GST TREATMENT ON MANUFACTURING AND RETAIL SECTOR Venue

GST TREATMENT ON MANUFACTURING AND RETAIL SECTOR Venue : KLSFEA Shah Alam Date : 26 February 2014 Organised by: KLSFEA Presenter: Sabariah Md Yusof ROYAL MALAYSIAN CUSTOMS

FIZ & LMW Concept Current treatments GST Treatments Ø Under Customs and Sales Tax legislation, FIZs and LMWs are deemed to be a placed outside Malaysia Ø For GST, it is treated as a place located in Malaysia. Ø Local sales made by FIZs and Ø For GST, is considered as local LMWs are as if importation into supplies and subject to normal Malaysia rules. Ø For documentary control, LMWs Ø For GST, FIZs and LMWs who are required to submit monthly are approved under the special records but not for FIZs. schemes (ATS/ATMS) are required to submit certain records. 2

FIZ & LMW Concept Current treatments Ø Importations of raw materials and machineries directly used for manufacturing are eligible for customs duties / sales tax exemptions. Ø Importations or acquisitions of goods indirect used for manufacturing purposes eg stationaries, tires and office equipments are subject to tax. GST Treatments Ø GST is suspended on importations of raw materials and machineries directly/indirectly used for manufacturing. Ø GST on importations of goods or locally acquisitions in the course or furtherance of businesses are subject to GST on inputs are claimable. Ø Auditing by Customs will be done at random based on risk criteria. Ø Auditing by Customs will be done at random based on Risk Management System (RMS) Ø Records need to kept for 6 years Ø Records need to be kept for 7 years 3

1 Facilities under GST 4

Approved Trader Scheme (ATS) • a facility to relieve GST payment on importation of goods • Under ATS participants are allowed to suspend GST on the importation of goods Goods imported is used in the course or furtherance of business The amount of GST suspended needs to be declared in the GST return in the month which the importation takes place Proposed amendment 2013: “Sec. 72(2) Any taxable person granted an approval under the Approved Trader Scheme shall declare the suspended payment 5 of tax in the return for the taxable period to which the 5

Approved Trader Scheme Malaysia AA Pte Ltd ATS approval XX Sdn Bhd GST-03 (November 20 XX) Total value of goods imported under ATS = RM 106, 000 Total value of GST suspended= RM 6000 Port (November 20 XX) Value of imported Goods (CIF + Duty Import )= RM 106000 GST 6%= RM 6000 overseas Customs no. 1 GST is suspended Goods cannot be suspended under ATS • Liquor, beer, wine and spirits • Tobacco and tobacco products • Blocked input tax goods • Goods for personal/non- business 6

ATS Persons eligible for ATS • Companies located within Free Industrial Zone (FIZ) • Licence Manufacturing Warehouse (LMW) • International Procurement Centre (IPC) • Regional Distribution Centre (RDC) • Toll manufacturers under ATMS • Jewellery manufacturers under AJS • Companies with turnover above RM 25 million and at least 80% of their supplies made are zero-rated; or • Any other person approved by the Minister 7 7

LMW COMPANIES SEC. 65/65 A CUSTOMS ACT 1967 –IMPORT/EXPORT/LOCAL SALES PROCEDURES INPUT OUTPUT - Raw materials / components - Machines / equipments EXPORT DA FCZ (outright export) IMPORT • EXEMPTION; • Import Duty • Excise Duty GST on importations (6%) suspended under ATS LMW Company GST REGISTRANT / ATS Local Supplier FIZ LMW Others Subject to GST; • Standard rate Zero Rated GPB / FIZ /FCZ Subject to GST • Standard rate LOCAL SALES GST incurred for making taxable supplies -Claimable Subject to - Import duty - GST at standard rate

ATS Approval subject to the following criteria: • Must be registered under Sec. 20 of the GST Act 20 XX • Participant must make wholly taxable supply • Must be a registered user of electronic service • Must submit monthly GST return • Must makes declaration on the importation of goods electronically • Must have good compliance record as a GST payer • Must have good accounting and internal control system • Must furnish security if required; and 9

