service tax rate of 6% will be applied on services performed before March 1, and services performed after March 1 will be subject to service tax of 8%. The issue here is how do you apportion the services performed.
How do you get this right?
Registered taxpayers should review all their transactions and determine whether 6% or 8% applies based on the above three parameters: when the services were provided or obtained in the case of imported services, when the invoices were issued/received, or when the payments were received/made.
The other complication is that invoices issued before March 1 will be issued at 6%. However, where the services are provided after March 1, and payments also received after March 1, this service tax needs to be adjusted to 8% through a debit note mechanism.
Although the application of the increase from 6% to 8% appears to be simple, registered taxpayers should be careful in the application, otherwise the cost of any incorrect application will cost them money.
Please note that this is based on the draft guidelines issued by the RMCD which may be subject to further changes before March 1.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
