Scope of SST and SST Cases S. Saravana Kumar 25.8.2018
Sales Tax and Service Tax- (1) Sales Tax Bill 2018 (2) Service Tax Bill 2018 (3) Proposed model by Customs on 19.7.2018
Scope of the Proposed Sales Tax Clause 8- Sales tax is a tax charged and levied on all taxable goods: (a) Manufactured in Malaysia by a registered manufacturer and sold, used or disposed by him; or (b) Imported into Malaysia by any person. No sales tax is charged on: (a) Goods listed under the Proposed Sales Tax (Goods Exempted From Sales Tax) Order; (b) Certain manufacturing activities that are exempted by Minister of Finance through Proposed Sales Tax (Exemption From Registration) Order.
Registration for Sales Tax Clause 12, registration requirement: a) taxable goods manufacturers are required/ liable to be registered when sales value of taxable goods has exceed RM500,000 for 12 months period. b) manufacturers who carry out sub-contract work on taxable goods where Value of work performed exceeds RM500,000 for 12 months periods. (Taxable goods belonging to a registered manufacturer, non registered manufacturer and manufacturer in special area (FIZ and LMW). Computation of registration threshold is based on: I. historical method (total value of taxable goods in that month and 11 months immediately preceding the month); and II. future method (total value of taxable goods in that month and 11 months immediately succeeding the month). Registered person would be known as Registered Manufacturer.
Timeline for Registration for Sales Tax Clauses 12 and 13, registration requirement: a) Liability to register at the end of the month after the Sales Tax Act is in force. b) Liability to submit application for registration to the DG by the end of the following month of (a) above. c) DG shall register the manufacturer with effect from the first day of the month following the month in (b) above. 1 Sep 2018 30 Sep 2018 31 Oct 2018 1 Nov 2018 Act comes into force Liability to register Liability to submit application DG to register the manufacturer 25 August 2018 31 August 2018 31 Sep 2018 1 Oct 2018
Scenario: SENATE DOES NOT PASS THE BILLS 8.8.2018 Bill passed by Dewan Rakyat 15.8.2018 Bill sent to Senate but not passed 14.9.2018 Presented for royal assent End of Sep 2018 Act comes into force
Registration for Sales Tax Voluntary registration option for: a) taxable goods manufacturers below threshold. b) Persons who are exempted from registration. Manufacturers of non taxable gods are not eligible for voluntary registration. Exemption from registration would be given to: (a) manufacturer below threshold (b) sub-contractor manufacturer below threshold (c) Manufacturer of non taxable goods Manufacturing activities given exemption including: 1. Tailoring 2. Jeweller, optician 3. Installation and incorporation of goods into building
Proposed Exemption by Customs Proposed Sales Tax (Goods Exempted from Sales Tax) Order 2018 Goods such as live animals, unprocessed food, vegetables, medicines, machinery, chemical etc. Proposed Sales Tax (Person Exempted From Sales Tax) Order 2018 Schedule A: Class of person Rulers, Federal or State Government, Local Authority, Inland Clearance Depot and Duty Free Shops Schedule B: Manufacturer of specific non taxable goods Exemption of sales tax on acquisition of raw materials, components, packaging etc. Schedule C: Registered manufacturer Exemption of sales tax on acquisition of raw materials, components, packaging etc. to be used in manufacturing of taxable goods (replacing CJ5, CJ5A, CJ5B)
Scope of Service Tax- Proposed Service Tax Act 2018 Clause 7, service tax is charged and levied on: a) Taxable service b) Provided in Malaysia c) By a registered person in carrying on his business. Not chargeable on imported service and exported service. Registration if taxable service exceeds RM500,000 (historical and future method). Proposed rate at 6% (provision of service or charge card at RM25)
LIST OF PROPOSED TAXABLE SERVICES NO 1975 - MARCH 2015 1 st SEPT 2018 ESTABLISHMENT THRESHOLD SERVICE PROVIDER TAXABLE SERVICES THRESHOLD 1. Hotel >25 rooms Accommodation: hotel, inns, lodging house, service apartment, homestay and any other similar establishment. All services including sale of food, drinks and tobacco products. RM 500,000 2. Restaurant in hotel >25 rooms 3. Restaurant in hotel 4. Restaurant outside hotel <25 rooms and threshold exceed RM300,000 RM3,000,000 1. Operator of restaurant, bar, snackbar, canteen, coffee house or any place which provides food and drinks eat-in or take-away exclude canteen in an educational institution or operated by a religious institution or body. 2.Caterer. 1.Food court operator. All services including prepared or served food or drinks; and sale of tobacco products, alcoholic and non-alcoholic beverages. RM 1,000,000 5. Night club No threshold 6. Private club RM300,000 Private club 1. Night club, dance hall, cabaret 2. 1 st, 2 nd or 3 rd class public house or 1 st or 2 nd class beer house 3. Health or wellness centre 4. Massage parlour or similar places All services including sale of food, drinks and tobacco products. RM 500,000 All services including sale of food, drinks and tobacco products. RM 500,000 7. Golf club and driving range No threshold Golf club and driving range All services including sale of food, drinks and tobacco products. RM 500,000 8. Private hospital (on ward and food charges only) RM300,000 Not taxable service
