GST Mixed Supplier
Updated: Nov 24, 2022
The world now is in a consumerist paradise, with more and more things to spend money, and more and more ways to acquire the funds to spend. In the midst of this, governments have long implemented consumption taxes to get tax revenue from those spendings. In Malaysia, we have been used to Sales & Service Tax (SST), but from 2015-2018, Goods & Services Tax (GST) was in effect.
Now, in light of the possibility of GST’s return, this article along with many others of its series, delves into the various aspects of GST. This time, it will be on how a mixed supplier can claim their input tax.
Normal rule
We should 1st categorise our input tax as a mixed supplier.
Those directly attributable are either entirely allowed (taxable supply) or entirely disallowed (exempt supply), subject to a few exceptions such as non-business use and blocked input tax of course. Examples of input tax which are directly attributable are inventories, staff cost for those only involved in taxable/exempt supply etc.
The leftover, dubbed “residual tax”, cannot be so straightforwardly attributed as it is not clear how much is used for taxable supply and exempt supply. This category of input tax includes utility bills which premise is used for both supplies, managerial staff costs etc. Therefore, Royal Malaysian Customs Department (RMC) has provided guidance on how to apportion the tax, by splitting it based on taxable-to-exempt supply ratio, calculated as taxable supply divided by total supply.
De minimis
With that out of the way, let’s look at something interesting. Sometimes, businesses may make incidental exempt supply, such as providing a loan to a director. RMC provides the de minimis rule to businesses in the hopes of making input tax relating to the exempt supply also allowed.
To qualify for de minimis, the 2 conditions that must be satisfied are:
exempt supplies must not exceed RM5,000 per month; and
Value of exempt supplies must not be more than 5% of total value in that period.
If satisfied, all input tax will be allowed. If not however, then the business will have to figure out which input taxes are directly attributable to what supplies, and the apportionment ratio to be used when splitting residual tax.
Year-end adjustments
Next, we will look into the adjustments which are made after 12 taxable months past. The 1st is annual adjustment, which is a measure taken to stamp out possible tax evasion. The calculation Is simple, estimated GST payable/receivable for the year is compared to the actual GST payable/receivable during the year. The difference will be payable/receivable.
The other adjustment is the capital goods adjustment (CGA). As it implies, it only applies to goods which is capitalised in the books (buildings, machinery, renovations etc.) & incurs input tax. However, blocked VAT items (motorcars) and disallowed items (computer network systems, software purchases & leased goods) are outside the scope of CGA. CGA also only applies to items above RM100,000 (GST exclusive) per unit. Unit implies that the item is functional on its own.
CGA exists to limit the claim of input tax on the capital goods based on the taxable-to-exempt supply ratio of the business over the span of 10 years. For any applicable capital goods, the business will claim input tax equal to the % given by the ratio. For the subsequent 9 years, an adjustment is made if the taxable-to-exempt supply ratio changes. Example, if in year 5 the ratio changed temporarily from 50% to 70%, input tax of the taxable period at the end of the year will include a 20% increase of 1/10 input tax of the capital goods.
Summary
Mixed suppliers have it rougher with the things they have to keep track of when it comes to GST. Businesses would do well splitting the taxable and exempt businesses as cleanly as possible to reduce the amount of administrative work needed.
However, if that is not an option, businesses must get a grasps on how these adjustments are made to ensure the correct amount of input tax is reported.
Reference
De minimis rule: http://gst.customs.gov.my/en/rg/SiteAssets/gst_actw2/R37.pdf
Capital Goods Adjustment: http://gst.customs.gov.my/en/rg/SiteAssets/specific_guides_pdf/GUIDE%20ON%20CAPITAL%20GOODS%20ADJUSTMENT%2018122015.pdf
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