Today we publish the second of a series of four weekly articles on the issue related to goods and service tax (GST) and its impact on selected industries and services. In the first instalment, Bhupinder Singh discusses the impact of the tax on financial institutions in Malaysia.
IN keeping with the Government’s stated intent of applying the Goods and Services Tax (GST) to the broadest possible base on Jan 1, 2007, under the tax reform proposal announced in the 2005 Budget, almost all supplies in the property and construction sector may be subject to the GST.
Treatment of supplies by the industry
The GST will apply to the sale of all goods and services by a registered business. In most cases, the GST will be levied on the price of goods and services supplied and businesses will be able to claim a tax credit on GST included in the cost of their business inputs.
The following activities are likely to be taxable: construction, sale or renovation of commercial property; infrastructure projects (e.g. toll roads); leasing of all non-residential land and buildings and building and construction materials.
The major issue for the property and construction industry is the effect of GST on the costs and prices and how this will flow through to market demand. The final impact is likely to be complicated and unpredictable.
GST is a transaction based tax, effectively meaning that each transaction entered into by a business must be examined to determine whether the transaction constitutes a “supply” in the GST context, and if it does, the rate of GST applicable. Similarly, for supplies received by a business, any GST charged must be captured correctly, and the extent of GST claimable must be determined accurately.
The construction industry bills on the progressive completion of the construction of a particular building project. However, the services may have already been rendered in an earlier taxable period and this would trigger the necessity to account for GST.
If residential properties are exempt from GST and a developer carries out a mixed development of residential and commercial properties, there will be an issue of apportionment of input tax between exempt and taxable supplies.
Insurance policies issued by property developers to house buyers whereby at the end of 30 years they get back an amount equal to the price paid for the property. Is the issuance of the policy a supply of service? Has it been priced into the cost of the house, etc?
What if a purchaser buys a commercial unit, say for RM400,000 but receives a rental guarantee of 10% for one year, such that he only pays RM360,000. Is GST to be accounted for on RM400,000 or RM360,000? Is the rental guarantee a provision of a service?
Some of the more common GST issues anticipated to arise are as follows:
(a) Building materials and builders’ hardware:
These constitute the conventional materials used in building work such as bricks, tiles, cement, glass, sand, pipes, timber, etc. Which materials are standard-rated and which are exempt?
(b) Many planning authorities now require developers to submit landscaping details as part of the planning permission approval process:
Will trees and shrubs used for landscaping be seen as “building materials” when supplied contemporaneously with the construction of properties and therefore qualify for input tax recovery?
(c) Built-in-furniture, electrical or gas appliances:
Will built-in furniture (for e.g. kitchen cabinets of concrete base with wooden doors and shelves) supplied contemporaneously with the construction of residential dwellings (which is an exempt supply), qualify for input tax recovery? If these electrical or gas appliances are built-in appliances in residential building (which is an exempt supply), is input tax recoverable?
(d) Services incidental to the construction of residential dwellings:
Do the following services separately made to a builder or building owner which are merely incidental to the construction of residential dwellings (which is an exempt supply), qualify for input tax recovery? For example, site investigations; concrete testing; site security; catering; cleaning site offices and workmen’s huts; temporary lighting and fencing around site; transport and haulage to and from site; scaffolding/formwork hire; professional services of architects, surveyors, solicitors, estate agents, valuers, consultants and other supervisory services; and construction management services.
(e) Conversion services:
Whether conversion services provided by a contractor to convert a non-residential building to a relevant residential building is standard-rated or exempt?
Will the conversion, reconstruction, alteration or enlargement of any existing building which do not result in the creation of an additional dwelling or dwellings qualify for input tax credit?
(f) Show houses:
Deduction of input tax is allowed when the items are either to be used solely for display purposes and scrapped at the end of their useful life. In the Malaysian scenario, the show houses are usually sold together with the loose displayed furniture. Deduction of input tax will have to be recomputed, with credit allowed on loose display furniture but disallowed on the house on the assumption that the supply of houses is exempt.
(h) Transitional issues:
Since at present there is a sales tax at 10% levied on many of the materials imported or purchased locally for use in construction activities prior to Jan 1, 2007, will the contractor be able to claim input tax credit on the materials and at what rate (10%?) if the GST rate is less than 10%?
What will happen for contracts that straddle the pre- and post-implementation period of GST and the warranty/repair for defects that continue well into the GST regime?
If low-cost residential properties are exempted from GST and commercial properties are standard-rated, what will be the scenario for mixed residential and commercial developments? Input tax credit is recoverable for commercial development but otherwise for low-cost residential properties. The parking areas, corridors, drains, fire equipment, lifts, playing fields, etc are common properties to both commercial and residential developments, so what is the fair formula for apportionment of input tax recovery as developments are seldom similar?
It is clear from the few examples provided that there are many practical issues and complexities involved in GST compliance. It is not too early for the property and construction industry to review all aspects on their business NOW and use this two-year window period to identify issues/complexities to be forwarded to the Government for consideration. Lobby the Government NOW for clarity and certainty and to obtain the best possible terms for your industry before the law is cast in stone. Once implemented, it will be an uphill task to change the rules.
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