NO 9. 10. 1975 - MARCH 2015 1 st SEPT 2018 ESTABLISHMENT THRESHOLD SERVICE PROVIDER TAXABLE SERVICES THRESHOLD Insurance (B2B only) Telecommunication and Paid-TV No threshold Insurer or takaful operator Telecommunication and paid television service provider 1. General insurance or takaful B2B and general insurance or takaful B2C excluding medical insurance or takaful 1. Excludes a. Insuring or takaful coverage of risks relating to the transport of passengers or goods outside Malaysia b. Insuring or takaful coverage of risks incurred on granting credit relating to the export of goods, services or investments outside Malaysia c. Insurance contract or takaful certificate to cover risks outside Malaysia 1. Telecommunication and relatedservices excluding provisions of services to another telco provider. 2. Paid television broadcasting services RM 500,000 RM500,000 11. Customs agent Customs agent Services of clearing goods from customs control RM500,000 12. Advocates and solicitors Advocates, solicitors and syarie lawyers 13. Public accountant Public accountant 14. Surveyors including registered valuers, appraisers or estate agents Surveyors including registered valuers, appraisers or estate agents Legal services and other charges in connection to such services. Accounting, auditing, book keeping, consultancy or other professional services and other charges in connection to such services. Surveying services including valuation, appraisal, estate agency or professional consultancy services and other charges in connection to such services. RM500,000 RM500,000 RM500,000 15. Profession al engineer Professional engineer Engineering consultancy or other professional services and other charges in connection to such services. RM500,000
NO 1975 - MARCH 2015 1 st SEPT 2018 ESTABLISHMENT THRESHOLD SERVICE PROVIDER TAXABLE SERVICES THRESHOLD 16. Architect Architect 17. Manageme nt services 18. Consultancy 19. Employment agency Management services excluding such services provided by: 1. the developer, joint management body or management corporation to the owners of a building held under a strata title; or 2. asset and fund managers Consultancy services excluding research and development companies Employment agency Architectural services including professional consultancy services and other charges in connection to such services. Management services and other charges in connection to the provision of management services including project management or project coordination Professional consultancy services and other charges in connection to such services excluding: 1. Consultancy services relating to medical and surgical treatment provided by private clinics or specialist clinics; or 2. consultancy services in connection with goods or land outside Malaysia or where the subject matter relates to a country outside Malaysia Employment services excluding 1. secondment of employees or supplying employees to work for another person for a period of time; or 2. employment outside Malaysia RM500,000 RM500,000 RM500,000 RM500,000 RM150,000 20. Private agency Private agency 21. Parking operator Parking operator Provision of guards or the protection or security of person, property or business excluding such services to guard or protect the above which is situated outside Malaysia Provision of parking spaces for motor vehicles where parking charges are imposed RM500,000 RM500,000
NO 22. 23. 1975 - MARCH 2015 1 st SEPT 2018 ESTABLISHMENT THRESHOLD SERVICE PROVIDER Motor vehicles service or repair Courier service operator 24. Hire and drive car RM150,000 RM300,000 Operator of motor vehicle service or repair centre or provider of motor vehicle service or repair Courier service operator Hire-and-drive passenger motor vehicle and hire-passenger motor vehicle licensed by Land Public Transport Commission, Commercial Vehicles Licensing Board Act 1987 and Tourism Vehicles Licensing Act 1999 TAXABLE SERVICES Provision of general servicing, engine repairs and tuning, changing, adjusting and fixing of parts, wheel balancing, wheel alignment or body repairs including knocking, welding or repainting of motor vehicles. Courier delivery services for documents or parcels not exceeding 30 kilograms each excluding such services for documents or parcels: i. from a place outside Malaysia to a place outside Malaysia; ii. from a place within Malaysia to a place outside Malaysia; or iii. from a place outside Malaysia to a place within Malaysia and includes the provision of courier delivery services within Malaysia that forms parts of the service referred to in subparagraphs (ii) and (iii)where the service is provided by the same person Provision of hire-and-drive or hire-passenger motor vehicle services including hire of passenger motor vehicle with or without chauffeur THRESHOLD RM500,000 RM500,000 RM500,000 25. Veterinary Not taxable service 26. Advertising Advertising Provisions of all advertising services excluding provision of such services for promotion outside Malaysia RM500,000
