Goods & Services Tax (GST) was a consumption tax introduced in 2015 to replace the sales tax and service tax before it. GST has its merits, but eventually it was abolished and repealed in 2018. Now it remains as a shadow lurking over the country as the people keep on guessing if GST will be reintroduced ever again. The facts, after all, point towards GST as a better tax collection system than Sales & Services Tax (SST), at the cost of more administrative work needed.
Therefore, to prepare you, who is possibly a merchant from being adversely affected by GST, this article aims to educate you on how to claim your input tax (GST suffered by a registered person) just in case GST is ever reinstated. We will start with the basics and proceed with the other concepts of input tax claiming. There is a follow-up article for mixed suppliers, so if you believe you will be making exempt & taxable supply simultaneously whenever GST is reintroduced, be sure to check that one out too.
Claiming Input Tax
Let’s start with the most basic facts, which is that you must be registered to claim input tax at all. If the business/a sole proprietor is not registered, then no input tax is claimable. To perform the claim, the business only needs to include the input tax claim (& supporting tax invoice evidence) in their GST return.
Now that you know how to do it, let’s go over the input tax limits that were present in 2018. Although it’s all historical, the concepts of these limits are similarly adopted in other countries that have GST (or Value Added Tax (VAT)), therefore it is expected to not change drastically.
Time of supply
Time of supply is a way to determine the exact date of a supply. For input tax purposes, this will determine which taxable period is input tax claimable on. Input tax on supply of goods is claimable at the earliest of:
1. goods received/taken off shelf,
2. invoice received, or
3. *payment made.
For services received, input tax is due at the earliest of:
invoice received, or *payment made.
*Special note for payment: Part payments that are earlier than goods received/taken off shelf or invoice received (for example a deposit made before invoice or goods are received), should have their input tax claimed separately. This means that when the full amount is claimed in the future, input tax relating to the part payment must be excluded.
Accruals as a concept is rooted in accounting, where it means income and expenses should be recognized when they are used, not when payment is made. This is what permits input tax to be claimed on invoice received or goods received, however it can cause some complications, mainly related to debit & credit notes and overdue debts.
Where there is genuine undercharge of invoiced amount, or a follow-up charge to goods/services provided, a supplier may issue a debit note which increases the expenses. Input tax on this amount is entirely claimable, but proper documentation must be kept for inspection to prevent abuse of the system to delay input tax claims.
Similarly, genuine overcharge or return of goods will result in a credit note being issued by the supplier. Input tax on the original invoice will be reduced if its input tax has not been claimed. If the input tax is already claimed, then a reverse charge will reduce input tax claimed in the period to balance out the difference. Proper documentation must be kept for inspection to prevent abuse of the system for overclaiming input tax in an earlier period.
Lastly of the adjustments is overdue debts, whereby debts that should have been paid 6 months ago but not paid will have their input tax reversed. Example, an invoice sent on 1 April & due in 30 days will likely have their input tax claimed in April already. However, if you haven’t paid on 31 October, a reverse charge equal to the input tax claimed will be imposed. You can claim back the input tax once payment is made, but only equivalent to % of payment made.
Like any rule, there are exceptions to accommodate for unique circumstances. This comes in the form of non-business use and blocked input taxes.
As input tax is designed to let businesses not suffer the effects of GST, only business-related transactions should be given input tax claim. Transactions with non-business elements such as telephone charges with some private use should be prorated using a reasonable scale. (For telephone, it could be call time; for utility bills it could be floorplan etc.)
Blocked input tax makes the entire input tax amount not claimable, regardless of business use or private use. This covers the following expenses:
While this may sound counter intuitive to the purpose of GST, Royal Customs Department Malaysia justify it by pointing out that these expenses often have elements of private use that are hard to measure. They also point out that even under business use, these expenses have an element of consumption (such as eating out with potential clients) and therefore should be taxed fully as well.
Regardless of how you feel about GST, it was a system made with consideration of usual business activities. This was a study of how a registered business can claim their input taxes and exceptions to the normal rule. While it is still unclear if GST will come back in the future, having this knowledge now isn’t harmful. Treat it as additional knowledge, with a possibility of future use.
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