Legal Perspective: Analysis of recent Director General s Decisions & Guidelines. Yuvaraj Sugapathy 19 May 2016

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1 Legal Perspective: Analysis of recent Director General s Decisions & Guidelines Yuvaraj Sugapathy 19 May 2016

2 Agenda 1. Sources of Law 2. Primary Legislation vs Subsidiary Legislation 3. DG s Decisions & Guidelines

3 Sources of Law

4 Sources of Law 1. Federal Constitution 2. Acts of Parliament 3. Case Law

5 Federal Constitution 1. In Ah Thian v Government of Malaysia [1976] 2 MLJ 112, Suffian LP held that: The doctrine of the supremacy of Parliament does not apply in Malaysia. Here we have a written constitution. The power of Parliament and of State legislatures in Malaysia is limited by the Constitution, and they cannot make any law they please. 2. Article 96 of the Federal Constitution states that: No taxation unless authorized by law 96. No tax or rate shall be levied by or for the purposes of the Federation except by or under the authority of federal law.

6 Acts of Parliament 1. Income Tax Act Real Property Gains Tax Goods and Services Tax Act 2014 ( GST Act )

7 Case Law The doctrine of stare decisis had been lucidly explained in the case of Kerajaan Malaysia & Ors v Tay Chai Huat [2012] 3 CLJ 577: The common law tradition is built on the doctrine of stare decisis which directs a court to look to past decisions for guidance on how to decide a case before it. This means that the legal rules applied to a prior case with facts similar to those of the case now before a court should be applied to resolve the legal dispute. The use of precedent has been justified as providing predictability, stability, fairness and efficiency in the law.

8 Primary Legislation vs Secondary Legislation

9 Primary Legislation vs Subsidiary Legislation 1. Primary Legislation: eg: Acts of Parliament 2. Subsidiary Legislation: eg: Regulations, Orders

10 Primary Legislation vs Subsidiary Legislation 1. Section 3 of the Interpretation Acts 1948 and 1967 (Consolidated and Revised 1989) defines subsidiary legislation to mean any proclamation, rule, regulation, order, notification, by-law or other instrument made under any Act, Enactment, Ordinance or other lawful authority and having legislative effect. 2. Section 23 of the same Act states that any subsidiary legislation that is inconsistent with an Act (including the Act under which the subsidiary legislation was made) shall be void to the extent of the inconsistency.

11 DG s Decisions & Guidelines

12 DG s Decisions & Guidelines 1. DG s Decisions and Guidelines are not laws. They are not legally binding on taxpayers if the provisions of the DG s Decisions and Guidelines contradicts the GST Act and/or goes beyond what the GST Acts provides. 2. In Multi-Purpose Holdings Berhad v Ketua Pengarah Hasil Dalam Negeri [2006] 1 CLJ 1121, Gopal Sri Ram JCA (as he then was) held that: There was a faint suggestion by counsel for revenue that the FIC Guidelines applied to this case. But, as my learned brother Arifin Zakaria JCA pointed out in response, the FIC Guidelines are not law. See Ho Kok Cheong Sdn Bhd & Anor v Lim Kay Tiong & Ors [1979] 2 MLJ 224 where Wan Hamzah J said: The guidelines were issued not pursuant to any power given by law, and in my opinion they have no force of law

13 Metacorp Development v KPHDN (High Court)

14 Metacorp Development v KPHDN Facts a) The taxpayer, a property development company, purchased two parcels of land in Malacca ( the Lands ). b) The Lands were compulsorily acquired by the State of Malacca and the Applicant was paid a compensation. c) The taxpayer did not subject the compensation it had received to income tax. d) The IRB raised notices of additional assessment with penalty against the taxpayer.

15 Metacorp Development v KPHDN Facts e) The taxpayer argued that the compensation it had received for the compulsory acquisition was not subject to income tax under the law and that the IRB had acted ultra vires and without any factual or legal basis in raising the said notices. f) The taxpayer further submitted that the decision impact statement (DIS) issued by the IRB, upon which the IRB s decision to raise the additional assessment was based, was ultra vires and had not legal effect because it sought to override the decisions of the superior courts, namely the Lower Perak case and the Penang Realty case.

16 Metacorp Development v KPHDN Facts g) The IRB submitted that the present application for judicial review should not be entertained by this court because there was an alternative remedy in the form of an appeal procedure under the ITA. h) The IRB further submitted that the decision made to raise additional assessment was within its jurisdiction, as it was empowered under s 91 of the ITA, and there was neither a failure on the part of the IRB to perform a statutory duty not any breach of natural justice.

17 Metacorp Development v KPHDN Decision a) It is settled law that the availability of an alternative internal remedy in the form of an appeal process would not bar an application for judicial review. This is especially so when the complaint made to the court is one on error of law or abuse of power that goes to the legality of the conduct of the decisionmaking authority as in the present case. The taxpayer in the present case had demonstrated illegality and unlawful treatment and it would be wrong to insist that it exhaust its statutory right of appeal, even if it was available. In fact, the present case should preferably be referred to the court as it raised a question of law.

