BUSINESS enterprises, including companies, are merely supposed to be tax collectors on behalf of the government under the Sales and Service Tax (SST) regime. The ultimate taxpayer will either be the individual or the business entity that consumes the goods or services at the end of the value chain.
Service tax is generally visible to the end consumer, as invoices typically disclose the value of the services separately from the service tax charged at the applicable rate of 6% or 8%. In contrast, sales tax is more opaque, as it is generally embedded within the selling price of the goods and is not separately reflected on the invoice issued to the customer.
Although businesses are meant to act as tax collectors under the SST regime, in practice they often end up bearing a portion of the tax cost. A common scenario arises where sales tax or service tax is incurred on inputs used to produce exempt goods or provide exempt services for sale to the end customer. In such cases, the SST embedded in the input costs may not be recoverable, unless the business is aware of and able to utilise the relevant exemptions and exclusions available.
As a result, managing SST efficiently is not a walk in the park.
How to maximise the exemptions
The most important exemption that should be considered by all businesses, where goods pass through many stages of manufacturing through various entities in a group, is the use of the business-to-business (B2B) exemption. This can involve third parties where intermediate goods are outsourced for certain manufacturing processes and then brought back to be finished by the business enterprise for ultimate sale to customers.
The problem here will be the multiple stages of the imposition of the sales tax and service tax. This is where you may need to scrutinise your business structures to reorganise to take advantage of the exemptions and exclusions available. The principal exemption you can consider is the B2B exemption for service tax. Manufacturers should look at Schedule C and others should look at Schedule A for sales tax.
An example of an exclusion is exported services, which may fall outside the scope of SST. Similarly, goods that are ultimately exported should be assessed for eligibility under Schedule A exemptions.
To fully benefit from available exemptions and exclusions, businesses should analyse each stage of a transaction individually while also considering the supply chain as a whole, from procurement to the final sale. This holistic approach helps ensure that all applicable indirect tax reliefs are identified and optimised.
What’s the bottom-line objective
Any group of companies or business enterprises should segregate the transactions within the group and transactions outside the group. In theory, SST is meant to be applied on the third-party transactions but even in the third-party transactions, there will be exemptions and exclusions to be considered. The majority of the companies that miss out and end up bearing the extra taxes are those who do not take advantage of the exemptions and exclusions for the intercompany transactions.
If indirect taxes are not managed effectively, they can increase the cost of goods and services, reducing both competitiveness and profitability. As indirect taxes have a direct impact on margins and cash flow, businesses should place greater emphasis on managing them strategically to protect their bottom line.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
