chapter 9, indirect tax

CHAPTER 9

INDIRECT TAXES

1ATXB 213 Malaysian Taxation I

LEARNING OBJECTIVE


ATXB 213 Malaysian Taxation I 3

INTRODUCTION

The responsibility to administer indirect taxation in Malaysia lies with the DG of Royal Customs Department

There are several indirect taxes that are currently regulated in Malaysia such as sales tax, service tax, custom duty and excise duty.

The legislations involving these taxes are:Custom Act 1967

Excise Act 1976

Sales Tax Act 1972

Service Tax Act 1975


Sales Tax

The objective of sales tax are:

To increase revenue collection.

Used by the government as a financial measure to regulate economic growth and national development.


The Concept of Sales Tax

Sales tax was first introduced into Malaysian taxation system in 1972 and governed by Sales Tax Act 1972.

It operates as a single stage tax – means tax is only imposed once either at the input or output stage.

It also called as a consumption tax which levied on consumer who acquires the taxable goods manufactured in Malaysia and goods imported to Malaysia for home consumption.


Scope of Sales Tax

Section 6 of the Sales Tax Act 1972 states that sales tax is charged and levied on:All taxable goods manufactured in Malaysia (except those

in Free Zones, Labuan, Langkawi and Joint Development Area).

Goods imported for home consumption.

Taxable goods (Section 2) – all goods except those exempted under Sch. A, B and C of Sales Tax (Exemption) Order 1980.Sales tax is not imposed on personal or professional

services (i.e, doctor’s services), sale of real property (i.e., land and house).


Duties of Taxable Person

Taxable person – domestic manufacturer and importer of taxable goods

Duties of taxable person:

At point of sales, compute and include sales tax in the invoice.

Keep records of sales and sales tax for 6 yrs.

File sales tax return within stipulated period.

Make payment within stipulated period.


Rates of Sales Tax

5% - Fruits, certain foodstuff, timber and building material.

10% - General rate on other taxable goods

5% - Cigarettes

5% - Liquor and alcoholic drinks.


Payment of Sales Tax

When the imposition of Sales Tax

Manufactured goodsCharged at the time of sale to customer

Charged at the time of disposal (if the goods not sold – self use, destroy, donate or supply free of charge to other party).

Imported goodsCharged at the point of entry in Malaysia together with the

custom duties.


Payment of Sales Tax

Sales tax imposed should be paid within 28 days from the expiration of the taxable period.

Taxable period means every two calendar months.

Example:

Jan – Feb Due date: 28 March

Mac – Apr Due date: 28 May

The tax collected is payable to Royal Custom and Excise Department.


Determination of Sales Value

Imported goods

The sales value would be the aggregate of the value of the taxable goods for custom duty purposes and amount of customs duty imposed on such goods at custom clearance upon entry into Malaysia.



Example:

Candy Sdn. Bhd imported goods from Jakarta. The cost of purchase was RM280,000. Freight charges and insurance on goods was RM2,800 and RM3,500 respectively. The goods arrived at Port klang on 24 January 2012. The custom duty was 25%.

Compute the sales tax payable by Candy Sdn. Bhd. (assuming the sales tax is 10%)


Discussion

Answer:



Manufactured goods

If sold to independent person – sales value = actual selling price.

If sold to non-independent person – sales value = market value.


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Sales value should only include manufacturing costs such as:

Cost of raw material

Direct labour cost

Manufacturing o/head (rental, electricity, water)

Non-manufacturing o/head (office exp, advertising)


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Depreciation of machinery, building and equipment

Profit or mark up.

Cost involving marketing and sale should be excluded.


Example –Manufactured Goods

Intan Sdn. Bhd is a manufacturing company located at Kuantan. The company incurred the following expenditure in producing finished goods. All the finished goods were sold in cash to Orchid Bhd on 1 Jan 2012. Intan Sdn. Bhd has no control over Orchid Bhd.

