Malaysia: Indirect tax challenges, coronavirus (COVID-19)

Malaysia: Indirect tax challenges, coronavirus

Taxpayers with indirect tax obligations in Malaysia need to consider certain actions in response to the challenges presented by the coronavirus (COVID-19) pandemic.


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Sales tax

Concerning sales tax, when there are cancellations of orders or changes in the purchase requirement, these can in some situations occur after an invoice has been issued, resulting in sales tax having been accounted for but not matched by later sales revenues. The sales tax law in Malaysia allows for the issuance of credit notes; however, businesses need to be mindful of the conditions to qualify. Similarly, there is a provision for bad debt relief when businesses may make a claim to the Royal Malaysian Customs Department for a refund of sales tax in relation to bad debt, but again there are conditions to comply. 

Some businesses may incur losses during the outbreak of the coronavirus.  For example, orders may be cancelled leading to the disposal or scrapping of stock or raw materials. Businesses need to be mindful that disposal of stocks may be subject to sales tax (depending on the HS Code). Further, there are conditions to be met in respect of any scrapping of raw materials when sales tax exemptions have been applied.

Cash-flow management may also require businesses to aim at minimizing the timeframe between point of sale and collection of cash, and thus to manage the associated sales tax within a reasonable period of time. Similarly, many contract terms may need to be adjusted in light of supply-chain delays, and to avoid accruing further sales tax obligations (that are not matched by sales revenues). 

There are certain sales tax exemptions to be considered, but subject to strict or numerous conditions for compliance, in view of the current situation.

Businesses acquiring and manufacturing taxable goods may want to evaluate whether they have been paying and charging the correct sales tax rate, by evaluating whether the HS code classification has been applied correctly. 

Service tax

Concerning service tax, the government has introduced various stimulus measures to assist businesses, particularly those in the tourism sector. 

While service tax is generally to be accounted for on payment basis, there is a 12-months deemed paid rule when service tax still needs to be paid regardless whether the customers have settled the invoice. For businesses that account for service tax on accrual basis or that need to account for the 12-months deemed paid rule, it may be prudent to start thinking of the mechanism to apply for bad debt relief.  Alternatively, businesses may consider how to renegotiate, or provide renewed supply or payment terms with their customers, which may in turn allow for an adjustment rather than the recognition of a bad debt which necessitates complying with the bad debt relief rules for service tax.

Businesses also need to be mindful of the service tax implications of going digital, particularly with the recent introduction of service tax on digital services. There are exemptions.

Read a March 2020 report prepared by the KPMG member firm in Malaysia

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