NO 27. 28. 29. 30. 31. 1975 - MARCH 2015 1 st SEPT 2018 ESTABLISHMENT THRESHOLD SERVICE PROVIDER TAXABLE SERVICES THRESHOLD Credit card or charge card services No threshold Credit card or charge card services provider regulated by Bank Negara Malaysia Betting and gaming provider involving bettings, sweepstakes, lotteries, gaming machines or games of chance Transmission and distribution of electricity provider Airline operator licensed under section 35 of Malaysian Aviation Commission Act 2015 [Act 771] or air service permit under section 36 of Malaysian Aviation Commission Act 2015 Information technology (IT) services provider Provision of credit card or charge card services through the issuance of a principal credit card, principal charge card, supplementary credit card or supplementary charge card, whether or No not annual subscription or fee is imposed threshold excluding fuel card and charge card in a closed community e.g. education institution or a sports club by its students or members 1. Betting and gaming services involving bettings, sweepstakes, lotteries, gaming machines or games of chance. 1. Conducting tournaments involving bettings, RM 500,000 sweepstakes, lotteries, gaming machines or games of chance. 1. Conducting or allowing the conduct of a card game or any other game by the casino operator Provision of electricity to any domestic consumer excluding for the first 600 kwh for a minimum RM 500,000 period of twenty-eight days per billing cycle consumed by that consumer Domestic passenger air transport service and all services in connection with such services excluding the air transport route as specified RM 500,000 under the Rural Air Services Agreement All types of IT services excluding: 1. sale of goods in connection with the provision of IT services; 2. IT services in connection with goods or land outside Malaysia or where the subject matter relates to a country outside Malaysia. RM 500,000
CASES ON SST ABC Sdn Bhd v DG of Customs (Customs valuation for sales tax)
ABC Sdn Bhd v DG of Customs Customs stance For sales tax valuation, Customs used the excise duty valuation method under Excise Act to value goods Excise method includes A&P expenses By using the excise method, A&P expenses were added to value of goods Upon adjustment of value, Customs issued bill of demand
Our view Sales tax valuation is governed by Sales Tax (Rules of Valuation) Regulations and the method is transaction value of the goods, not the excise method. If the transaction value could not be used, there are other methods under the Regulations to be used i.e. value of identical goods and similar goods The Regulations requires the Customs to give opportunity to the taxpayer to satisfy that the value is correct. Customs is also required to give its grounds when adjusting the value, of which were not performed by the Customs Existence of domestic remedy does not preclude taxpayer from filing judicial review, due to the operation of Section 141N of Customs Act and Section 67 of Sales Tax Act
High Court and Court of Appeal s view It is the Customs internal practice to apply the excise value method in uplifting the price of goods for sales tax purposes Sales tax valuation must be based on the Sales Tax Regulations, and not the Excise Act Uplift of value of goods for sales tax purposes by incorporating advertising and marketing expenses is without legal basis
Ketua Pengarah Kastam v Kenwood Electronics Sdn Bhd Sales tax issue for LMW
Defendant (KEM) buys goods from 2 LMWs: a) KETM; and b) Montech Licensed under Sections 65 & 65A of the Customs Act 1967. Plaintiff: Alleged that D has underdeclared value of goods removed from LMWs Sought to recover from D arrears of import duties and sales taxes underpaid Defendant: Contended that it did not bear burden or liability to pay import duties and sales tax. FACTS Defendant: Also contended that there was no under-declaration of value on goods removed from LMWs.
ISSUES Who bears the burden of paying short paid import duty and the sales tax on goods removed from LMW?
D was not liable to pay sales tax in respect of goods removal from an LMW. LMW licensees (KETM & MASB) bears responsibility for payment of import duty and sales tax on goods removed from LMW (Regulation 29 of Customs Regulations 1977). DECISION Value relied by Customs to prove under declaration of value and short payment of import duties and sales tax was unreliable. Customs relied on 2 different invoices referring to 2 different goods and failed to call relevant witnesses to prove actual value of goods.
Everise Sprint (M) Sdn Bhd v MOF Remission of sales tax and import duties by MOF
Appellant: In the business of buying and selling used prime movers Bought 69 units from Scania Malaysia, exported from Scania UK Appellant: Paid import duties and sales tax based on invoices issued by forwarding agents after Customs clearance Customs: Released prime movers after providing clearance Conducted audit on Scania Malaysia and discovered shortfall Sought recovery of short-paid taxes form Appellant FACTS Appellant applied for remission of duty and tax from MOF under S.14A Customs Act and S.33 Sales Tax Act 1978. MOF refused request and Appellant filed JR.
