FRAUD: GOODS AND SERVICES TAX (GST)

Bernard Yap

Partner

Ernst & Young

Tax Consultants Sdn Bhd

AGENDA

• GST update

• Overview of GST

• Proposed GST treatment of financial

services

• Common GST fraud practices

• Protecting against GST fraud

2011 GST UPDATE

• GST will be implemented in Malaysia to

replace the current sales tax (5% and 10%)

and service tax (6%).

• The GST Bill was tabled on 16 December

2009. The second reading scheduled for

March 2010 was deferred.

• Implementation date is expected to be in

2013/2014.

2011 GST UPDATE

• Price Control and Anti-Profiteering Act 2011

to prevent profiteering under GST regime

has been enforced since 1 April 2011.

• 13 September 2011: PM stated “….in the

near future, after the GE, we will introduce

GST.”

OVERVIEW OF GST

Basic features of GST:

• Broad-based consumption tax – Levied on all goods and services

• Certain goods and services to be exempted

• Imposed on money spent, not money earned

OVERVIEW OF GST

Basic features of GST:

• Transaction-based, multi-stage tax applying at each stage of the production and distribution process

• Threshold level to exclude small

enterprises - Expected to be RM500,000

• The applicable GST rate in Malaysia is

expected to be 4% (lower than the

current sales and service tax)

MULTI-STAGE TAX WITH CREDITS

• Output tax and input tax to be accounted

for, generally, on an invoice basis

• Generally, no requirement to match input

and output tax

• Output tax > input tax = Net GST payable

• Output tax < input tax = GST refund

MULTI-STAGE TAX WITH CREDITS

• Possible cash flow impact if customers

are provided with extended credit terms

• No tax cascading as GST is imposed only

on the value added at each stage of the

supply chain

• Potential lower cost of doing business;

need to analyse the impact on the price of

goods and services

TYPES OF SUPPLY

All supplies fall within 4 categories:

• Standard rated Taxable supplies

• Zero rated Taxable supplies

• Exempt No GST (Input tax not recoverable)

• Out-of-scope No GST

Input tax recoverable

FINANCIAL SERVICES AND GST

Financial services

• Exempt

‒ Margin-based products

‒ Return on investment transactions

• Standard rate

‒ Fee-based services

‒ Outsourced services

• Zero rate

‒ Exported financial services

FINANCIAL SERVICES AND GST

Islamic financial services

• To offer similar treatment as conventional

in order to ensure neutrality

• GST treatment on Shariah advisory

services:

‒ Supply of services by Shariah Advisory

Council / Committee is not subject to

GST

BANKING SECTOR AND GST

Fixed Input Tax Recovery (FITR)

• To use FITR rate of input tax (similar to Singapore)

• Confined to banking sector

• Bank Negara Malaysia to facilitate discussions between industry and authorities in determining the FITR rates

• Different rates for different banking sectors:

‒ Conventional

‒ Islamic

‒ Investment

‒ Development financial institutions

COMMON GST FRAUD PRACTICES

• Under-reporting of total sales, resulting in

lower GST output tax

• Fictitious supplier invoices created to

facilitate higher ITC claim

• Collusion between related parties –

undervaluing supplies where the recipient

cannot claim full ITCs

• Claiming of ITCs on expenses disallowed

under the law

COMMON GST FRAUD PRACTICES

• Underpayment of GST on “imported

services” (e.g. FS companies)

• Suppliers not registering for GST where

required

• Suppliers charging GST where not

registered

• Identification of direct expenses and

common expenses for ITC claim

PROTECTING AGAINST FRAUD AND ERRORS

• Ensure a robust internal system for

recording, processing and reporting GST

• Consider the potential for manipulation

(e.g. manual v automated actions)

• Separation of duties for GST (approving,

processing, reporting, payment)

• Develop comprehensive reconciliation

procedures for GST reporting

PROTECTING AGAINST FRAUD AND ERRORS

• Conduct periodic reviews

• Vendor verification – Confirm GST

registration status and details

• Education – Personnel to know

consequences of GST fraud and errors

• Training – Ensure personnel are GST-

knowledgeable and aware of risks

HOW TO MOVE FORWARD

• Singapore – Subsidy from Government for

appointing advisors to conduct GST

reviews (similar scheme could operate for

GST implementation in Malaysia)

• UK – Senior Accounting Officer (SAO)

certification to ensure reasonable steps

taken to monitor and maintain accounting

arrangements

HOW TO MOVE FORWARD

► Australia – Co-operative compliance

agreements between taxpayer and

authority, addressing key GST-risk areas

► China – Using pre-approved advisors to

undertake review of VAT returns to

minimise penalties / interest for late

payments

QUESTIONS

&

ANSWERS

THANK YOU

© 2011 Ernst & Young Tax Consultants Sdn Bhd All Rights Reserved. FEA no. 07000344 This presentation contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young Tax Consultants Sdn Bhd nor any other member of the global Ernst & Young organisation can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this presentation. On any specific matter, reference should be made to the appropriate advisor.