THIS is the first in a three-part question-and-answer series provided by PricewaterhouseCoopers for The Star readers on various aspects of Budget 2005. The next two articles will appear in StarBiz on Monday and Tuesday.
Q: I just heard that Malaysia is going to implement the goods and services tax with effect from Jan 1, 2007 to replace the existing sales tax and service tax. What is this goods and services tax, and isn’t the existing sales tax and service tax the same as the goods and services tax?
A: The current sales tax and service tax in Malaysia are two separate taxes operating under two separate legislations. Sales tax is a single-stage tax imposed on certain locally manufactured goods, and on similar goods imported whilst service tax is a consumption tax levied and charged on any taxable service provided by any taxable person.
A goods and services tax (GST) has generally been interpreted to be a value added tax (VAT), which is a multi-stage consumption tax, levied at all stages of production and distribution with credits for tax paid on inputs.
The net effect is that the final consumer (who can claim no tax credit) pays tax at the appropriate rate on final consumption.
At present, the framework of how this tax would operate or what the features and scope would be has not been announced.
Nevertheless, our Finance Minister has indicated in his budget speech that the Government will ensure that the low-income group will not be burdened by the implementation of this new tax.
Thus goods and services considered as basic needs will either be zero-rated or exempted. The Minister of Finance further indicated that small businesses will also be exempted from this tax.
Q: Is it true that with the implementation of goods and services tax, there would be an increase in the prices of goods in general?
A: This would depend a lot on the implementation of the tax. There have been cases in other countries where the implementation of a similar tax had minimal effect on prices. However, in our opinion, the increase in the prices of goods and services is inevitable, as the sales tax would be moving from the manufacturers’ level to the retailers’ level.
In addition, increase in the costs of doing business, for example increase in the costs of keeping proper records and in the costs of complying with the various Goods and Services Tax requirements would also bring about the increase in the prices. Nevertheless, in our opinion, the increase should be minimal.
Q: I am the Treasurer for an orphanage in the Klang Valley. The home has been receiving contributions from the public to fund its operation costs. The home has been granted the status of an approved institution under Section 44(6) of the Income Tax Act, 1967.
In year 2004, the home used about 80% of the contributions received for payment of the home’s operating expenses. The remaining 20% is placed in fixed deposits and other form of investments.
Currently, the home operates from rented premises, and the management of the home is planning to buy its own premises to promote its long-term objective of providing shelter to needy children. To fund the purchase, the following budget has been prepared:
Contribution from public and other income (preceding year) (A): 300,000 in 2004 and 350,000 in 2005. Operating expenditure (B): 240,000 in 2004 and 210,000 in 2005. Percentage of B over A: 80% in 2004 and 60% in 2005.
As you can see, the percentage of operating expenditure over contribution received for year 2005 would be reduced as compared to year 2004. The home is embarking on a cost reduction measure to finance the purchase of the new premises.
One of my committee members told me that the reduction in expenditure may have an adverse impact on the exemption status of the home. I heard that there are some changes announced in the recent budget. Can you please clarify?
A: Currently, the Inland Revenue Board (IRB), when it approves an institution under Section 44(6) of the Income Tax Act, 1967 requires it to spend at least 70% of its income for charitable purpose. Many institutions faced difficulty in meeting this condition, as they require substantial sums to be retained to meet future expenses.
Nevertheless, for year 2004, your home has fulfilled this condition.
To encourage institutions to strike a balance between its current spending and retention for future expenses, the government has announced in Budget 2005 that the 70% requirement will be reduced to 50%. Hence, the home’s exemption status would not be revoked if the expenditure is based on your 2005 forecast.
Q: I am presently 52 years old. I understand that if I retire from employment now, a proposal in the budget will allow the retirement gratuity that I will receive to be exempt from tax. Kindly confirm if this will be so.
A: Present legislation allows for a retirement gratuity to be totally exempt from tax if the recipient has been employed with the same employer or companies in the same group for 10 years, and is retiring on or after the age of 55 years or on reaching the compulsory age of retirement specified under any written law.
The proposal is apparently intended to ease the present retirement age requirements by allowing one to retire at the earlier age of 50 years but before age of 55 years, although this earlier retirement age must be compulsory pursuant to a contract of employment or collective agreement.
However, the exemption will not be on the full amount of the gratuity but will be limited to the extent of RM6,000 for each completed year of service in that employment.
It is interesting to note that this proposed provision will come into effect retrospectively beginning with Year of Assessment 2003.
Q: In past years, I have had to report my income on my husband’s income tax return form which, from the aspect of privacy, can be rather inconvenient. Will this ever change?
A: Under the self assessment system (SAS) that came into effect for individual taxpayers beginning with this Year of Assessment 2004, each spouse will report his/her respective income on his/her own separate tax return Form B.
Q: I am a non-resident individual. The recent budget gave tax exemption on interest income from bonds. Is it applicable to me?
A: Currently non-resident individuals are given income tax exemptions on interest income from these sources:
·Interest paid or credited by bank and financial institutions licensed under the Banking and Financial Institutions Act 1989;
·Securities or bonds issued or guaranteed by the Government;
·Debenture, other than the convertible loan stocks, approved by the Securities Commission; and
·Malaysia Savings Bonds issued by Bank Negara.
The exemption on interest income from bonds announced in the 2005 Budget is granted to non-resident companies only and it is in respect of ringgit-denominated Islamic securities and debentures, other than convertible loan stocks, approved by the Securities Commission and securities issued by the Malaysian Government.
Q: My company is in the business of supplying halal food. Can you brief me on the incentive announced by the Finance Minister?
A: Presently, a company which incurs expenses in obtaining halal certificate would qualify for a single deduction for the purpose of determining its assessable income.
It is now proposed that a double deduction be given to companies which incur expenses in obtaining quality systems and standards certification as well as halal certification from the Jabatan Kemajuan Islam Malaysia (Jakim) and in obtaining international quality systems and standard certification.
Q: The Finance Minister has announced that institutions of higher learning are encouraged to form smart partnerships and merge to create education entities on par with the renowned universities in developed countries. What are the incentives provided for the merger and is there a time frame for this merger?
A: Exemption on the stamp duty and real property gains tax will be given to private institutions which obtained the approval of the merger from the Ministry of Higher Education. The merger must be undertaken not later than Dec 31, 2006.
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