When the goods and services tax (GST) was first introduced to replace the general sales tax and service tax regimes in 2015, the overarching concern for businesses was the implementation and administrative aspect. As companies scrambled to understand the rules and procedures in order to facilitate the rollout of GST, many, if not all, would have neglected or overlooked the fact that this transition would trigger a double collection of taxes for goods still held as stock across both tax regimes.
The general sales tax was payable upon manufacturing or importation of the goods. Consequently, all stock still held by businesses in Malaysia as of the cut-off date (1 April 2015) would have been subject to sales tax. Provided that such stock was not part of the zero-rated or exempt supplies, they would also be subject to GST. This is a classic instance of double taxation.
Conditions for refund
Sections 190 and 191 of the Goods and Services Tax Act 2014 (GST Act) were inserted to resolve this instance of double taxation as part of the various transitional measures. In essence, a full refund could be obtained in respect of the sales tax amount paid for stock held in hand, provided that the following are fulfilled:
- The taxpayer is registered under the GST regime as at 1 April 2015;
- The taxpayer held the goods as at 1 April 2015 for the purposes of making a taxable supply under the GST Act;
- The goods are taxable under the Sales Tax Act 1972, and sales tax has been charged and paid by the taxpayer; and
- The taxpayer must hold the relevant supplier’s invoice proving that he is the recipient for which sales tax has been charged, or import documents proving that he is the importer, consignee or owner for which sales tax has been paid.
It is also expressly provided under s190(4) of the GST Act that the refund shall not apply to:
- goods that have been capitalised under accepted accounting principles;
- goods that have been used partially or incorporated into some other goods;
- goods held for hire, goods held for other than business use and goods not for sale or exchange;
- goods on which sales tax has been paid under the Sales Tax Act 1972 before 1 April 2015 and subsequently to be exported where a claim for drawback on the sales tax paid is to be made; and
- goods on which the taxpayer is allowed to claim a deduction of sales tax as a licensed manufacturer under s 31A of the Sales Tax Act 1972.
This application for refund must have been made before 30 September 2015. Other requirements include an audit certificate signed by an approved auditor to certify the amount of special refund and that the information on the application was not false, inaccurate, misleading or misrepresented.
A partial refund of 20% of the sales tax paid could also be obtained in the event that the invoices do not state the sales tax charged.
Rejection of sales tax refund applications
In 2016, Customs rejected a substantial number of taxpayers’ applications, predominantly on the grounds that the price of goods did not decrease or had increased after the implementation of GST, or that the application contained information that was false, misleading, inaccurate or misrepresented.
Increase of price/No decrease of price
Sections 190 and 191 of the GST Act do not stipulate the increase or decrease of price as a condition for sales tax refund. In fact, the increase of price of goods after the implementation of GST is governed by the Price Control and Anti-Profiteering Act 2011, as administered by the Ministry of Domestic Trade, Cooperatives and Consumerism.
Customs could not impart laws of a completely different legislation to a sales tax refund application. It could not also step into the shoes of an entirely separate government agency and enforce the laws of the latter. It must instead decide on an application based on the existing conditions set out in the provisions of the GST Act. Doing otherwise will render its decision to reject an application to be invalid as they have not complied with the statutory provisions provided.
In any event, should a taxpayer comply with all the conditions stated under the GST Act, it should immediately be entitled to the sales tax refund. Any additional conditions set forth and required by Customs are purely administrative guidelines that are open to be challenged.
Claims that are allegedly false, misleading, inaccurate or misrepresented
In recent times, Customs has also rejected sales tax refund applications on the grounds that they contained information that was false, misleading, inaccurate or misrepresented. Undoubtedly, this is a condition under s191(3) of the GST Act. Nevertheless, Customs must substantiate its allegation by showing to what extent the information submitted by a taxpayer is false, misleading, inaccurate or misrepresented. This must be made in the form of evidence when Customs rejects an application, i.e. it is able to show which particular information or document contravenes s191(3).
In totality, the burden is on Customs to show that the information contained in the application is false, misleading, inaccurate or misrepresented.
Further, the universally accepted principle and legal doctrine of de minimis non curat lex could also be relied on by taxpayers whose applications have minor computation or documentation errors. For instance, a slight difference in the quantum of one particular stock out of 10,000 is arguably a trivial error where Customs could not rely on s 191(3) to reject the entire sales tax refund application. It could also be potentially argued that even if the said provision applies, it is only applicable on the said stock to which the minor error relates, and not the entire application.
Remedies available to taxpayers
The Fourth Schedule of the GST Act precludes the GST Appeal Tribunal from hearing any matters relating to sales tax refund. Consequently, taxpayers whose applications were rejected by Customs are prohibited from appealing to the GST Appeal Tribunal.
In that instance, taxpayers could first apply for a review by the Director General of Customs pursuant to s124 of the GST Act. Such an application must be made within 30 days of the initial rejection of the sales tax refund application. Nevertheless, the wording of s 124 of the GST Act clearly reflects that the application for review by the Director General is merely an option.
Section 124(1) reads as follows:
“Any person may apply to the Director General within thirty days from the date the person has been notified of any decision made by an officer of goods and services tax for the review of the decision and provided no appeal has been made on the same matter to the Tribunal or court.” (Emphasis added)
The above clearly illustrates that an appeal before the High Court is not discounted at all by Parliament. In fact, it highlights the fact that taxpayers can:
- file for an application for review;
- appeal to the GST Tribunal; or
- appeal to other courts. If the taxpayer has opted to file its appeal before the High Court, then he is excluded from filing an application for review.
The “appeal before the High Court” that is available to taxpayers is by way of an application for judicial review against the Customs’ decision to reject the sales tax refund application. Such an application is to review the decision-making process of Customs and the grounds are the commission of an error of law, improper exercise of power, ignoring relevant considerations or taking irrelevant ones into account and unreasonableness of said decision. Intending applicants must display the occurrence of the above in order to succeed in a judicial review application. This application must be made within 90 days of the Customs’ decision to reject a sales tax refund application.
Under ordinary circumstances, a sales tax refund application should not be subject to an extraordinary set of conditions as denying the same is akin to commission of double taxation, as taxpayers are forced to account for both sales tax and GST in respect of the same goods. However, in light of the recent trend where Customs has continuously imposed additional conditions not stipulated in the GST Act, taxpayers affected by such enforcement should choose to take a stand on whether to toe the line or right the wrong. Clearly, the author of this article is a proponent of the latter.
This article is reproduced, with permission, from the Legal Herald Special Issue on GST (May 2017 issue), a publication by Lee Hishammuddin Allen & Gledhill, Advocates & Solicitors, Kuala Lumpur, Malaysia