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It is still early days, but the new Sales and Services Tax (SST) has come into force without nearly as much confusion as the previous Goods and Services Tax (GST). To a large extent, the experts are unanimous in their assertion that the first few weeks of the new tax regime have been kinder to the business community.
“In 2015, just a day before the GST came into force, my team and I were camped out overnight in our offices, answering all sorts of queries and trying to clear any doubts among our clients. Things were much more relaxed this time around,” Ernst and Young Tax Consultants Sdn Bhd (EY) indirect tax leader Yeoh Cheng Guan recalls.
According to Yeoh, the rollout of the new SST regime — led by Finance Minister Lim Guan Eng and Royal Malaysian Customs Department (RMCD) director-general Datuk Seri Subromaniam Tholasy — has been characterised by high levels of direct engagement with the business community and the general public. “Let’s give credit where it is due. Due to the very short notice on the implementation of the SST, Lim and Subromaniam took it upon themselves to conduct at least 20 briefing sessions with the public,” he says.
“These were primarily direct question-and-answer sessions and a lot of the major problems were discussed with the public and immediately resolved and amended the very next day in the industry guidelines. Thanks to the finance minister taking this up himself, a lot of potential issues were solved very early on,” he adds.
“I would give the SST rollout a ‘B’,” says McMillan Woods founder and president Datuk Seri Raymond Liew.
“I am of the view that the rollout was better understood by the public, due to it being a revised version of the previous SST regime. In April 2015, when the GST regime was rolled out, it caused tremendous confusion during the first few weeks.”
This should hardly be surprising as the SST applies to a much narrower band of goods and services. The impact of its rollout and subsequent tax collection fall on a smaller number of businesses. Even so, Yeoh and Liew warn that there are still pockets of uncertainty, not to mention glaring inconsistencies.
The list or not the list
On the RMCD website is a long, non-exhaustive list of goods and services deemed to be exempt from the SST. News reports peg the list at well over 5,000 items, and counting. This exemption “master list” is further complemented by a series of industry-specific guidance documents, pertaining to the scope and application of the exemptions within a particular industry.
There are three pre-requisites to satisfy before becoming responsible for SST. The law states that a business has to be considered a taxable entity, dealing in a taxable service or product, and exceeds the minimum revenue threshold (RM500,000 in most industries, RM1.5 million in the food and beverage sector). Only then will a business be responsible for collecting SST. “Even if one of the three pre-requisites is not met, the business does not attract any SST responsibility,” says Yeoh.
Liew tells Enterprise that there is some confusion as to who constitutes a “chargeable or taxable person”. “There ought to be clearer guidelines to avert the problem of ‘double taxation’ in the supply chain between manufacturers, wholesalers and retailers,” he says.
Yeoh is concerned about the welfare of the F&B industry under the new tax regime. “I am concerned about the current SST treatment of businesses in this sector,” he says.
A key exemption within the new tax regime is rental income, which is not subject to any form of SST. Yeoh says, “It is not uncommon for a restaurateur to own the building or shoplot in which his business operates. His restaurant may be on the ground floor while he lets out the second and third floors to collect rental income. Under the SST industry guidance, if you are an F&B operator and have been licensed to charge service tax, the rental income is now subject to service tax. I struggle to understand the spirit of the law in this instance.”
What is particularly mystifying, he adds, is that the problem of rental income attracting service tax is only found in the F&B industry. There is no instance of it anywhere else in the economy. “I do not understand why this incongruence exists,” he says.
According to Yeoh, the RMCD’s position on this issue relates to the SST treatment of hotels. “In a hotel, all the rooms and spaces are open for so-called short-term rental — you pay to stay in a room for a few days and the hotel charges you a service tax on this payment. There is also a service tax on the rental if the hotel decides to rent out its concourse area for an event,” he says.
In this very specific and narrow instance in the hospitality industry, Yeoh agrees that a service tax imposed on short-term rental is justified. “But I do not think this example can be applied to the wider F&B industry because there are so many differences between renting a hotel room or an event space for the weekend and a business taking out a long-term lease on the second floor of a building,” he says.