Approved Toll Manufacturer Scheme Purpose • a facility to overcome the GST embedded when a person buys goods from an overseas person via a local toll manufacturer Sec. 73 (2) – Approved Toll Manufacturer Scheme (proposed amendment 2013) Any taxable person (Toll Manufacturer) are allowed to disregard the supply of services which comprises the treatment or processing of goods to the overseas principal (who belongs to a country other than Malaysia) Any person (belongs to Malaysia) who receives the processed goods from the toll manufacturer shall account and pay tax as if he had himself supplied and 10

Approved Toll Manufacturer Scheme (ATMS) Overseas Principal 3. Overseas principal invoices local customer on finished goods received 1. Malaysia 4. Toll Manufacturer Local Customer Recipient accounting TM imports consigned goods from the overseas principal (ATS) TM invoices overseas principal for value-added services -disregarded 2. TM drop-ships finished goods to local customer of overseas principal Local supplier deliver goods on behalf of OP (ZR) Local supplier 11

ATMS Eligibility for approved under the ATMS Any toll manufacturer who has contract(s) with overseas principal who is not belong in Malaysia e. g he is not a taxable person He carries out value added activities with the overseas principal: v worth RM 2 million or more (excluding the cost of raw materials supplied or belonging to the overseas principal) per annum; and v 80% of the processed goods must be exported; What types of value added activities are allowed under ATS? related to manufacturing, treatment, processing, finishing, assembling and other manufacturing-related works on 12

ATMS GST tax treatment for ATMS • Supply of services by toll manufacturer (TM) to overseas principal (processing charges/toll) to be disregarded • TM deliver the processed goods on behalf of his overseas principal to the local customer • Supply of processed goods by overseas principal to his local customer subject to GST Ø Local customer has to account the GST by way of recipient accounting Ø Need to account based on whichever is earlier: § Invoice received from overseas principal; or § Payment made to overseas principal Acquisition of goods by overseas principal Ø Local supplies delivered to the toll manufacturer under the account of overseas principal is zero rate 13

ATMS Example: “Recipient Accounting” A Toll Manufacturer (A) approved under ATMS delivers processed goods on behalf of overseas principal to the local customer (B) on 29 April 2015. The Overseas principal issued an invoice to local Customer (B) with the amount of RM 200, 000. 00 on 5 May 2015 How to account for the tax? Local Customer (registered person) Local customer (not a registered person) Needs to account the tax amounting RM 12, 000 (6%XRM 200, 000. 00) in his GST return. Ø Needs to account the tax not later than the last day of the subsequent month from the month in which the supply is made GST Return - May 2015(GST-03) *GST No. 4 - May 2015 OUTPUT TAX = RM 12, 000 Value of supply INPUT TAX RM 12, 000 GST amount payable = RM 200, 000. 00 RM 12, 000. 00 *Return for non-registrant 14

ATMS Approval subject to the following criteria: Must be registered under Sec. 20 of the GST Act Must be a registered user of electronic service Must submit monthly GST return Must have good compliance record as a GST payer Must have good accounting and internal control system Must furnish security if required; and 15

Warehousing Scheme Types of warehouses license under Customs Act 1967: Ø Customs warehouse Ø Licensed warehouse Ø Duty free shops Ø Inland clearance depot Inputs: Forklift charges, storage charges C A Sup ply m Dis wareh ade in o reg ard use: ed s upp ly B in e ad e: ply m s ly hou sup pp re ed Su wa rd a eg r is D Declares supply and pays GST

WS - GST Treatment • GST on goods deposited into the warehouse to be suspended • GST on goods moved from one warehouse to another warehouse to be suspended • Intermediate disregarded supplies within a warehouse to be • The last supply is subject to GST (trigger the duty point) • Goods released to local market to be subjected to GST • Goods released to overseas market to be zero- rated • All goods and services consumed in warehouse to be 17

