VAT, GST and Sales Tax in Malaysia

Summary

Name of the taxes Goods and services tax (GST)
Dates introduced 1-Apr-15
Administered by Royal Malaysian Customs Department (RMCD) (http://www.customs.gov.my)
GST rates
Standard 6%
Other Zero-rated (0%) and exempt
GST return periods Monthly if annual sales turnover is MYR5 million or more Quarterly if annual sales turnover is less than MYR5 million
Threshold for registration Annual taxable turnover exceeds MYR500,000
Recovery of GST by non-established businesses  No (unless the non-established business is registered for GST in Malaysia)

Scope of the taxes

GST is to be charged and levied on:

  • Any supply of goods and services in Malaysia, including supply of imported services and anything treated as a supply under the GST Act
  • Any importation of goods into Malaysia

Who is liable

Taxable persons (i.e., any person who is or is liable to be regis­tered under this Act) are businesses or individuals who perform taxable supplies of goods or services in the course of business in Malaysia.

Compulsory registration. The GST registration threshold is MYR500,000. For compulsory registration, the threshold applies in one of the following ways:

  • The historical taxable annual turnover is more than MYR500,000.
  • There are reasonable grounds that the future taxable annual turnover will be more than MYR500,000.

Based on the above, a business must notify the Director General (DG) about the liability to register within 28 days of becoming liable.

Voluntary registration. If the value of taxable supplies made by a business is below the registration threshold, the business may apply to register for GST voluntarily. A business that registers for GST voluntarily must remain registered for at least two years unless otherwise allowed by the RMCD.

Under the GST law, “taxable supply” is defined as a supply of goods or services made in Malaysia other than an exempt supply. In other words, businesses that make wholly exempt supplies would not be eligible for voluntary registration.

Group registration. Businesses that perform wholly (with some limited exceptions) taxable supplies and have control over anoth­er company either directly or indirectly through subsidiaries by holding more than 50% of the issued share capital of the other company can apply for group GST registration. Each member must be individually registered for GST. After group members are registered as a GST group, they are treated as a single taxable person and submit a single GST return. Supplies made between members within the same GST group are disregarded for GST purposes. Group members are jointly and severally liable for all GST liabilities.

Foreign companies that are not established in Malaysia cannot become members of a group. However, for the purposes of eligi­bility for group registration, their subsidiaries or registered branches in Malaysia can be considered as members of a group.

Divisional registration. A business that operates through branches or divisions has to determine whether it is liable to be registered based on the aggregate total taxable supplies of all the branches and divisions. Divisional registrations ease the GST administra­tion for such businesses. On approval, each branch or division may apply to register individually under the name of that branch or division. Supplies made between divisions within the divi­sional registration are disregarded for GST purposes.

Exemption from registration. A taxable person that makes wholly zero-rated supplies may request approval from the DG to be exempted from registration.

Deregistration. A business that ceases operations must cancel its GST registration. The business is required to notify the RMCD within 30 days from the date of such occurrence.

Non-established businesses. A “non-established business” is a business that has no fixed establishment in Malaysia. A business that is not established in Malaysia must register for GST via a local agent if it makes taxable supplies in Malaysia exceeding the registration threshold of MYR500,000.

Tax agent. Where required, a non-established business is required to appoint a local agent to act on his behalf for all matters per­taining to GST. The local agent will be liable for the account­ability for tax regardless if he is a taxable person or not. The registration will be under the name of the non-established business.

Late-registration penalties. Penalties will be imposed for failure to register for GST, late payment of GST, late submission of GST returns and the submission of incorrect returns.

Reverse charge. When a person receives imported services for the purpose of business in Malaysia, the recipient itself is treated to have made such a supply. The recipient is required to account for GST under the reverse-charge mechanism. It may be noted that when the recipient is registered for GST, it may be eligible to take input tax credit of the tax paid under reverse charge, subject to fulfillment of other prescribed conditions.

Designated Area (DA). The duty free islands are free from all types of customs duties and excise duties. For the purposes of GST, the duty free islands are known as DA, specifically Labuan, Langkawi or Tioman. Generally, any supplies of taxable goods or taxable services made by any person within or between the DAs are not subject to GST unless they are prescribed otherwise by the Minister. Further, any goods imported from overseas or sup­ply of imported services into the DA are not subject to GST unless they are prescribed by the Minister.

Digital economy. Supplies of goods or services in Malaysia via the internet or any other electronic media does not, generally, alter the taxability of the transaction for GST purposes.

Tax rates

The term taxable supplies refers to supplies of goods and ser­vices that are liable for GST, including supplies that qualify for zero-rating relief (subject to GST at 0%). The term exempt sup­plies refers to supplies of goods and services that are exempt for GST. Exempt supplies may give rise to a restriction on the input tax recoverable.