Yeoh is concerned that the inconsistent treatment of F&B businesses will cause an uneven playing field for the broader industry. “If I set up a company for the sole purpose of buying properties and renting out the space, I would actually not attract any service tax. However, because an F&B operator does the same for the upper floors of his building, his rental income will be hit by service tax. There is a risk of the industry becoming less competitive,” he says.
Yeoh continues to engage with the RMCD and has requested that it consider fine-tuning this rental regulation in the industry guidance documents. “Suppose the RMCD makes a ruling to the effect that only a restaurateur who rents out the top floor as a short-term event space would be responsible for the 6% service tax, it would clearly be a justified taxable activity.”
McMillan Woods’ Liew has identified another problem that could affect F&B operators. “As we understand it, the service tax should only be imposed on services rendered, and not incidentals that are defrayed on behalf of clients,” he says.
“In addition, clearer guidelines are needed when there is a mixed supply chain operating within a holding company structure. It is important to note that where a sales tax is imposed, there cannot also be a service tax within that supply chain and vice versa.
“Take an F&B group of companies with a central kitchen operating as a subsidiary. The central kitchen ‘manufactures’ food, which it then sells to the group’s own shops [retailers] and charges them a sales tax. The retailers then sell the food to the public and are required to charge their customers a 6% service tax.
“This results in a potential 16% tax situation, leading to a price increase. The authorities need to study this situation so it can help the business community mitigate the cost of doing business.
“Like every new tax regime, there are always early glitches. It would appear that within the new SST regime, certain transactions may be subject to multiple tax exposures. This ‘tax cascade’ has the effect of indirectly increasing the prices of certain goods and services. Businesses engaged in the sale of these goods and services would arguably be less competitive and consumers would opt for products from other similar suppliers,” he says.
Another problem has to do with the SST treatment of convenience stores. The responsibility to charge service tax in the F&B industry has been broadened to include convenience stores. This is applicable even if the convenience stores do not provide any “services” per se.
“Some of these convenience stores may have two or three tables outside, as well as a microwave for customers to heat up a sandwich. Because of this very rudimentary element of ‘service’, the convenience stores are now adjudged to be providing a service and have to charge service tax on the relevant products,” says Yeoh.
This puts convenience store owners in a bind. Yeoh argues that these “services” are not sufficient grounds for the store to be treated like an F&B business. “Ultimately, a convenience store is just a place with shelves full of goods. The customers pick up the products, pay and leave. Under the circumstances, I am not sure that convenience stores satisfy the first criteria of being an SST taxable business,” he says.
Worryingly, convenience stores also face the prospect of a “tax cascade” scenario. Among the items not exempted by SST are products like alcoholic beverages, cigarettes and various non-alcoholic beverages that are sold over the counter. On their own, these products attract a sales tax. But when they are sold in convenience stores, they attract an additional 6% service tax due to the nature of the ‘service’ being rendered, says Yeoh.
“So now, on top of the usual sin tax and excise duties for alcohol and cigarettes, these products attract a sales tax on their own. And if they are sold over the counter in a convenience store, they are hit with another 6% service tax. How can it be considered a service when the customer picks up the product, brings it to the counter to have it scanned, pays for it and then takes the product away?”
Should input tax credits make a return?
Businesses were left reeling when it was revealed in August that nearly RM18 billion in GST input tax refunds had been removed from government trust accounts. These funds had been earmarked for businesses that qualified to receive input tax refunds under the GST regime. According to the finance minister, the missing funds amounted to 93% of the total GST input tax credits owed to businesses.
Nonetheless, for Yeoh, one of the most crucial issues under the current SST regime is that the authorities consider adopting the input tax credit mechanism of the previous GST regime.
Basically, under the old tax regime, those who qualified for GST were required to charge tax on their output of taxable supply of goods and services to customers. But they were allowed to claim as credit any GST incurred on their purchases that are inputs to their business. This helps avoid multiple layers of taxation and only the value-added at each stage is taxed.
