Special credit refund

July 2016

by Nur Haslinda Harun

Have the taxpayer’s rights been appropriately considered?

The special credit refund provision under Section 190 of the Goods and Services Tax Act 2014 (“GST Act”) was introduced to avoid tax cascading of 6% GST and 10% sales tax embedded in the price of goods sold after 1 April 2015. Such a measure is aimed at curbing inflation. 

Companies, largely in the manufacturing and trading industries, were entitled to claim the special credit refund if they fulfilled the following conditions under Section 190 of the GST Act:

• The claimant was GST registered;
• The claimant held goods for resale on 1 April 2015;
• The goods were subject to sales tax and the sales tax had been paid by the claimant before 1 April 2015; and
• The claimant held the relevant supplier’s invoices and import documents proving that the claimant is the recipient or importer of the goods for which sales tax has been paid.

Where the entitlement to special refund is met, and the amount of claim is above RM 10,000, the claimant must have the claim certified by a chartered accountant.

Recently….

At the recent National GST Conference 2016, the Royal Malaysian Customs Department (“RMCD”) shared that only 2,384 out of 70,000 businesses have claimed the special credit refund. The majority of the businesses decided to forego the special credit refund. This could be due to the following:

• The claim amounts may not outweigh the additional administrative cost to undertake the stock count exercise, time cost to complete necessary documentation and chartered accountant costs.
• The payment of the special credit refund via equal instalments over a 2 year period is too long and not appealing to businesses.
• Fear that the claims may trigger GST audit. 

In view of the low level of applications, it is apparent that businesses were not supportive towards this one-off initiative by the RMCD. As a result, this has contributed to GST being imposed on product prices with embedded sales tax after the implementation of GST. The special credit refund has not ultimately achieved its objective.

A cautious approach has been taken by the RMCD to approve the special credit refunds especially those involving larger amounts. To date out of the 2,384 applications, the RMCD has approved 1,185 (either in full or partially). About 499 of the total applications have been rejected and the remaining 700 are still under review.

Based on industry feedback, the two most common reasons for rejection of claims by the RMCD are as follows:

• Submission of incomplete and inaccurate documents in relation to the claim form such as invoices and import documents; or 
• Failure to prove that the businesses have reduced their selling price after the implementation of GST.

The second reason has caused a stir in the market as businesses argue that the requirement to reduce the selling price is not one of the prescribed conditions for entitlement to the special credit refund under Section 190 of the GST Act. 

Businesses are mindful that the sales tax refunded should not be included in any product cost as communicated in the Price Control and Anti-Profiteering (Amendment) Act 2014 (“PCAPA”).

We believe that this requirement should be reviewed and enforced on businesses upon receiving the special credit refund approval and the relevant authority to do so is the MDTCC, in accordance with Section 3 of the PCAPA. 

With reference to Sections 5(1) and 5(5) of the GST Act, the responsibilities of the RMCD are limited to superintendence of all matters relating to goods and services tax, subject to the direction and control of the Minister including to enforce and ensure due compliance with the provisions of the GST Act. The duties and powers of the RMCD do not extend to having the right to review the pricing policy of businesses to take into account the provisions of the PCAPA and related regulations. 

In light that the RMCD insists on price reduction as a criteria for granting the special credit refund approval, it is worthwhile for businesses to consider the following.

Approved application

The obligation of businesses who have successfully obtained approval for refund does not stop there. To be compliant with Section 10A of the PCAPA, it is important that the businesses have in place and maintain documentation to prove that the special credit refund has been passed onto their customers.

Businesses who fail to prove the above may anticipate higher level of scrutiny by the MDTCC on non-compliance under the PCAPA.

Application under review

For those under review and have already passed on the special credit refund to their customers, it is in their best interest that such fact is communicated to the RMCD during the course of a review (should the RMCD have not already requested such).

Rejected application

For those who had reduced or maintained prices on the expectation that the special credit refund would be refunded, it is important that the businesses now assess their financial impacts, whether the non-refunded amount would have an impact to their businesses and profit margins.

While the special credit refund is a non-appealable matter to the GST Tribunal, businesses can still apply for the review of rejection decision to the Director General (“DG”) of RMCD under Section 124 of the GST Act. This application must be made within 30 days from the date the businesses have been notified of the RMCD decision. 

In order to proceed, it would appear that the businesses must immediately undertake the following:

Access the accuracy and completeness of the documentation in relation to the claim, notwithstanding that the stocks were verified by the chartered accountants.

Demonstrate the mechanics of passing on the special credit refund to customers, which could have been done in various phases given the diversity of products.

Despite one’s best efforts in submitting the required documentation to the RMCD, it is crucial that the business is also able to appropriately explain the submitted documentation to the RMCD instead of relying on potentially unfavourable assumptions and interpretations by the RMCD review officers.

If the review decision is unsuccessful, the last resort would be to seek legal recourse by way of judicial review before the High Court on the basis that the RMCD has acted beyond its legislated powers in enforcing the provisions under the PCAPA.

In today’s economy, every penny counts. The most important thing about not taking any action is that the businesses are now left with a squeezed margin or other financial impacts to the company, shareholders and their customers. 

Nur Haslinda Harun is a Senior Consultant, Indirect Tax Advisory Group at PwC Malaysia.