Updated: Nov 11, 2022
Consumerism is a powerful force in today’s economy, and of course the government wouldn’t just let it slide. Consumption taxes have been a core part of Malaysia’s tax since 1972, with the introduction of Sales tax. Service tax was introduced later, but the topic of today’s article is Goods and Services Tax (GST), which was introduced in 2015 to replace sales tax and service tax but repealed in 2018.
Although not currently in effect, it would be interesting to examine GST’s operations, specifically how small businesses would be affected by it. This can also be very useful for the future if GST is ever reintroduced. This article will cover some key aspects of GST that a small business will be heavily affected by.
Before doing registration, we should 1st understand why you would want to. In short, because registered businesses get to reclaim GST suffered by the business (input tax). Registering also comes with a certain level of prestige from your small business peers, as mandatory registration only comes after reaching a certain size, so being registered can be an indication of size (not that businesses below the threshold can’t register, but most do not).
However, why not to register is also important. Registered businesses must furnish a GST return quarterly or monthly, which can be a lot of work for a business. It may even cost the business more than the GST savings if additional manpower is required to account of GST. Worse is that the penalties for failure to comply are quite steep, with fines up to RM50,000 and imprisonment no more than 3 years. Additionally, customers will now be charged GST on their purchases, which may cause them to leave for a unregistered competitor which offers at a lower price.
The pros and cons of registering should be considered carefully for any small business, but that is all irrelevant if the business is required to register anyways. If the business noticed that their taxable supply in the last 12 months (including the current month) is above RM500,000, then they are immediately required to register; If it’s foreseen that the taxable supply in the next 12 months (including the current month) is above RM500,000, the business is also required to register. The deadline to register is 28 days from the day the business exceeds the threshold.
Sole proprietors have to be extra careful, as they themselves are the entity liable to registration. Meaning, that if a person runs multiple businesses at the same time as sole proprietor, the taxable supply of all businesses is summed to determine if the person is liable to register. Once registered, a sole proprietor must charge GST & submit a consolidated GST return for all of his businesses. Partnerships, however, are taxable entities, therefore can register solely based on their own taxable supply.
However, if the business is not required to register, they can still do so if they make any taxable supply. Businesses making wholly exempt supplies cannot register. Registration can be done online through Royal Malaysian Customs Department (RMC) website for GST (its no available now of course).
Now that the business is registered, you will have to issue tax invoices, which are mostly just normal invoices with a GST figure separately state along with the tax exclusive and tax inclusive amount paid by the customer. Be mindful that these invoices are evidence of the GST you’ve collected (output tax). As for input tax, be sure to obtain and keep tax invoices from your suppliers as evidence.
If the GST amount is lower than RM30, a simplified tax invoice is acceptable. Simplified tax invoices are tax invoices where no specified customer is addressed in the invoice. The GST amount limits transactions to about RM500 in an invoice (using 2018 rate of 6%), any higher than that would require a full tax invoice to be issued. If a simplified tax invoice was received and would be used to claim input tax more than RM30, you should ask the supplier to issue a full tax invoice.
At the end of each taxable period (usually 3 months but can be 1 month, starting after you register), you must prepare a GST account, showing all input and output tax in the period in relation to your business activity. Find the difference, and file it with all the relevant tax invoices. You can file the GST return through RMC’s website for GST.
Flat rate scheme
The government knows that GST compliance work is tedious and unappealing to small businesses, hence they introduced this scheme to specifically aid small, below threshold farmers (crop cultivating & animal rearing alike). To qualify, a farmer needs to not be already registered and part of a regulatory association for their produce. Although allowed to carry out other activities, the farming activity must represent 80% of their annual supply (exempt supply is included), and all taxable supply is considered when determining if they exceed the RM500,000 threshold (which they must not exceed). If any conditions is breached, the farmer must leave the scheme.
To flat rate traders, they are only required to charge 2% additional charge to their customers. No GST return required, although an annual statement of their supplies must be prepared for RMC. Input tax does not need to be accounted for, and the 2% additional charge is the farmers’ to keep. Customers of a flat rate trader can claim the additional charge as input tax.
GST can be a nuisance to deal with, but this should be seen as a small downside when you consider the overall effect of GST on the wider economy. However, the government should recognize the weakness of the system, and try to lessen the impact of GST implementation on small businesses. The flat rate scheme seems to be one such avenue for aiding small businesses to participate in GST.
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