THERE are significant changes to sales tax and service tax. Some 3,400 items have been moved from the exempt category to 5% and 10% sales tax categories.
Six new categories of services have been added to the service tax. Education, healthcare, and construction services will be subject to 6%, while financial services, rental/leasing, and wellness and beauty services will be subject to 8%. These changes will take effect from July 1, except for newly registrable businesses, for whom the obligation to charge service tax will begin from Sept 1, provided they have already met the conditions for registration.
Businesses are middleman acting as collectors of taxes for the government, and the underlying principle is that businesses should not incur a cost in assisting the government collect the tax. Ultimately, it is the consumer that has to bear the tax. But in reality, it is not always possible for businesses to pass on the full cost of the tax increase to the customer, and this will largely depend on the elasticity of the demand for the product or service.
Generally, businesses that are in a monopolistic situation can pass on the cost, while others may have to bear some of the cost to remain competitive.
Businesses are very concerned that if the interpretation adopted by them is not accepted by the authorities, the misalignment can be expensive in the form of additional taxes and penalties at a later date when the authorities audit the taxpayers.
An example would be where you have a mixed development and the land title is designated for commercial purposes, in which case the authorities take the view that despite the contract between the contractor clearly stating that his services are only for the residential portion of the mixed development, the tax treatment accorded to such a contractor will be one of a commercial development.
If it is a standalone residential development, a contractor providing services for such a development will not be subject to service tax. However, if the services are provided for a commercial development, it will attract 6% service tax.
In a hybrid situation like that, the current position of the authorities is that the 6% service tax will apply to both residential and commercial portions of the development. Issues of this nature do not seem to resonate with the commercial reality.
There are other instances where the interpretation based on the taxpayer’s understanding of the commercial transaction may not be in sync with the authorities’ thinking which may be based on a purely legal basis. Businesses need to be aware of the situation where they could take advantage of the business-to-business (B2B) exemptions. Under the expanded scope, B2B exemption will be available for construction services, financial services and leasing/rental. Group relief is generally not available for the latest expanded list of services.
Ongoing contracts that will span past the July 1 effective date can use the exemption granted to non-reviewable contracts for one year. However, you can anticipate that the authorities will strictly scrutinise such contracts and, in the past, there has been significant disputes between the authorities and taxpayers on whether a contract is reviewable or not.
We hope that this situation will not be repeated. The one-year exemption appears to be rather short compared to the previous Goods and Services Tax regime which had a five-year exemption period.
MSME tenants whose turnover is less than RM500,000 need not pay service tax on rental. Such enterprises do not need to register for service tax purposes. All businesses, whether registered or not, must account for service tax on importation of taxable services.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