WS Example Daim Sdn Bhd keeps his imported goods in a warehouse approved under section 65 of the Customs Act. One of his customers has agreed to buy certain goods at RM 10, 000. 00 and the goods are to be taken out from the warehouse. How does his customer determine the value of the last supply? (Prevailing import duty rate = 10% and GST = 6%) 18

WS *Value of supply Rate of import duty Total duty import payable = RM 10, 000. 00 = 10% = RM 1000. 00 (10%X RM 10, 000. 00) Daim Sdn Bhd’s customer needs to declare the following amount: Value for customs purposes = RM 10, 000. 00 Import duty (10%) = RM 1, 000. 00 Total value for calculating GST = RM 11, 000. 00 GST Payable (6% x RM 11, 000) = RM 660. 00 * 19

Designated Area – Langkawi, Labuan & Tioman GST Treatment on DA: Supply GST Treatment DA to DA: Goods and Services * Not Subject to GST Within the DA: Goods and Services * Not Subject to GST World to DA: Goods and Services * Not Subject to GST DA to World: Goods and Services Zero rated * Except for petroleum and other goods as prescribed by the Minister of Finance 20

Designated Area – Langkawi, Labuan & Tioman Supply GST Treatment PCA to DA: Goods Services Zero rated Standard rated DA to PCA: Goods Standard rated (as if importation) * Except for petroleum and other goods as prescribed by the Minister of Finance Services Standard rated 21

v v v GST TREATMENT ON MANUFACTURING SECTOR Farming Out Drop shipment Employee benefit Loan on stock and equipment Discount Other transactions Gifts Samples Warranty Disposal of assets Goods lost/destroyed 22

Farming out within Malaysia § No transfer of ownership of goods. it is not a supply of goods § Sub-contractor to account for GST on value of services supplied Finished goods and charged RM 15, 000 for labour XYZ SDN. BHD. (GST registered person) ABC SDN. BHD. (GST registered person) Farmed out Returned Raw materials valued at RM 100, 000 23

Farming outside Malaysia § No GST on goods returned § If new parts are added GST will be imposed (similar to item 51 of the Customs Duties (Exemption Order) § Recipient to account GST on the supply of imported services Finished goods and charged RM 15, 000 for labour ABC SDN. BHD. (GST registered person) Farmed out Returned ALLAN PTE LTD Raw materials valued at RM 100, 000 24

Drop Shipment 4. Non-resident invoices local customer on finished goods received Overseas Non-Resident 1. Non resident makes order for finished goods from CM Sdn. Bhd. 2. CM Sdn. Bhd invoices finished goods supplied to the non-resident. Malaysia Local Customer 3. CM Sdn. Bhd. dropship finished goods to local customer of non-resident GST registered Contract manufacturer (CM Sdn. Bhd) 25

Drop Shipment (Contract Manufacturer Non-Resident (non-registrant) § Supply made by contract manufacturer to non-resident subject to GST is goods exported is zero rate § Supply of goods by contract manufacturer (taxable person) to non-resident : subject to GST at standard rate GST needs to be charged to the non-resident based on transaction value § Supply of goods (drop-ship) by non-resident to the local customers are not liable to GST 26

Employee Benefits § Employee benefits include any right, privilege, service or facility provided free of charge to employees as stated in the contract of employment not subject to GST and input tax is claimable § If not stated in the contract of employment all goods provided free to the employees is subject to GST (subject to gift rule of RM 500) except those exempted, blocked input tax and zero rated goods input tax claimable output tax on gifts > RM 500 value to be based on open market value § Services supplied free no GST 27

Loan stock and equipment Raw materials on loan § it is a supply of goods subject to GST Equipments on loan § it is treated as a supply of services subject to GST 28

Discount GST on the value after discount includes : Cash discount Prompt payment discount Volume discount, etc § Normally given in percentage or value § Given when using discount card/coupon at the time of sale or after sale § Sales to connected person based on open market value and not on discounted price § 29

