FROM Jan 1, 2014 SMEs are defined as a business enterprise in the manufacturing sector with an annual sales turnover not exceeding RM50 million or with less than 200 full time employees, while for the service sector enterprises the corresponding numbers are RM20 million or 75 workers.
Although these are small businesses, the upcoming proposed 6% Goods and Service Tax (GST) will equally apply to them from April 1, 2015 once Parliament approves the GST bill which is expected to be debated in the March/April 2014 session.
Early preparation is very important since April 1, 2015 date will soon be here. The following are a few things business owners should be looking at to prepare yourself :
1) Understanding the general GST mechanism.
Customs and various professional bodies such as the Chartered Tax Institute of Taxation of Malaysia and industry associations are conducting GST awareness sessions which will provide a quick overview of the GST mechanism.
There is substantial information and educational materials and GST guides on the Royal Malaysian Customs website at gst.customs.gov.my. You can also find reading materials from the websites of most professional bodies and industry associations and accounting firms.
Please note from April 1, 2015 the Sales Tax Act 1972 and the Service Tax Act 1975 will be repealed subject to certain transition rules applicable to legacy matters and will be replaced by GST. All facilities and exemptions given under the old regime will be removed from April 1, 2015.
2) Should you register for GST or not?
If an SME is making wholly exempt supplies such as financial services, healthcare services, educational, transport services and supply of land for residential or agricultural purposes etc, such SMEs cannot register for GST.
Mandatory registration is required for businesses with annual sales of taxable turnover exceeding RM500,000. However voluntary registration of businesses below the threshold is allowed, provided the business enterprise can show that it plans to stay in business in the future.
Registration, allows the business owner to claim the GST paid on the purchases or inputs which will otherwise become a cost. Of course registering comes with a cost of compliance, therefore a cost benefit analysis must be done before opting for voluntary registration of GST.
In doing this analysis business owners should also consider factors such as the availability of resources to maintain proper accounting records to meet their GST obligations that will be called upon in any future audit by the Customs Authorities.
Signing up can also become an administrative burden for SMEs, considering that filing of GST returns need to be done on a timely basis (either monthly or for those with less than RM5 million annual turnover on a quarterly basis); payment of taxes on time; issuing GST compliant tax invoices; credit notes and debit notes and receiving similar invoices to enable them to account for and claim back the GST paid; proper coding of the income and expenditure in the accounts, cost and time spent on training the staff; changing price displays and invoices to reflect GST inclusive prices, as well as time spent to check on the GST status of suppliers etc.
3) Assess the impact of GST on all the transactions of the business enterprise involving money or otherwise.
This includes both local and overseas transactions involving goods, services and financial & intellectual property transactions.
It will be important to classify on the output side (ie. sale/revenue) all the supplies into standard or zero rated or out of scope or exempt supplies as each has different implications.
The exempt and out of scope supplies are not taxable supplies but the zero rated supply is a taxable supply without GST. On the input side (ie. acquisition), the key issue is whether the input tax can be recovered. Please note that generally GST will apply if the supply is made in Malaysia.
4) When to account for GST and at what value should the GST be charged.
The general rule is GST should be charged when the supply is made. This is called the basic taxpoint. In the case of goods it is the time when goods are removed or when the goods are made available to the customer or in the case of services it is when the services are performed. However there are exceptions: for example where a payment is received or a tax invoice is issued before the basic tax point, the time of supply can be moved forward to the earlier of either events mentioned above.
There are many more exceptions to the general rule.
Again on valuation, the basic rule is that GST will be applied on the value of the supply i.e. price paid or payable excluding GST. Again there are many exceptions: eg supply made for consideration in kind, then the value shall be open market value less the tax chargeable.
When preparing for GST the SMEs need to look at the implications of all the transactions involving the whole value chain.
Examples of issues that may have an impact on their business post April 1, 2015 are:
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- Contracts spanning April 1, 2015 – check whether GST can be recovered post April 1, 2015
- Pricing policies need to be reviewed – do the prices need to be increased or reduced based on the post GST situation (e.grefunds may allow for price reduction or purchase of exempt goods and services may add to the cost of the business)
- Fringe benefits given to employees – selected benefits may be subject to GST
- IT software and systems – can your system produce the information required to prepare the GST return.
- Impact on cash flow:
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depends on the timing of the payments and receipts to suppliers and from customers as GST may beneed to be paid over to the authorities before the cash comes in.
The above is only intended to provide you a flavour of the kind of issues and challenges faced by the SME in implementing GST. As mentioned at the beginning the first step is to start early, and education and understanding concepts relevant to your business is the starting point.
Originally published under S.M. Thanneermalai in The Sun Daily. S.M. Thanneermalai is the President of Chartered Tax Institute of Taxation Malaysia and the Senior Executive Director of PwC.