ISSUE Whether the appellant was the importer and whether it is possible to impose liability on two parties at the same time (Appellant & Scania Malaysia)?
Demand on two persons for the same short-paid taxes created ambiguity and serious doubt as to tax liability tax statutes are to be interpreted strictly with no intendment - absurd and unjust to impose liability on the appellant as well as Scania Malaysia. DECISION Decision premised on wrong appreciation of facts and failure to consider relevant facts must be quashed. Customs failed to consider some relevant facts and considered irrelevant facts decision tainted with illegality
Royalty: Customs valuation for sales tax purpose (Levi Strauss and U Sdn Bhd v DG of Customs) Customs stance Royalty paid by licensees to foreign license holders to be added to transaction value. Even if there is separate sale agreement and royalty agreement, royalty is seen as a condition of sale If there is a reference to sale of goods in royalty agreement, the royalty must be incorporated
Our view and Court s view Even if royalty agreement makes references to sale of goods, it does not mean royalty should beadded Royalty must be directly paid in consideration for the sale of the goods In Levi Strauss v Customs and U v Customs, our Courts held that: The royalties paid by the taxpayer were not a condition to sell the products in Malaysia but to enable the exploitation the trademarks and licensing rights granted to the taxpayer. Additionally, the taxpayer had no contractual requirement to appoint related parties to manufacture the products. Procurement was the taxpayer s sole discretion based on commercial reasons
Decision of the High Court Transaction value can be adjusted by adding royalties paid in respect of goods imported, if it forms the condition of the sale of the goods to Malaysia. Customs allegation that the royalties were a condition of the sale of the products was not supported by evidence Customs allegation that the royalties were a condition of the sale of the products was not supported by evidence Our courts recognise that condition of sale has a settled legal meaning and that the words are unambiguous. In its usual meaning, a condition is a term which, without being the fundamental obligation imposed by the contract, is still of such vital importance that it goes to the root of the transaction Rather than creating a complex series of tests, courts preferred on the common law and sales of goods law to determine whether royalties are paid as a condition of sale. Hence, the courts have rejected the economic realities test advanced by Customs in the previous cases
Power Root (M) Sdn Bhd v Director General of Customs [2014] 2 MLJ 271 Tariff classification
The Applicant manufactured certain drinks ('the goods') which the respondent classified as attracting a sales tax of 10%. The Applicant were of the view the goods were only liable to a 5% sales tax However, in view of the Respondent's decision, the Applicant paid the sales tax at the rate of 10% and then appealed against the Respondent's decision to the Customs Appeal Tribunal which dismissed their appeal The Applicant then appealed to the High Court which found in their favour. The Court of Appeal unanimously dismissed the respondent's appeal against the High Court's decision. FACTS The Applicant then appealed to the High Court which found in their favour. The Court of Appeal unanimously dismissed the respondent's appeal against the High Court's decision. The Applicants wrote to the Respondent requesting for the extra 5% sales tax it had collected to be refunded to them. The Respondent refused the request saying there was no order of court directing the refund to be made.
ISSUE Whether the Applicants are entitled for a refund pursuant to the High Court and Court of Appeal s orders?
HC: Sales tax is charged on the manufacturer, which are the applicants. The respondent alleges that the sales tax overpaid by the applicants was 'passed on' to the consumers and therefore if they were to refund the sums to the applicants, the applicants would be unjustly enriched. DECISION On the contrary, it is the respondent who will be unjustly enriched if they were permitted to retain the ultra vires tax. Once the law is declared ultra vires, the respondent has no right to retain such taxes collected. Article 96 of the Federal Constitution of Malaysia states that no tax or rate shall be levied by or for the purposes of the Federation except, by or under the authority of federal law
DECISION The respondent's assertion that for the reason the illegally collected taxes are 'passed on' to the end users therefore relieves them of their obligation for restitution, is simply unfounded. In the first place, the respondent has no right to retain illegally collected taxes and the applicants should have recourse to restitution as of right. It would be a breach of fundamental constitutional principles to permit the respondent to retain illegally collected taxes.
OTHER ISSUES
Retrospective imposition of sales tax and service tax Customs stance When challenging any past sales tax or service tax return, bills of demand will be issued with penalties Companies must settle the bills of demand and penalties within 28 days Directors will be prohibited from travelling for failure of payment
Our view Customs must state legal basis for raising time barred bills of demands Legal action can be commenced against Customs including a stay order If Customs cannot justify or acts arbitrarily A stay of travel restriction notice was be sought from High Court if the director has no plans to leave Malaysia
APPEAL PROCESS FOR SST Application for review by the DG Customs Appeal Tribunal Judicial Review
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