This is necessary, Yeoh argues, because even though the SST is meant to be a single-tier tax at source, the single-tier advantage is lost in industries where subcontracting is a common practice. Taxes end up being charged at multiple points in the business-to-business supply chain, forcing businesses to figure these costs into their mark-ups. This causes a compounding effect, resulting in end users footing the bill for multiple SST charges.
Which businesses are vulnerable to this compounding effect? “Let’s take the IT and telecommunications industries. There are many layers of subcontracting that occur here. Suppose Party A subcontracts a taxable service to Party B, and Party B subcontracts part of that service to Party C, there will be multiple service taxes levied by the time that final service goes down the chain, back to Party A,” says Yeoh.
“Due to the absence of an input tax credit mechanism, there is nowhere in this supply chain for the businesses to externalise these service taxes and claim a refund from the government. This goes against the concept of a single-tier tax system.”
There is yet another inconsistency in the application of the SST regime in this instance. This problem of compounding taxes only ever occurs in the subcontracting of services. “If you look at manufactured goods under the sales tax regime, there is actually a provision that exempts subcontracting work from sales tax,” says Yeoh.
For Yeoh, the effectiveness of any tax regime comes down to the quality and integrity of those tasked with managing the regime. “My belief is that, if the input tax credit mechanism makes a return and is managed transparently and honestly, then businesses will welcome it. It is a matter of responsible management,” he says.
Liew, however, has a different view. “It may well reduce the cost of doing business, but this must be measured against the increase in the cost of administration and the added confusion as to what kinds of inputs can be claimed, or otherwise. Furthermore, the addition of an input tax credit mechanism would lead to accounting complications. The SST regime is meant to be simple. So, let’s strive to keep it that way.”
Business owners speak up
Nelson’s Franchise (M) Sdn Bhd general manager and finance director Datuk Eric Tai tells Enterprise that he was surprised to find that his company would be responsible for imposing a sales tax under the new regime. “Under the old regime, our core product — frozen corn kernels — was zero-rated, so we did not have to charge customers GST. And we were able to submit input tax refund claims for any GST that our suppliers imposed on us,” he says.
“We did not expect to be responsible for charging a sales tax. But having said that, we realise that certain old public administrative practices have led to the country’s finances becoming increasingly precarious in recent years. Under the circumstances, we have to do our part to help raise tax revenue for the country.”
Tai takes a dim view of some manufacturers who indiscriminately raise prices just prior to the rollout of the SST regime. “The fact is that not all manufacturers were hit with GST under the previous regime. Consider this alongside the fact that many manufacturers tend to have at least a few months of additional supply on hand,” he says.
“This supply would not have had any GST imposed on it. So, how can the prices of these products be raised so that they appear to have SST imposed on them?
“Our company was in this situation. We had excess corn products left over from the GST period. These goods were zero-rated and we sold them as such. Now that we attract a sales tax, we have made the decision to absorb any price increase for now. We are able to do this because we did not have to contend with price increases during the old GST regime.”
Tai is taking some very practical steps to comply with the new SST regime. “I do understand there is some uncertainty under the new tax regime, but I think the business community has been rather patient. For the time being, we are communicating with our suppliers to determine all possible sources of SST for us. We will take some time to closely monitor if and how any of these SST-rated supplies affect the costing of our products,” he says.
Tai maintains a close working relationship with officials from the Ministry of Domestic Trade and Consumer Affairs, with a view of establishing a track record of openness and cooperation with the ministry. “The reason I am monitoring all of our costs is we cannot rule out the possibility of increasing prices in the future. If we end up making this decision, we will need to make sure it is supported by our costing documents, in the event we are asked to justify the increases,” he says.
According to Pathlab Group CEO Datuk Marcus Kam, his company’s medical testing services have been exempted from SST. “There is some SST embedded in the price of products purchased by importers, which are then passed on to local distributors. We purchase certain raw materials from these distributors for testing. In addition to this, there is SST for the purchase of various services including professional services, IT services, general insurance and entertainment expenses,” he says.
“However, so far, we have found these SST costs to be minimal. We will certainly track any developments in the current SST regime. But for the time being, we see no urgency to adjust any of our prices.”