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Legal Perspective: Analysis of recent Director General’s Decisions & Guidelines Yuvaraj Sugapathy 19 May 2016
Legal Perspective:
Analysis of recent Director General’s
Decisions & Guidelines
Yuvaraj Sugapathy 19 May 2016
Agenda
1. Sources of Law
2. Primary Legislation vs Subsidiary Legislation
3. DG’s Decisions & Guidelines
Sources of Law
Sources of Law
1. Federal Constitution
2. Acts of Parliament
3. Case Law
Federal Constitution
1. In Ah Thian v Government of Malaysia [1976] 2 MLJ 112, Suffian LP
held that:
“The doctrine of the supremacy of Parliament does not apply in
Malaysia. Here we have a written constitution. The power of
Parliament and of State legislatures in Malaysia is limited by the
Constitution, and they cannot make any law they please.”
2. Article 96 of the Federal Constitution states that:
“No taxation unless authorized by law
96. No tax or rate shall be levied by or for the purposes of the
Federation except by or under the authority of federal law.”
Acts of Parliament
1. Income Tax Act 1967
2. Real Property Gains Tax 1976
3. Goods and Services Tax Act 2014 (“GST Act”)
Case Law
The doctrine of stare decisis had been lucidly explained in the case
of Kerajaan Malaysia & Ors v Tay Chai Huat [2012] 3 CLJ 577:
“The common law tradition is built on the doctrine of stare
decisis which directs a court to look to past decisions for
guidance on how to decide a case before it. This means that
the legal rules applied to a prior case with facts similar to
those of the case now before a court should be applied to
resolve the legal dispute. The use of precedent has been
justified as providing predictability, stability, fairness and
efficiency in the law.”
Primary Legislation
vs
Secondary Legislation
Primary Legislation vs Subsidiary Legislation
1. Primary Legislation:
eg: Acts of Parliament
2. Subsidiary Legislation:
eg: Regulations, Orders
Primary Legislation vs Subsidiary Legislation
1. Section 3 of the Interpretation Acts 1948 and 1967 (Consolidated
and Revised 1989) defines subsidiary legislation to mean “any
proclamation, rule, regulation, order, notification, by-law or other
instrument made under any Act, Enactment, Ordinance or other
lawful authority and having legislative effect”.
2. Section 23 of the same Act states that “any subsidiary legislation
that is inconsistent with an Act (including the Act under which the
subsidiary legislation was made) shall be void to the extent of the
inconsistency”.
DG’s Decisions & Guidelines
DG’s Decisions & Guidelines
1. DG’s Decisions and Guidelines are not laws. They are not legally binding
on taxpayers if the provisions of the DG’s Decisions and Guidelines
contradicts the GST Act and/or goes beyond what the GST Acts provides.
2. In Multi-Purpose Holdings Berhad v Ketua Pengarah Hasil Dalam
Negeri [2006] 1 CLJ 1121, Gopal Sri Ram JCA (as he then was) held that:
“There was a faint suggestion by counsel for revenue that the FIC
Guidelines applied to this case. But, as my learned brother Arifin
Zakaria JCA pointed out in response, the FIC Guidelines are not law.
See Ho Kok Cheong Sdn Bhd & Anor v Lim Kay Tiong & Ors [1979] 2
MLJ 224 where Wan Hamzah J said: The guidelines were issued not
pursuant to any power given by law, and in my opinion they have no
force of law…”
Metacorp Development v KPHDN (High Court)
Metacorp Development v KPHDN
Facts
a) The taxpayer, a property development company, purchased two
parcels of land in Malacca (“the Lands”).
b) The Lands were compulsorily acquired by the State of Malacca
and the Applicant was paid a compensation.
c) The taxpayer did not subject the compensation it had received to
income tax.
d) The IRB raised notices of additional assessment with penalty
against the taxpayer.
Metacorp Development v KPHDN
Facts
e) The taxpayer argued that the compensation it had received for
the compulsory acquisition was not subject to income tax under
the law and that the IRB had acted ultra vires and without any
factual or legal basis in raising the said notices.
f) The taxpayer further submitted that the decision impact
statement (DIS) issued by the IRB, upon which the IRB’s decision
to raise the additional assessment was based, was ultra vires
and had not legal effect because it sought to override the
decisions of the superior courts, namely the Lower Perak case
and the Penang Realty case.
Metacorp Development v KPHDN
Facts
g) The IRB submitted that the present application for judicial review
should not be entertained by this court because there was an
alternative remedy in the form of an appeal procedure under the
ITA.
h) The IRB further submitted that the decision made to raise
additional assessment was within its jurisdiction, as it was
empowered under s 91 of the ITA, and there was neither a failure
on the part of the IRB to perform a statutory duty not any breach
of natural justice.
Metacorp Development v KPHDN
Decision
a) It is settled law that the availability of an alternative internal
remedy in the form of an appeal process would not bar an
application for judicial review. This is especially so when the
complaint made to the court is one on error of law or abuse of
power that goes to the legality of the conduct of the decision-
making authority as in the present case. The taxpayer in the
present case had demonstrated illegality and unlawful treatment
and it would be wrong to insist that it exhaust its statutory right of
appeal, even if it was available. In fact, the present case should
preferably be referred to the court as it raised a question of law.