Cost of raw material RM250,000

Cost of direct labour RM33,000

Manufacturing o/head RM24,000

Non-manufacturing o/head RM7,200

Depreciation of machinery RM26,000

Salesman commission RM5,500


Example –Manufactured Goods

Profit mark up is 20%

Required:

Compute the sales tax imposed on Orchid Bhd at the point of sales (assuming the rate of sales tax is 10%).


Exemption on Raw Material Inputs

Ring System [section 9(1) and (2) Sales Tax Act]

– Provision of tax free materials from one manufacturer to another

– Application has to be made to the Sales Tax Office

– The applicant has to be licensed

– The materials are used in the manufacture of finished product


Exemption on Raw Material Inputs

Refund System [section 31 Sales Tax Act]– Modified version of ring system – A licensed manufacturer can purchase raw materials free

of sales tax from a vendor who has paid the sales tax– The vendor can then apply to claim a refund

Credit System [section31A Sales tax Act]– Intended for small manufacturers – Ensures their inputs do not suffer any tax– Based on a refund of tax paid by the manufacturer– Licensed manufacturer able to obtain a credit of the tax


Penalty

• Where any amount of sales tax remains unpaid after the last day on which it was due, a penalty of 10% of such unpaid amount shall be payable

• If the sales tax due and payable remains unpaid for more than 30 days after the last day on which it is payable, the rate of penalty will be increased by 10% for the second period

• Maximum penalty 50%


Service Tax

Service tax was introduced into Malaysian taxation system in 1975 and governed by Service Tax Act 1975.

It also operates as a single stage tax – means tax is only imposed once either at the input or output stage.


Service Tax

It also called as a consumption tax which levied on consumer who consumes prescribed goods sold and services provided by the prescribed establishment or prescribed professional establishment.

Rate of service tax is 6% effected from 1 January 2011. Prior to 1 January 2011, the rate of service tax was 5%.

The Service tax applies throughout Malaysia excluding Langkawi, Labuan, Tioman and Joint Development Area.


Licensing Requirements (Section 8 STA)

Every taxable person is required to apply for a license to collect services tax.

No taxable person is allowed to carry on the business of providing taxable services or selling or providing taxable goods unless in possession of such a license.

The license will remain a taxable person until his license is revoked.


Licensing Requirements (Section 8 STA)

Director General of the Royal Customs Department revokes/cancel if: Cessation of business

Death

Dissolution of company

Failure to provide taxable services

Voluntary licensing (Section 8A STA)Any person who is not required to be licensed, voluntary

apply to the DG to be licensed to collect services tax from their customers. The license will be granted if the person satisfied to the Director General – provides taxable service.


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The service tax is levied on the:

Taxable Person Operators of hotel, excluding for hotel not more than 25 rooms,

hostels for students of education institutions or religious institution.

Operators of restaurants, bars, snacks-bars or coffee houses located in hotels, health centers, private clubs having annual sales turnover of at least RM300,000 of taxable goods and taxable services.

Motor vehicles service agencies, companies, firms and sole proprietors providing employment services, hire & drive car, consultancy services, telecommunication services, management services and others.


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The service tax is levied on the:

Taxable services Provision of rooms for lodging or sleeping accommodation in a

hotel having than 25 rooms, premises for meeting or for promotion of cultural or fashion shows, health services, massages or beauty salons in a hotel having more than 25 rooms.

Provision of all advertising services, accounting, auditing, bookkeeping, consultancy and other professional services provided by Public Accountants.

Provision of all types of employment services, parking space for motor vehicles, credit card, services provided by dentists and veterinary surgeons and others.


Scope of Charge

Timing of imposition of service taxPrescribed taxable goods – the tax is levied at the point

of sales.The actual price for which goods are sold OR

Where no charge is made, the charge which would have been made in the ordinary course of the business

Prescribed taxable services – charged at the time when the taxable service is provided to customer by taxable person.


