Groupement dintrt conomique - RCS : C 68

1B, Heienhaff - L 1736 Senningerberg (Luxembourg)

Banque et Caisse dEpargne de lEtat, Luxembourg
IBAN LU49 0019 2855 1871 6000, BIC : BCEELULL
VAT identification : LU 220 135 38
Taxand Economic Interest Grouping 2010

Malaysia Introduction of Goods and Services Tax (GST)

After several years of indecision and months of speculation, Malaysia has finally
announced the introduction of GST. In the 2014 Budget proposals presented on 25
October 2013, it was announced that GST will be introduced into the Malaysian tax
framework with effect from 1
st
April 2015.

GST, which has been tabled in the past, has been postponed or deferred but it
appears that the Government is now ready to bite the bullet and see this proposal
through. The level of Government deficit and the recent downgrade by Fitch Ratings
have prompted initiatives towards enhanced fiscal management in the near term and
fiscal sustainability measures over the longer term. The longer term measures
include the introduction of the long-awaited GST.

GST in Malaysia will operate along the lines of other GST and VAT regimes globally.
GST will replace the existing sales tax and service tax regimes in Malaysia. Sales tax
is currently imposed at varying rates, 10% being the most common rate, on imports
and on goods manufactured in Malaysia. Service tax is imposed at 6% on selected
services. GST will be introduced at the rate of 6%, and will operate as a broad based
consumption tax which will be imposed at every stage of a supply chain. To alleviate
inflationary concerns, basic food items, piped water supply, the first 200 units of
electricity per month for domestic consumers, Government services, transportation
services, education services, health services, sale, purchase and rental of residential
properties and certain financial services will either be zero-rated or exempted from
GST. The Price Control and Anti-Profiteering Act which was enacted in 2011 in
anticipation of GST is meant to curb opportunistic price increases. How this will be
policed remains to be seen.

With the 1 April 2015 introduction date, businesses only have a lead time of 17
months to get themselves GST ready. To date the GST Bill and related regulations
have not been tabled at Parliament yet, and are expected to be tabled in late
November. The law is likely to be enacted early next year.

The relatively short lead time will be challenging for businesses, particularly larger
enterprises with various types of supplies. As with other VAT/GST systems, an
entity which makes mixed supplies will need to be able to track and apportion input-
tax credits. For certain industries, representations have been made to seek fixed
recovery ratios or to seek clarity on how the apportionment should be done. To date,
the authorities have released some guidelines for various sectors, but there is much
work to be done by the authorities to create the certainty that taxpayers need to
prepare for GST effectively and efficiently.

The Government has also announced various initiatives as part of a GST package
including the following:

A reduction in the corporate income tax rate from 25% to 24% with effect
from the year of assessment (YA) 2016. For small and medium enterprises
(SMEs), which in tax terms are broadly defined as companies with paid-up
capital of not more than RM2.5 million at the beginning of the basis period for
a YA, the income tax rates applicable on the first RM500,000 of chargeable




Groupement dintrt conomique - RCS : C 68
1B, Heienhaff - L 1736 Senningerberg (Luxembourg)
Banque et Caisse dEpargne de lEtat, Luxembourg
IBAN LU49 0019 2855 1871 6000, BIC : BCEELULL
VAT identification : LU 220 135 38
Taxand Economic Interest Grouping 2010
income will be cut by 1% from 20% to 19%. Any balance of chargeable
income will be subject to tax at 24%.

Accelerated capital allowances (ACAs) on the cost of information and
communication technology equipment (ICT equipment) will be given until
the YA 2016 to assist entities in acquiring the appropriate ICT equipment and
software to prepare for GST implementation.

Expenses incurred for GST-related training in accounting and ICT will be
given double deduction for tax purposes for the YAs 2014 and 2015. Further,
the Government has allocated a GST training grant of RM100 million and a
fund for financial assistance of RM150 million for the purchase of accounting
software in 2014 and 2015.

Individual income tax rates will be revised downwards by 1% to 3% across all
chargeable income bands with effect from YA 2015 after the implementation
of GST. The maximum tax rate of 26% will be reduced to 25% and the
ceiling of chargeable income attracting the maximum tax rate will be raised
from RM100,000 to RM400,000.

The introductory GST rate of 6% is currently the lowest among Southeast Asian
countries. Malaysias immediate neighbours, Thailand and Singapore, both operate
GST at the rate of 7%. However, it is worth noting that both these countries have
lower corporate tax rates than Malaysia; Singapores rate being 17% and Thailands
rate being 20%. In time, it is expected that the 6% GST rate will increase, and with
it, corporate and income tax rates should gradually decline.


Taxands Take
The introduction of GST in Malaysia is an important change that will have a significant impact
on businesses. The relatively short lead time will mean that businesses need to act fast to
take the necessary steps to ensure GST compliance by 1 April 2015. Businesses must
therefore review their processes and supply chains to identify the incidence of GST at each
stage of the supply chain, review their contracts and trading terms to manage the transition
to GST and ensure appropriate systems and documentation are in place to account for and
ensure GST compliance.

The Malaysian Government in turn, must release the GST laws/regulations as soon as
possible to enable businesses to manage their transition to GST and ensure appropriate
channels are in place to resolve the uncertainties which will invariably arise with the
introduction of a new tax. No doubt, there will be numerous questions and issues
surrounding the initial implementation of GST, but in the midst of these uncertainties, one
thing is certain, all businesses must be GST ready by 1 April 2015.

Your Taxand contact for further queries is:
Renuka Bhupalan
603-2032 2799
rb@taxand.com.my