The hard truth about GST

FOR goods and services tax (GST)-registered businesses who have monthly filing obligations, they would have filed their August 2016 GST return last month and this would have been their 17th GST return since Malaysia introduced this consumption tax on 1 April 2015.

After 17 returns, what is the state of play now? Do businesses know what they need to know to meet their expected GST obligations? With the 2017 Budget announcements coming up on Oct 21, 2016, what can businesses expect in terms of amendments or changes to the GST regime to improve the tax system?

At present, the Royal Malaysian Customs Department (Customs) is in its second month of carrying out audits on GST-registered businesses, targeting 50,000 audits by year end. It is my understanding that, so far, what these audits have revealed is the level of understanding that businesses have in order to comply with its GST requirements is very poor.

This is not due to the GST system being complex, granted there are complex issues, but rather those who are managing the GST compliance matters do not seem to understand some very basic and fundamental concepts of GST.

For example, businesses do not register for GST when clearly they have exceeded the RM500,000 annual licensing threshold, businesses claim input tax credit when they do not have a valid tax invoice, businesses do not understand the reverse charge mechanism, businesses receive advance payments but did not account for GST to Customs, and many others.

For many of these businesses, what they will soon realise is that non-compliances can be subject to fines or compounds and in cases where there is an underpayment of GST, there can also be late payment penalties imposed. Worst is if left uncorrected and these non-compliances are repetitive, the fines, compounds or even penalties can be manifold.

The types of fines, penalties or compounds that can be imposed on businesses on a per offence basis as a result of non-compliance could include the following: When GST was introduced on April 1, 2015, the law did not have any provisions for late payment penalties but during the last Budget, a late payment penalties provision was introduced and this was effective since Jan 1, 2016. Depending on how long the GST has been outstanding, the maximum late payment penalty rate is 25% of the total GST due and payable for that taxable period. (see chart)

This is very onerous, rather than applying the penalty rate on only the amount of the outstanding GST. And further, in my view, this late payment penalty should only be imposed on wilful defaulters and not as a matter of standard practice whenever there’s outstanding GST (especially when the outstanding GST is due to technical interpretation of the law).

For the coming Budget announcement, one of my wishes is for a new provision to be introduced which will distinguish penalties applicable between taxpayers who voluntarily disclose their mistakes and those taxpayers whose mistakes are discovered during an audit.

Penalty provisions exist in the GST legislation as a form of deterrent to taxpayers so that they are aware of the consequences of their (in)actions. However, there should be no reason why the same provisions cannot exist to “incentivise” taxpayers to voluntarily disclose their mistakes.

For instance, a voluntary disclosure will not be subject to penalties or subject to a very minimal penalty only. These types of “incentive” will promote a greater degree of compliance and also allow Customs to focus their effort on those errant defaulters.

What I have realised now is that GST can be very complex and being a transactional tax, quite often, decisions will have to be made quickly and “on the spot” as business must go on. Customs has done a very good job of publishing various guidelines to help businesses understand better the associated GST requirements but there are still many uncertainties.

There are also practical difficulties in applying the law, such as the reverse charge mechanism on imported services where the reporting and accounting of the GST is now based on the earlier of the date of invoice or date of payment. Businesses do not have control over when the foreign service provider will issue their invoice and when they will receive it and quite often, it is after the reporting deadline.

For example, in the month of September 2016, it is likely that businesses will be receiving invoices from their foreign service providers which are dated earlier than September 2016, say August 2016. Strictly, these businesses must report and account for GST on these imported services in the August 2016 taxable period. This can be practically very difficult and in some cases, impossible.

I hope that there are more guidelines issued by Customs to provide greater clarity on complex issues and perhaps even suggesting how to resolve practical difficulties.

More importantly, I hope Customs can be more lenient towards taxpayers who have taken reasonable efforts to comply with the GST provisions but may not fully meet Customs’ expectations. Imposition of penalties should always be the last resort rather than the standard practice of an enforcement agency.

Bob Kee is executive director, KPMG Tax Services Sdn Bhd.