18 Metacorp Development v KPHDN Decision b) In the Penang Realty case it was the decision of the Court of Appeal that compensation from compulsory acquisition was not liable to tax. The case applied the principle, which was enunciated in the Lower Perak case, that compulsory acquisition could not constitute sale because of the element of compulsion that vitiated the intention of trade. c) The Penang Realty and Lower Perak case were binding authorities on the IRB, being an arm of the executive. Thus, the IRB s decision, which was not based on the legal authorities of the superior courts, was in excess of its authority. Based on the doctrine of stare decicis, this court was also bound by the decisions of the superior courts.

19 KPHDN v Success Electronics & Transformer Manufacturer Sdn Bhd (High Court)

20 KPHDN v Success Electronics & Transformer Manufacturer Sdn Bhd Facts a) The IRB had decided that the taxpayer was only entitled to a reduced reinvestment allowance (RA) for the year of assessment 2002 and that it was not entitled to a RA for the year of assessment 2003 for the amount it incurred in respect of the research and development room. b) When the IRB rejected the taxpayer s claim for RA, the taxpayer appealed to the SCIT. c) The IRB submitted that based on its internal ruling, the entitlement for RA was restricted to the production area only.

21 KPHDN v Success Electronics & Transformer Manufacturer Sdn Bhd Facts d) Based on the authorities on point, the SCIT decided that all the meeting rooms, office spaces, toilets, staircases, void areas, lift lobby, surau and warehouse in Factory B and the lighting adjustments, installations of air-conditioners, electrical fittings and partition walls in Factory C were part of the factory and the taxpayer is allowed to claim RA in respect of the expenses spent on those items. e) The SCIT also found that the IRB was not entitled to reduce or disallow the RA claimed under Sch 7A of the ITA based on its own internal ruling or guidelines. f) The SCIT allowed the taxpayer s appeal.

22 KPHDN v Success Electronics & Transformer Manufacturer Sdn Bhd Decision a) The was no error made by the SCIT with regard to the meaning to be assigned to the word factory. The SCIT were justified in taking into account the non-production area as part of the factory in both the buildings for which the respondent had incurred capital expenses. b) If Parliament had intended the word factory to be narrowly interpreted as was submitted by the IRB, then a meaning different from the meaning provided in Sch 3 of the ITA ought to have been provided in Sch 7A of the ITA.

23 KPHDN v Success Electronics & Transformer Manufacturer Sdn Bhd Decision Regarding the restriction of RA by the Respondent on production area only, RW1 admitted during the trial that the Respondent s decision was based on its own internal ruling; or in other word based on its own guideline. At the same time, it was noted that the RW1 has also admitted that the condition for production area was not contained in Schedule 7A of the Act. Premised on that circumstance, the Special Commissioners were of the view that the imposition of the condition production area based on internal ruling or guidelines without any legal authority is not law; and therefore no force of law. In other word, the Respondent is not entitled to reduce or to disallow the RA claimed under Schedule 7A of the Act based on its own internal ruling or guidelines.

24 DG s Decisions & Guidelines Possible arguments that the DG s Decisions & Guidelines are inconsistent with the GST Act: Amended DG s Decision 1/2014 (Item 3) Our view: The DG imposes additional conditions for bad debt relief. Section 58 of the GST Act and Regulations of the GST Regulations are the only conditions that must be fulfilled in order to claim bad debt relief.

25 DG s Decisions & Guidelines Amended DG s Decision 2/2014 (Item 5) Our view: A person applying for voluntary registration before the commencement of business must make the first taxable supply within 12 months from the date of application. Section 24(1) of the GST Act provides that the DG may impose conditions as he deems fit. However, this discretion my be exercised in accordance to the spirit and intention of the GST Act. In this regard, the explanatory statement to the GST Act states that GST is not a cost to business.

26 DG s Decisions & Guidelines Guide on Land and Property Development (18 April 2016) Our view: The DG takes the view that the GST treatment of a vacant land will be based on the land title issued by the relevant authority. Land title is not conclusive as to the GST treatment of a vacant land. The fact that a land has a commercial title does not prevent it from being used for residential purpose. An objective assessment of the intended use of the land should be made in order to ascertain the GST treatment of the land. This assessment should not be limited to the land title and should include other factors such as the zoning of the area where the land is located.

27 DG s Decisions & Guidelines Guide on Land and Property Development (18 April 2016) Our view: The DG takes the view that Section 187 and Section 188 of the GST Act are alternative to each other. See Q & A 42. Section 187 is not a charging provision. It is a provision for the treatment of a supply. On the other hand, Section 188 seeks to provide for the chargeability of tax on a progressive or periodic supply which is made under an agreement for a spanning supply.

28 GST Appeal Process

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The Inland Revenue Board (IRB) has recently uploaded the new Form CP58 and the Guide Notes on Filling Out Form CP58 [Pin.1/2013] on its website.

The Inland Revenue Board (IRB) has recently uploaded the new Form CP58 and the Guide Notes on Filling Out Form CP58 [Pin.1/2013] on its website. RYTA TAXATION SERVICES SDN. BHD. (Company No. 70004-T) Tax Update Issue 4, April 2013 Statement of Monetary and Non-Monetary Incentive Payment to An Agent, Dealer or Distributor Pursuant to Section 83A