The standard rate of GST in Malaysia is 6%. The standard rate of GST applies to all supplies of goods and services, unless the sup­plies qualify for zero rating, exemption or relief.

Exports of goods and the supply of international services are generally zero-rated. International services that qualify for zero-rating are specifically listed in the GST Zero-Rated Supply Order.

Under the GST Relief Order, certain specified persons are relieved from the payment of GST on the acquisition of certain goods or services subject to prescribed conditions. In addition, there are also specified persons who are relieved from charging GST on the supply of goods and services, subject to certain con­ditions.

Examples of zero-rated transactions

  • Essential foodstuffs (e.g., rice, table salt, sugar, plain flour, cooking oil)
  • Essential medicines
  • Livestock supplies
  • Supply of the first 300 units of electricity per month to domes­tic users
  • Supply of treated water to domestic users
  • International services

Examples of exempt transactions

  • Sales/lease/rental of residential land/property
  • Domestic mass public transportation
  • Tolled highways
  • Land for agricultural purposes and land for general use (gov­ernment buildings and burial grounds)
  • Private health care and certain educational services
  • Certain financial services

Examples of relief transactions

  • An importer who exports goods and subsequently re-imports them for repair or reprocessing
  • Multimedia equipment used as teaching aids for private educa­tional institutions for childcare, preschools, primary and sec­ondary schools registered under the specified Acts
  • Equipment and materials for public higher educational institu­tions registered under the specified Acts
  • An importer who imports production samples

Time of supply

Generally, the basic time of supply of goods is:

  • If the goods are to be removed/delivered, at the time of removal of the goods
  • If the goods are not to be removed, at the time when the goods are made available to the person to whom the goods are sup­plied
  • If the goods are being sent or taken on approval, sale, return or similar terms (i.e., consignment sale), at the time when it becomes certain that the taxable supply has taken place or 12 months after the removal, whichever is the earlier

The basic time of supply of services is the time when the ser­vices are performed. The RMCD considers a service “per­formed” when the work is done or completed by the supplier.

However, if a tax invoice is issued within 21 days from the basic tax point, the time the invoice is issued is taken as the time of supply. This applies to both supply of goods and services.

Where the invoice is issued or payment is received prior to the basic tax point, the date of such invoice or receipt of (whichever is earlier) is taken as the time of supply, but only to the extent covered by the invoice or the payment.

Reverse charge. The time of supply of imported services is treated at the earlier of the following dates:

  • The date when any payment is made by the recipient
  • The date when any invoice is issued by the supplier who belongs outside Malaysia

Recovery of GST by taxable persons

A taxable person may recover the GST incurred on its expenses as input tax if the input tax is incurred for the purpose of making a taxable supply in the course or furtherance of business. Input tax comprises GST incurred on any supply of goods and services made to a taxable person and GST paid or to be paid by a taxable person on any importation of goods. A taxable person generally recovers input tax through its GST returns, by deducting it from output tax, when GST is charged on supplies made.

Under GST, two types of accounting are accepted: invoice (accrued) based or payment based. Generally, a registered person is required to account for GST on an accrual basis; however, the registered person may request approval from the DG to account for GST on a payments basis.

A valid tax invoice must be held to support a claim for input tax.

A taxable person is required to repay to the RMCD any input tax claimed for which payment has not been made to the supplier for more than six months from the date of supply.

Nondeductible input tax. Input tax may not be recovered on pur­chases of goods and services that are not used for business pur­poses (for example, goods acquired for private use by a taxable person) or incurred by a person other than a taxable person. In addition, input tax may not be recovered for some items of busi­ness expenditure.

Examples of items for which input tax is nondeductible

  • Purchase/lease or maintenance of a passenger motor car
  • Club subscription fee
  • Medical and personal accident insurance premium or takaful contribution
  • Certain medical expenses
  • Family benefits
  • Entertainment expenses (excluding expenses incurred for exist­ing customers and staff), except for entertainment expenses incurred by a person who is in the business of providing enter­tainment

Partial exemption. No credit is available on any input tax incurred on the acquisition of goods or services that is attributable to exempt supplies. However, there are exceptions as follows:

  • De minimis rule: the input tax attributable to any exempt supply is treated as input tax attributable to a taxable supply where the value of all exempt supplies does not exceed an average of MYR5,000 per month and an amount equal to 5% of the total value of all taxable and exempt supplies made in that period.
  • Incidental exempt financial supplies: special rules allow tax­able persons other than financial institutions and investment holding companies to claim credit for any input taxes attribut­able to the making of the following exempt financial supplies: — The deposit of money
    • The exchange of currency
    • The holding of bonds, debentures, notes or other similar instruments representing or evidencing indebtedness
    • The transfer of ownership of securities or derivatives relat­ing to securities
    • The provision by a taxable person of any loan, advance, credit or other similar facility to his employee or between connected persons (e.g., a loan from a holding company to a subsidiary)
    • The assignment of or the provision of credit for any trade receivable
    • The holding or redemption of any unit or other similar instruments under a trust fund
    • The hedging of any interest rate risk, currency risk, utility price risk, freight price risk or commodity price risk

A mixed supplier is a taxable person who makes both taxable and exempt supplies. If the de minimis rule is satisfied for a particu­lar taxable period, the supplier is entitled to claim credit in respect of all input tax incurred during the taxable period. Otherwise, he is entitled to claim input taxes that relate to taxable supplies, or are common for both taxable and exempt supplies that are attributable to the taxable supplies only. For residual input tax, the proportion allowed is the ratio of taxable supplies to total supplies.

