The indirect tax system in Malaysia underwent a major reform earlier this year. On April 1, 2015, the goods and services tax (GST) was implemented, replacing both the sales tax imposed on goods and the service tax imposed on designated services. While the goods and services tax (GST) might sound like a merger of the two taxes that it replaced, it is in actuality a different creature from them.
The sales tax was a single-stage tax on the first stage of the process of selling goods that took place in Malaysia. It applied to the sale of goods by manufacturers in Malaysia, as well as goods imported into Malaysia. It was essentially a manufacturer’s sales tax, rather than a retail sales tax. The standard rate of sales tax rate was 10%.
The service tax, as its name indicated, applied to a list of designated services provided in Malaysia. Services not included in that list were not subject to tax. Examples of taxable services included hotel accommodations, restaurant services, and telecommunications services. The standard service tax rate was 6%.
The GST is a valued added tax (VAT) with a standard rate of 6%, imposed on supplies of goods and services in general in Malaysia as well as the importation of goods into Malaysia. As a VAT, the GST is not a single-stage tax but rather it is imposed on each transaction along the supply chain. An input tax credit system allows businesses in the supply chain to recover VAT owed on purchases (input VAT). The Royal Malaysian Customs Department (http://gst.customs.gov.my/en/Pages/default.aspx) administers GST.
The GST Act authorizes the Malaysian Ministry of Finance to designate supplies of certain goods and services to be taxed at 0% or exempt from the tax. The Ministry issued GST Orders of zero-rated and exempt supplies in October 2014 to specify goods, services, and transactions qualifying for special GST treatment. Both Orders were amended in the week before the implementation of the GST.
Examples of zero-rated supplies include food, newspapers, and printed books. In the GST Zero-Rated Supply Order of October 2014, zero-rating on printed books was limited to dictionaries, student textbooks, reference books, workbooks, and religious texts. The amended Order right before the implementation of the GST significantly expanded the scope of zero-rated printed books to further include all other publications classified as printed books under the tariff code, such as technical, scientific, professional, and art books.
Examples of exempt supplies include residential buildings, investment precious metals, financial services, and education services. While input tax credit (ITC) is available for businesses providing zero-rated supplies, ITC is not available or limited with respect to exempt supplies.
Relief from payment of GST is also provided to certain specified goods and services acquired by specified entities: for example, federal and state government departments, educational institutions, and charitable organizations. A few entities are also relieved from charging GST for certain transactions. A signed certificate is typically required in order to obtain the tax relief.
In addition, the GST Act relieves three designated areas from the GST: Labuan, Langkawi, and Tioman. No tax is charged on otherwise taxable supplies of goods and services made within or between the designated areas. Goods or services supplied from one of the designated areas to Malaysia, however, are subject to GST.
By implementing the GST, Malaysia has joined the majority of countries in the world, as well as in the Asian-Pacific region, which have a VAT. Malaysia must also be recognized as its own entity: a particular case that other regional and national players should study carefully.