Metacorp Development v KPHDN
Decision
b) In the Penang Realty case it was the decision of the Court of Appeal that
compensation from compulsory acquisition was not liable to tax. The case
applied the principle, which was enunciated in the Lower Perak case, that
compulsory acquisition could not constitute sale because of the element of
compulsion that vitiated the intention of trade.
c) The Penang Realty and Lower Perak case were binding authorities on the
IRB, being an arm of the executive. Thus, the IRB’s decision, which was
not based on the legal authorities of the superior courts, was in excess of
its authority. Based on the doctrine of stare decicis, this court was also
bound by the decisions of the superior courts.
KPHDN v Success Electronics &
Transformer Manufacturer Sdn Bhd (High Court)
KPHDN v Success Electronics & Transformer Manufacturer Sdn Bhd
Facts
a) The IRB had decided that the taxpayer was only entitled to a
reduced reinvestment allowance (RA) for the year of assessment
2002 and that it was not entitled to a RA for the year of assessment
2003 for the amount it incurred in respect of the research and
development room.
b) When the IRB rejected the taxpayer’s claim for RA, the taxpayer
appealed to the SCIT.
c) The IRB submitted that based on its internal ruling, the entitlement
for RA was restricted to the “production area” only.
KPHDN v Success Electronics & Transformer Manufacturer Sdn Bhd
Facts
d) Based on the authorities on point, the SCIT decided that all the
meeting rooms, office spaces, toilets, staircases, void areas, lift
lobby, surau and warehouse in Factory B and the lighting
adjustments, installations of air-conditioners, electrical fittings and
partition walls in Factory C were part of the factory and the taxpayer
is allowed to claim RA in respect of the expenses spent on those
items.
e) The SCIT also found that the IRB was not entitled to reduce or
disallow the RA claimed under Sch 7A of the ITA based on its own
internal ruling or guidelines.
f) The SCIT allowed the taxpayer’s appeal.
KPHDN v Success Electronics & Transformer Manufacturer Sdn Bhd
Decision
a) The was no error made by the SCIT with regard to the meaning
to be assigned to the word “factory”. The SCIT were justified in
taking into account the non-production area as part of the factory
in both the buildings for which the respondent had incurred
capital expenses.
b) If Parliament had intended the word “factory” to be narrowly
interpreted as was submitted by the IRB, then a meaning
different from the meaning provided in Sch 3 of the ITA ought to
have been provided in Sch 7A of the ITA.
KPHDN v Success Electronics & Transformer Manufacturer Sdn Bhd
Decision
“Regarding the restriction of RA by the Respondent on “production area”
only, RW1 admitted during the trial that the Respondent’s decision was
based on its own internal ruling; or in other word based on its own
guideline. At the same time, it was noted that the RW1 has also admitted
that the condition for “production area” was not contained in Schedule 7A
of the Act. Premised on that circumstance, the Special Commissioners
were of the view that the imposition of the condition “production area”
based on internal ruling or guidelines without any legal authority is not law;
and therefore no force of law. In other word, the Respondent is not entitled
to reduce or to disallow the RA claimed under Schedule 7A of the Act
based on its own internal ruling or guidelines.”
DG’s Decisions & Guidelines
Possible arguments that the DG’s Decisions & Guidelines are
inconsistent with the GST Act:
Amended DG’s Decision 1/2014 (Item 3)
The DG imposes additional conditions for bad debt relief.
Our view:
Section 58 of the GST Act and Regulations 70 – 74 of the
GST Regulations are the only conditions that must be fulfilled
in order to claim bad debt relief.
DG’s Decisions & Guidelines
Amended DG’s Decision 2/2014 (Item 5)
A person applying for voluntary registration before the
commencement of business must make the first taxable
supply within 12 months from the date of application.
Our view:
Section 24(1) of the GST Act provides that the DG may
impose conditions as he deems fit. However, this discretion
my be exercised in accordance to the spirit and intention of
the GST Act. In this regard, the explanatory statement to the
GST Act states that GST is not a cost to business.
DG’s Decisions & Guidelines
Guide on Land and Property Development (18 April 2016)
The DG takes the view that the GST treatment of a vacant land
will be based on the land title issued by the relevant authority.
Our view:
Land title is not conclusive as to the GST treatment of a
vacant land. The fact that a land has a commercial title does not
prevent it from being used for residential purpose. An objective
assessment of the intended use of the land should be made in
order to ascertain the GST treatment of the land. This assessment
should not be limited to the land title and should include other
factors such as the zoning of the area where the land is located.
DG’s Decisions & Guidelines
Guide on Land and Property Development (18 April 2016)
The DG takes the view that Section 187 and Section 188 of
the GST Act are alternative to each other. See Q & A 42.
Our view:
Section 187 is not a charging provision. It is a provision for
the treatment of a supply. On the other hand, Section 188
seeks to provide for the chargeability of tax on a progressive
or periodic supply which is made under an agreement for a
spanning supply.
GST Appeal Process