Gifts and samples Gift § Gift of goods not more than RM 500 made in the course or furtherance of business to the same person in the same year : not subject to GST Samples § Imported trade sample given relief under GST Relief Order § Trade samples given for promotion not subject to GST on conditions packed differently and labelled ‘sample’ or ‘not for sale’ samples not packed differently is subject to business gift rules of RM 500 30

Warranty § Manufacturer’s warranty normally includes: after–sale services and repairs any replacement of spare-parts free of charge during the warranty period not subject to GST 31

Disposal of Assets § Sale of capital assets, other than TOGC subject to GST § Sale of assets as TOGC not subject to GST (not a supply) § Given free the value will be the open market value subject to GST (>RM 500) § Sell as scrap the value will be the sale value of scrap subject to GST 32

2 RETAILING 33

Agenda • • • Pricing Consignment Sales Trade in Goods Hire purchase Credit Sales 34

RETAILING – PRICING GST charged on standard rated supplies Assuming the value of goods or services supplied is RM 100. 00 and GST chargeable is 6%. Value : RM 100. 00 6% GST charged (output tax) (RM 100. 00 X 6%) : RM Total (price inclusive of 6% GST) : 6. 00 RM 106. 00 35

RETAILING – PRICING GST incurred on standard rated supplies Assuming the price of goods supplied to the registered retailer is RM 106. 00 inclusive of 6% GST. Price (inclusive of 6% GST) : RM 106. 00 The GST incurred (input tax) (RM 106. 00 X 6% / 106%). : RM 6. 00 36

RETAILING – PRICING Registered retailer sales price: Assuming the GST inclusive price of goods supplied to the registered retailer is RM 106. 00 and at the point of sale, the registered retailer marks up 20% on the cost of goods. Price of goods (inclusive of GST) 6% GST inclusive (Input tax incurred) (RM 106. 00 X 6%/106%) Actual cost : 20% Mark-up on Actual cost : (RM 20% X RM 100. 00) Value (cost) at the point of sale : 6% GST Charged : Price at the point of sale : : RM 106. 00 : (RM 6. 00) RM 100. 00 RM 20. 00 RM 120. 00 RM 7. 20 RM 127. 20 37

RETAILING – PRICING Registered retailer sales price: Incorrect method Price of goods (inclusive of GST) : 20% Mark-up on Actual cost : (RM 20% X RM 106. 00) Value (cost) at the point of sale : RM 106. 00 RM 21. 20 6% GST Charged Price at the point of sale RM 7. 63 RM 134. 83 6% Input tax claimed : : RM 127. 20 : (RM 6. 00) ? 38

RETAILING – PRICING Non-registered retailer sales price: Assuming the GST inclusive price of goods supplied to the non-registered retailer is RM 106. 00 and at the point of sale, the registered retailer marks up 20% on the cost of goods. Price of goods (inclusive of GST) No input tax Actual cost : : RM 106. 00 : (RM 0. 00) RM 106. 00 20% Mark-up on Actual cost (RM 20% X RM 106. 00) Value (cost) at the point of sale : RM 21. 20 : RM 127. 20 No GST Charged Price at the point of sale : : RM 0. 00 RM 127. 20 39

RETAILING – CONSIGNMENT GOODS Consigned Goods § Goods sent by consignor to a consignee. § the consignee has possession of goods and will attempt to sell them, but the consignee does not own the goods. 40

RETAILING – CONSIGNMENT GOODS Features of consignment are: • The consignor is entitled to receive all the expenses in connection with consignment. • The consignee is not responsible for damage of goods during transport or any other procedure. • Goods are sold at the risk of consignor. • The profit or loss belongs to consignor only 41

Examples: Perfumes Clothes Household accessories Furnitures Shoes 42

RETAILING – CONSIGNMENT GOODS GST Treatment on Supplies Made When consignor has to account for GST? Time of Supply (TOS) q when it becomes certain that a supply has taken place, (i. e. goods has been sold by consignee) § Basic TOS : Date of Statement of Sale § Actual TOS : Date of tax invoice Provided that the tax invoice was issued within 21 days from the basic TOS 43

