Abolition of Goods and Services Tax ("GST") and introduction of sales tax and service tax ("SST")
Following the Malaysian general elections on 9 May 2018, a new Malaysian Government was formed by the Pakatan Harapan coalition. In line with the new Government's pledge to abolish the GST regime within 100 days of coming into power, the GST rate for standard-rated supplies was reduced from 6% to 0%, effective from 1 June 2018. The GST regime was subsequently abolished on 1 September 2018 by the Goods and Services Tax (Repeal) Act 2018, and was replaced by a new SST regime effective from the same date.
• Service tax - Under the SST framework, service tax is imposed at 6% on the provision of taxable services by a registered person in the course or furtherance of a business in Malaysia. Taxable services include, amongst others, provision of accommodation, food and beverage preparation, consultancy and management services, courier services, information technology services and advertising services. Certain services provided between companies in the same group of companies are not treated as taxable services, subject to the fulfilment of certain conditions.
• Sales Tax - On the other hand, sales tax is generally imposed on the manufacture of taxable goods in Malaysia and the importation of taxable goods into Malaysia, at the rate of 5% or 10% or a specified rate depending on the category of goods. Sales tax exemptions may be granted by way of a statutory order to exempt (i) any goods or class of goods from sales tax; or (ii) any persons or class of persons from the payment of sales tax. For example, most raw food items and medicine are currently exempted from sales tax.
The SST regime is administered by the Royal Malaysian Customs Department.
Proposed changes to the SST regime pursuant to the Budget 2019
The Malaysian Budget 2019, which was unveiled by the Malaysian Minister of Finance on 2 November 2018, revealed plans to introduce some changes to the SST regime in Malaysia. Two notable changes impacting the service tax regime includes the imposition of service tax on imported taxable services by way of reverse charge and introduction of service tax on imported online services provided by foreign service providers to consumers.
• Service tax on imported taxable services - Presently, under the Malaysian Service Tax Act 2018, service tax is only imposed on taxable services rendered by service providers who are located in Malaysia. The Malaysian Budget 2019 proposed to widen the general scope of taxable services to include services rendered from foreign service providers and imported by Malaysian businesses (B2B) with effect from 1 January 2019. This is to ensure that local service providers of taxable services are not unfairly disadvantaged compared to foreign service providers. The Malaysian Finance Bill 2018, which was tabled for its first reading in the Parliament on 19 November 2018, currently proposes that recipients of imported services will have to account for and remit the service tax to Customs via a system similar to the reverse charge mechanism previously adopted under the GST regime.
• Service tax on imported online services - The Malaysian Government has proposed the imposition of service tax on electronically supplied services obtained from foreign service providers to consumers (B2C) with effect from 1 January 2020. Examples of such services include, but are not limited to downloaded software, music, video or digital advertising. This is in line with the OECD BEPS Project's recommendation that any tax on the digital economy should be imposed based on the place of consumption of the services in the form of consumption tax. At this stage, no further details have been released in this regard.
The SST regime is still taking its shape and being refined given that the regime is still relatively new. On this front, the Malaysian Government has proposed further changes to the SST regime. However, at this juncture, it remains to be seen how the Government will implement the changes to the SST regime announced in the Budget 2019 as some of the proposed changes were not addressed in the Malaysian Finance Bill 2018. As a result, businesses are facing issues with the transition from the GST regime to the SST regime and navigating through uncertainties and gaps that currently exist under the SST regime.