Written by Bryan Lew, Corporate Development & GST Director of Cheng & Co & Jack Wong, Senior Tax Manager
More than a year has passed since the implementation of Goods and Services Tax in Malaysia; however with numerous ops conducted by the Royal Malaysia Customs (RMC) still seems to get all businesses worried whether their understanding on GST and its methodology use in their daily operations are accurate or otherwise. Every business operators are hoping that they will not be getting a surprise visit by the RMC as news on penalties seems to be looming around lately.
But that is not the only worries faced by the business owners. It is understandably that every business owners need to survive from any crisis, thus SMEs may want to expand their business either locally, overseas or franchise their businesses. Thus dealings with financial institutions will be much frequent than usual. However, what should the business owners know about the GST impact from the Financial Institution and Commercial Banking on them?
Types of supply
Cheng & Co believes that by now every business owners should know that financial institution and banks make three types of supplies; Exempt supply, Standard-rated supply, and Zero-rated supply.
A supply is exempted if the consideration of the supply is in the form of an interest or a spread. Exempt supply covers:
- Provisions of loans/advances,
- Exchange of currency/traveler’s cheques,
- Provision of financing under hire purchase,
- Banker’s acceptance financing,
- Accounts operation of current, deposit, or investment accounts. (which includes deposits or withdrawal money)
- Trading of money market instruments and equity, and
- Debt capital market instruments.
To elaborate further most financial services provided to the business owners are not subjected to GST however, banks and financial institutions also provide fee-based services which are subjected to GST at a standard rate. Thus the standard rated supply covers:
- Loan processing,
- Standing Instruction services,
- Rental services,
- Counting services for coins and currency deposit,
- Prepaid and reload services,
- Maintenance services in relation to buying and selling of shares,
- Safe-keeping or custodial services, and
- Intermediary services in which fees or commissions are being charged such as arranging, broking, underwriting, and advising on any of the financial services. (inclusive of Investment Banking)
It is quite straight forward for Zero-rated supply, as any services supplied to business owners will be charged at zero-rate if the business owner is outside of Malaysia at the time the services rendered as this is considered as an export service. Some examples for exported (Zero-rated) financial services are:
- Any financial service supplied directly in connection with land and goods situated outside of Malaysia; and
- Any financial services provided to a foreigner (non-resident) not directly in connection with capital market products traded or issued in Malaysia.
Understanding the Scenario
To have an opportunity to expand one’s businesses either locally, overseas or franchising their business is definitely every-successful SME would want. In some cases, business owners need to get a loan facility from financial institutions or banks in order to expand their business be it for cash flow purposes or to cover the cost of setting up new offices.
Business owners need to remember that loans, its interest and stamp duty are exempted from GST. On the other hand, loan processing fee imposed on the loan to the SME is subjected to GST at a standard rate. The same applies to any fees or charges imposed on advisory, consultancy, placement, admin and handling, and annual fees. Unless the provision of loan is to finance a project outside of Malaysia, then the provision of loan is considered a zero-rated supply together with the processing fee in respect of the loan is also a zero-rated supply.
Do take note that even third party ATM withdrawal is subjected to GST. For instance, if you are Bank ABC customers and decided to withdraw money via Bank XYZ’s ATM machine. Bank XYZ will charge you a RM1.00 service fee (MEPS) plus GST which will be RM1.06.
However, there are certain fees or charges which will not be subjected to GST. These are fees and charges being imposed to compensate for loss, damages, or to penalize the business owners for not meeting certain requirements or conditions. Such fines or penalties which are punitive in nature include:
- Late payment charges,
- Commitment fee (for unutilized portion of overdraft),
- Compensation charge for dishonoured cheque, and
- Overdraft excess fee.
As business owners, you may recover the GST expenses incurred as your input tax during the closing of GST accounts by offsetting your output tax on the GST-03 before submitting to the RMC.
For financial services which are received (imported) from overseas, standard-rated GST applies if it fulfill the following requirements:
- Supplier is from outside of Malaysia,
- Recipient is from Malaysia,
- Consumed in Malaysia,
- Being taxable supply if made in Malaysia,
- For business purposes
Therefore a reverse charge mechanism applies. A business owner will have to insert the tax code under Deemed Supply (DS) to account the output tax however, there is not any tax invoice being issued. Only if the GST-registered business owner uses the services for business purposes, he or she may claim the input tax. If the business owner is not a GST-registered person, then he or she has to account for output tax and is not entitled to claim input tax.
If the supply is used for making exempt supplies – rather than taxable supply – then the business owner is not entitled to claim the GST as his input tax.
In contrast, if the supply is not made for business purposes and is meant for private consumption, then the recipient is not liable to account for GST on the supply of imported services he or she receives.
A business owner must know by now what are the impacts and concerns which will affect their overall businesses. A business cannot run with zero cash flow, thus knowing how financial institution and banks can help a business grow will benefit and bring the businesses to a greater height. Whether to expand, franchising, or setting up new establishments, every cent has to be considered. A business owner must realize that to a certain extent with good negotiation, certain fees or charges may be requested to be waived. A waived fees or charges do not have GST. For further enquiry, do call Cheng & Co at 03-7985 9999.