RETAILING – CONSIGNMENT GOODS Example: Sales statement issued by consignee 1 Company A 01. 05. 2015 Consignor 2 Shop B Consignee Goods removed Sales Statement 25. 05. 2015 Basic time of supply (Date of Sales Statement) 3 25. 05. 2015 Time Of Supply (If no Tax Invoice issued within 21 days) 21 days rule 05. 06. 2015 If Tax invoice issued 15. 06. 2015 (21 days) Actual Time Of Supply (Invoice Date) 44

RETAILING – CONSIGNMENT GOODS GST Treatment on Supplies Made When consignor has to account for GST? Time of Supply (TOS) q 12 months after the removal of the goods, § Basic TOS : Date after 12 months the goods were sent § Actual TOS: Date of tax invoice Provided that the tax invoice was issued within 21 days from the basic TOS 45

RETAILING – CONSIGNMENT GOODS Example: No sales statement issued by consignee Company A 1 01. 05. 2015 Consignor 2 Goods removed No Sales Statement Shop B Consignee 01. 05. 2016 Basic time of supply (12 months after goods removed) 3 01. 05. 2016 Time Of Supply (If no Tax Invoice issued within 21 days) 21 days rule 05. 2016 If Tax invoice issued 21. 05. 2016 (21 days) Actual Time Of Supply (Invoice Date) 46

RETAILING – TRADE-IN GOODS Sec 15(4) When a transaction involves trade-in goods, the consideration for the supply is not wholly in money. In such a supply, the consideration of supply is the aggregate of: - (i) the amount in money as part of the consideration; and (ii) the open market value of the trade-in goods as part of the consideration. 47

RETAILING – TRADE-IN GOODS Scenario 1: person Customer is a non-registered 48

RETAILING – TRADE-IN GOODS Retailer Price (+6% GST) of new sofa : RM 1, 908. 00 Consideration Cash Trade-in old sofa Total Consideration 6% GST inclusive : (RM 1, 908. 00 X 6%/106%) : RM 848. 00 : RM 1, 060. 00 : RM 1, 908. 00 RM 108. 00 The retailer accounts for output tax amounting to RM 108. 00. 49

RETAILING – TRADE-IN GOODS Scenario 2: Customer is a registered person. Sec 15(3) Where the supply is for a consideration not in money, the value of the supply shall be taken to be an amount, with the addition of the tax chargeable, equal to the open market value of that consideration. 50

RETAILING – TRADE-IN GOODS Supply = of old television Consideration = Open market value of consideration = price (+6% GST) of new television = RM 1, 908. 00 Consideration for old television 6% GST inclusive (RM 1, 908. 00 X 6%/106%) : RM 1, 908. 00 : RM 108. 00 customer has to account for output tax amounting to RM 108. 00 51

Hire Purchase 52

RETAILING – HIRE PURCHASE Treated as 2 supplies - Supply of goods and supply of credit 53

Credit Sales 54

RETAILING – CREDIT SALES What is credit Sales? ØA sale in which the full amount will be made in one payment some time in the future or in smaller regular payments over a period of time. ØPurchases made by a consumer that do not require a payment made in full at the time of purchase. Example: Courts, Singer 55

RETAILING – CREDIT SALES Treated as 2 supplies - Supply of goods and supply of credit 56

RETAILINGGST Implementation Day – Matters to consider § price display GST inclusive § tax invoice to show GST chargeable 57

RETAILINGGST Implementation Day – Replace of price tag M 1 R . 00 0 06 New price tag during GST regime shown is the amount plus GST chargeable. Amount inclusive of GST= RM 1060. 00 Tax fraction = 6%/106% x RM 1060. 00 = RM 60. 00 58 58

Thank You GST Unit Royal Malaysian Customs Department