Malaysia GST: Implications for Manufacturers

Malaysia has introduced a new Goods and Services Tax of six percent. However, the country’s Customs Department has said that confusion over the new tax will last six months to a year. Consumer concerns regarding the GST have been over price increases, whereas businesses concerns have focused on compliance costs and its effect on competitiveness.

For manufacturers, local and imported manufacturing inputs such as capital assets, raw materials and components, and services and utilities are subject to GST, except zero-rated and exempt supplies. In order to avoid double taxation, manufacturers are allowed to claim input tax credit on any purchases that are inputs to their business.

Manufacturing outputs fall into two categories: zero- and standard-rated. All supplies of goods exported from Malaysia and international services are zero-rated. Standard-rated outputs are taxable and include all supplies made by the manufacturer; this not only includes goods but also the following:

• Disposal of business assets
• Application of business assets for non-business purposes
• Business gifts exceeding RM500 given to the same customer in the same year
• Goods which are business assets on hand at deregistration
• Employee benefits given to employees
The Customs Department will refund the net difference to the manufacturer if the input tax is larger than the output tax payable.

Government help

In order to help manufacturers manage the effects of GST, the Malaysian government has created the following schemes:

• Special Approved Toll Manufacturer Scheme (ATMS)
o Shifts GST liability from approved toll manufacturers to the local customers who, whether a registered person or not, have “to account and pay for the tax as if [they] had supplied and acquired the goods.”
o A taxable person can apply for Toll Manufacturer status if the value of supplies for further treatment or processing is RM 2 million or more, the final treated/processed good is sent back to the overseas principal, and at least 80 percent of the finished good is exported.
• Warehousing scheme
o GST on goods, including imported goods, is suspended when the goods are stored in a warehouse or transferred between warehouses.
• Approved Trader Scheme (ATS)
o Allows manufacturers to suspend GST payment on imported goods, and will benefit re-exporters of imported supplies by providing access to cash flows as they will have large input tax credits and no output GST.
GST regulations require all taxable businesses to keep their tax payment records for seven years.

Manufacturing subsectors

General GST guidelines apply broadly to all major manufacturing subsectors like petroleum, automotive, base metals, and fabricated metal products.

Petroleum Industry

In terms of downstream implications, as of April, the GST has been imposed only on RON97 petrol, while RON95 and diesel prices remain the same. As for upstream implications, companies carrying out upstream activity in Malaysia (including offshore) must sign a Production Sharing Contract with Petronas. The upstream petroleum GST guide recommends that companies register under the GST in order to be able to claim input tax credit.

Automotive Industry

The effect of the GST on the automotive industry, one of Malaysia’s most important manufacturing sub-sectors, is unclear. According to the Customs Department and Malaysian Automotive Institute (MAI), car prices are expected to decrease by one to three percent. At the same time, car manufacturers are split on the impact of the new tax regime. Some warn that the prices are going to increase, while others expect them to stay the same or decrease.

Base Metals, Fabricated and Precious Metals

Investment precious metals (IPM) are a GST exempt supply. IPMs include gold, silver, and platinum, as well as certain gold, silver, and platinum coins.

Under the Approved Jeweler Scheme (AJS), an approved jeweler manufacturer and not the supplier is liable for the payment of GST. However, the output tax is to be paid by the approved jeweler only when prescribed precious metals are manufactured into finished goods and supplied to the local market. Prescribed precious metals include gold (≥99.5 percent), silver (≥99.9 percent), and platinum (≥99 percent). Following the general rule for exported manufactured goods, jewelry goods for export are zero-rated.

According to Reuters, there are no clear legal guidelines on the warehousing of base metals, and the London Metal Exchange (which has almost 50 percent of its nickel, 85 percent of tin, and one-third of lead stocks in Malaysia) is considering stopping the issuance of warrants at its two Malaysian locations from July 1, 2015.

Looking forward

The new indirect tax regime is expected to increase the competitiveness of Malaysia’s exports. As a result, export-oriented manufacturers will be the least affected by the GST since exports are zero-rated and input tax can be recovered.

The input tax credit helps offset the potential negative effects of the GST on manufacturers’ costs. Therefore, if the price of manufacturing inputs remains the same, the GST should not have any negative effects on manufacturers’ profits.