Example

Elite Corporate Service Sdn Bhd (ECSB) is a Penang basedcompany providing taxable services to its clients under STA.In providing consultancy services to its client, RamsamiBhd., ECSB sough legal advice from Dharma & Co., areputable legal firm located in Sungai Petani. The legal firmissued an invoice amounting to RM7,500 (inclusive ofservice tax). ECSB issued an invoice for RM10,000 toRamsami Bhd. being charges for consultancy services. ECSBprovided all the services to Ramsami Bhd. in June 2012.miscellaneous expenses incurred by ECSB are as follows: Transport cost RM450

Telephone expenses RM120

Fax charges RM30


Discussion

Required: Assuming that ECSB provides taxable services under the

Service Tax Act, prepare the invoice to be issued by thecompany to Ramsami Bhd. Indicating all charges, icludingthe sum invoiced by the legal firm (Dharma & Co.)


Management Services

Corporate affairs' management Human resource management Internal audit Management information systems Administrative and secretarial Sales and marketing management Property management Financial management Asset management Project management services Construction management services


Management Services

Management services provided by a company in a group of companies to any company in the same group of companies are no longer regarded as taxable services.

To qualify as companies within a group, one company within the group MUST control the other company. The required shareholding is:At least 50% of issued share capital either directly or

indirectly through subsidiaries, OR

Between 20% to 50% with the powers to appoint or remove all or a majority of directors in the second company


Payment of Service Tax

Service tax imposed should be paid within 28 days from the expiration of the taxable period.

Taxable period means every two calendar months.

Example:

Jan – Feb Due date: 28 March

Mac – Apr Due date: 28 May

The tax collected is payable to Royal Custom and Excise Department.


Goods and Service Tax (GST)

The Malaysian govt made a commitment in the Budget 2005 to introduce GST in 2007 but has postponed of its implementation to 2010?

GST is a levy on consumption and is essentially a territorial tax.

This tax will replace the sales and service tax

The common features of GST are: The tax is collected at every stage of production process

The amount collected at each stage is based on the value added at that stage.


The rationale for introducing GST is as follows: It would improve collection of revenue for the Government

in a manner that is more comprehensive, transparent and effective.

Means of increasing the Government tax base by reaching out to a broader group of people, namely consumers

The GST system has a self-policing mechanism due to in-built cross checking features which would improve tax compliance

Provide opportunity for the Government to lower corporate and individual tax rates

Encourage greater foreign direct investment as well as foster saving among the taxpayers.

Rationale for GST


Input Tax credit - the gross GST liability of each business is assessed as tax rate applied to sales and then allows the business credit against GST incorporated in the business input costs

Zero Rating – totally free of GST but can claim input tax credit during the purchase.

Exemption – not required to charge GST on their sales and not entitled to claim input tax credit on their purchase.

Attributes of GST


Drafting Legislation for GST

The following are the four pronged rules should taken into consideration in drafting legislation for GST:

Rule 1: Reduce exemptions

Rule 2: Zero ratings only for exports

Rule 3: Exempt small business

Rule 4: Administration of GST and income Tax by the same agency.


Advantages of GST

Could reduce the income tax rate for company as well as individual taxpayers so that the income tax system becomes more competitive

Avoid cascading effect prevalent under existing sales tax and service tax

Improve ability to detect non-compliance

Increase the tax revenue in the future.

GST is a multistage concept of indirect tax, thus should be able to speed up the

Collection of tax revenue for the government.

GST flow Chart

Supplier sell raw materials

• Supplier collects GST on the value added at the first stage (sale of raw materials) and remits the tax to Government

Manufacturer sells finished goods

• Manufacturer collects GST on the value added at the second stage (raw materials converted into finished goods) and remits to the Government

Retailer sells finished goods

• Retailer collect GST on the value added at the third stage (sales of finished goods) and remits to Government

Consumer

• Customer pays GST on the value of finished goods which is the sum of the value added in the first to third stages


THANK YOU

Q & A


chapter 9, indirect tax

Education

sales tax act

point of sales

records of sales

consumption tax

file sales tax return

malaysian taxation iatxb

malaysian taxation system

service tax act