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
Input tax
Zero rated Taxable supplies recoverable
Exempt No GST (Input tax not
recoverable)

Out-of-scope No GST
 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

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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.