Tax in Malaysia

MEMBER FIRM OF BAKER & MCKENZIE INTERNATIONAL
Client Alert
November 2013
Implementation of Goods & Services Tax in

Malaysia
The cloud over whether goods and services tax ("GST") will be introduced in
Malaysia was finally lifted on 25 October 2013 after the Prime Minister of
Malaysia announced the Budget 2014. The idea of introducing GST was first
conceived in 2005, but GST's implementation had been deferred
subsequently to facilitate public education and consultation. Although the draft
GST Bill was read for the first time in Parliament in 2009, the Bill has not been
passed into legislation and no clear timeline was set as to GST's
implementation.
The uncertainty as to GST's implementation cast many doubts as to whether
Malaysia will have a GST regime and if so, when the GST will be
implemented. Many businesses were taking a wait-and-see approach before
taking any steps to prepare for GST's implementation.
The Budget 2014 announcement ended the speculation and the uncertainties
relating to GST's implementation. It is announced that the GST will be
implemented in Malaysia with effect from 1 April 2015 at the rate of 6% and
will replace the current sales and service tax regime. As such, businesses will
have approximately 17 months to prepare for the implementation of GST.
Nevertheless, at the time of writing, the GST Bill remains in a draft form and is
still subject to further amendments.
GST vs. Current Sales and Services Tax

The only similarity between the GST and the current indirect tax regime is that
the Royal Malaysian Customs Department (Customs) which is
administering the current sales and service tax regime will also be
administering the GST regime. Apart from this, the GST regime differs quite
substantially compared to the sales and services tax regime.
a) Multi-Stage Tax
In contrast to the current sales and service tax regime, GST will be a broadbased consumption tax, based on a value-added concept. GST will be levied
and charged on all taxable supplies of goods and services made in the course
of a trade or business in Malaysia by a taxable person. The imposition of GST
on a multiple-stage basis is a key difference from the current sales tax and
service tax which is levied at only one stage of the supply chain.
b) Tax Neutral to Businesses

GST is a multi-stage tax payable by all the intermediaries in the production
and distribution chain, with the tax burden ultimately borne by the consumer.
Unlike the sales and service tax regime, businesses which are registered for
GST purpose, will be allowed to claim input tax credit (i.e. GST it has paid in
the course of business) to offset against the GST levied on the goods or
services supplied to its customers.
Generally, GST will not be a cost to intermediaries nor will it appear as an

expense in their financial statements. However, GST may not be entirely tax
neutral for certain businesses making exempt supplies as such businesses
are not allowed to claim input tax credit.
c) Broad-based Tax
GST has a substantially broader reach compared to sales and service tax
which is only levied on particular taxable goods and services. All supplies of
goods and services will be subject to GST unless they are zero-rated supplies
or exempt supplies, or fall within particular special schemes.
d) Businesses Bear Compliance Burden

As a key feature of the GST is the ability of business to offset GST paid
against GST charged, businesses will bear a significant part of the compliance
burden of implementing GST. Businesses will play the tax collector of GST,
since ultimately the GST will be collected by businesses and remitted to
Customs after setting-off the correct amount of input tax credit. Strict rules
relating to timing of charging and remitting GST as well as invoicing
requirements will need to be adhered to.
e) GST on Imported Services

Whilst no sales or service tax is imposed on services provided by a foreign
service provider to Malaysian entities, under the GST, such imported services
will be subject to GST. The reverse charge mechanism is likely to be adopted
to ensure that the GST payable are accounted for by the recipient of the
services.
Taxable or Exempted?
a) Standard-rated supplies
Standard-rated supplies are taxable supplies of goods and services which will
be subject to the proposed rate of 6%. A taxable person who is registered to
collect GST on such supply is also entitled to claim input tax credit on his
business inputs in making taxable supplies.
b) Zero-rated supplies
Zero-rated supplies are taxable supplies of goods and services which are
subject to a GST rate of 0%. As such, businesses will not collect any GST on
such supplies but are still entitled to claim a tax credit on inputs used in the
course or furtherance of the business.
Most basic food items (including poultry, meats, fish, cooking oil, rice, sugar,
salt and vegetables), supply of the first 200 units of electricity per month for
domestic consumers will not be subject to GST (zero-rated supplies).
c) Exempt supplies
Exempt supplies are supplies of goods and services which are not subject to
GST. Businesses will not collect any GST on the such supplies and no input
tax credits can be claimed in respect of exempt supplies.
Based on the draft proposed list of exempt supplies in the Budget 2014
announcement, it appears that certain financial services, domestic passenger
transportation, private healthcare services, education services, supply of
agriculture land and residential properties will be GST-exempt.
Implementation of Goods & Services Tax in Malaysia 2013
www.wongpartners.com
For further information please

contact
Yvonne Beh
+60 3 2298 7808
yvonne.beh@wongpartners.com
Krystal Ng
+60 3 2298 7937
krystal.ng@wongpartners.com
Level 21,
The Gardens South Tower,
Mid Valley City,
Lingkaran Syed Putra,
59200 Kuala Lumpur
d) Out of Scope Supplies

Certain supplies which do not fall within the charging provisions of the GST
Bill include non-business transactions, the sale of goods from a place outside
to another place outside Malaysia and services provided by the Government.
Moreover, to promote certain tax-free areas within Malaysia, supplies made in
Labuan, Langkawi and Tioman will be disregarded for GST purposes.
Preparing For GST's Implementation

Businesses should take the necessary steps and pro-active measures to be
GST ready. Some of the steps which will need to be undertaken include:
a) Review of Commercial Contracts and Transactions

All long-term commercial contracts and transactions should be reviewed and
reconsidered for GST purposes. The review is important to determine the
allocation of the GST burden and the treatment of contracts spanning the
implementation of GST. Particular transitional provisions may be applicable to
such transactions and contracts. Companies should also consider the impact
of irrecoverable GST on their business.
b) Review of Internal Supplies

Companies should undertake a review of all their internal transactions such as
the provision of employee benefits, since such supplies may attract GST.
Careful planning of employee benefits may be required taking into account the
GST implications.
c) Updating of Accounting System / Recording Systems

All accounting and recording systems should be updated to allow for the
calculation of output tax and input tax claims. Businesses must be prepared to
bear the compliance costs associated with the collection and remittance of
GST to Customs.
d) Training of Employees
It is important that employees and staff are prepared and well-equipped to
implement GST in the business operations through trainings and awareness
programs.
Experience in many countries which have already implemented GST show
that early preparation is crucial to ensure a smooth transition to GST. GST
preparations should be undertaken as soon as possible so that companies are
able to properly manage the implementation of GST.
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Implementation of Goods & Services Tax in Malaysia 2013

Tax in Malaysia

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MEMBER FIRM OF BAKER & MCKENZIE INTERNATIONAL

Implementation of Goods & Services Tax in

GST vs. Current Sales and Services Tax

b) Tax Neutral to Businesses

Generally, GST will not be a cost to intermediaries nor will it appear as an

d) Businesses Bear Compliance Burden

e) GST on Imported Services

Implementation of Goods & Services Tax in Malaysia 2013

For further information please

d) Out of Scope Supplies

Preparing For GST's Implementation

a) Review of Commercial Contracts and Transactions

b) Review of Internal Supplies

c) Updating of Accounting System / Recording Systems

Implementation of Goods & Services Tax in Malaysia 2013

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