Repayments. If the amount of input tax recoverable in a GST period exceeds the output tax in the same period, the excess is refundable. In principle, according to current guidance from the RMCD, the refund will be made within 14 working days after the return to which the refund relates is received for online submis­sion and 28 working days after the return to which the refund relates is received for manual submission.

Recovery of GST by non-established businesses

Malaysia does not refund GST incurred by non-established busi­nesses that are not registered for GST in Malaysia.

Invoicing

Tax invoice and credit notes. A tax invoice must be issued when a GST-registered person makes a taxable supply. Subject to approv­al by the DG, a simplified tax invoice can take the form of an invoice, receipt, voucher or any other similar document, as long as it contains the particulars approved by the DG. A simplified tax invoice can be used to claim input tax credit. However, if this invoice does not have the name and address of the recipient, the maximum amount of input tax that can be claimed is MYR30.

Adjustments generally arise as a result of the cancellation of a supply or acquisition, a change in the amount of consideration, a change in the quantity of the supply, or a change in tax rate. Adjustments also arise if the goods or services cease being a tax­able supply.

Adjustment notes (i.e., debit and credit notes) should contain the prescribed particulars under the Regulations and must cross-ref­erence the original tax invoice number and date it relates to.

Proof of exports. Export of goods is zero-rated for GST purposes if supported by evidence confirming the departure of the goods from Malaysia. This evidence consists of a range of documenta­tion:

  • Export declaration (K2)
  • Sales invoice
  • Bill of lading
  • Shipping note
  • Insurance note
  • Payment document, such as documentary credit, debit advice, bank statement, etc.
  • Debit and credit notes
  • Tally sheet from the port authority
  • Short ship/short-landed certificate
  • Other documents related to the export

Foreign-currency invoices. If a tax invoice is stated in a foreign currency, the following particulars in the tax invoice have to be converted into Malaysian ringgit for GST purposes:

  • The amount payable before GST
  • The total GST chargeable
  • The total amount payable (including GST)

The foreign currency is converted into Malaysian ringgit by using the daily exchange rate. The selling rate of any bank operat­ing in Malaysia is acceptable. In the case of importation, the importer can use the exchange rates published by Malaysian Customs, which are updated every week.

GST returns and payment

GST returns. Every taxable person is required to account for tax by furnishing the GST-03 form monthly, quarterly or in any other prescribed period upon approval by the DG.

The GST return is required to be furnished to the DG not later than the last day of the month following the end of the taxable period. If a taxable person’s taxable period does not end on the last day of the month, the GST return should be furnished no later than the last day of the 30-day period from the end of the varied taxable period.

The taxable person can submit the GST return in one of three ways:

  • Electronically
  • By posting to the GST Processing Centre
  • By furnishing to the GST Processing Centre

The taxable person who is in the payable position must pay to the DG the amount of tax due and payable by him. Any tax due in respect of a taxable period becomes payable not later than the last day on which the taxable person is required to furnish the GST returns payable by way of electronic fund transfer, checks, bank draft, money order or postal order.

Penalties

Late submission and payment of GST. Any person who fails to furnish the return as required will commit an offense and may upon conviction be liable to a fine not exceeding MYR50,000 or to imprisonment for a term not exceeding three years or to both.

Effective 1 January 2016, the penalty for late payment is:

  • For the first 30-day period that the tax is not paid, 5% of the GST amount due
  • For the second 30-day period that the tax is not paid, an addi­tional 10% of the GST amount due
  • For the third 30-day period that the tax is not paid, an addi­tional 10% of the GST amount due, subject to a maximum penalty of 25% of the amount of tax due and payable.

After the expiry of the 90-day period, any person who fails to pay to the Director General, may upon conviction, be subject to a fine not exceeding MYR50,000 or to imprisonment for a term not exceeding three years or to both.

Submission of incorrect return. Any person who submits an incor­rect return by omitting information, understating output tax or overstating input tax, or giving any incorrect information com­mits an offense and shall, upon conviction, be subject to a fine not exceeding MYR50,000, imprisonment for up to three years or both; plus a fine equal to the amount of tax that has been or would have been undercharged.

Further penalties apply with respect to tax evasion, improperly obtaining a refund and offenses related to invoices and receipts.