The date of the 1st April 2015 has finally been set for the implementation of the Malaysia’s new goods and services tax (GST), announced at the October 2013 reading of the government budget for the following year. Despite the initial proposal in 2009 of an alternative to replace the current 10% sales and services tax, Malaysia moved no further forward with the plan to implement the 6% GST until the announcement in October. However, it has since outlined the implementation of the new tax for various industries, including Islamic finance.
An industry expert speaking to Islamic Finance
news (IFN) asserted that the most important distinction to be made in the GST legislation for Islamic finance is the definition of Islamic structures and how they are interpreted by the law — form over substance. This appears to have been taken into consideration by the Royal Malaysian Customs Department (RMCD) as its moves forward toward implementation of the tax, with the services provided by Islamic finance falling under the banner of three GST supply types: standard rate, zero rated and exempt.
According to Bernard Yap, an analyst with Ernst & Young (EY), with the introduction of the new tax, Islamic finance continues to remain on an even standing with conventional finance in terms of legislative treatment. “The RMCD has agreed to uphold the neutrality principle ensuring that the Islamic finance industry is not more affected in any way by the introduction of GST. Whilst in principle this is positive, how it will be implemented is still to be seen. However, it sets the foundation for Malaysia to continue to lead in the development of the Islamic finance industry.”
Retail banks and their customers are likely to experience the impact of GST most keenly, as are trade finance participants, with the standard rate being applied to fee-based services including annual subscription for bank cards, processing fees and commission for financing and advising on financial services. However Shariah advisory fees are exempt, as are profit charge and transactions involving overseas assets. Also exempt is the provision of financing, credit or advance, exchange of currency and the trading of financial options or futures, providing leeway for the continued development of the Islamic finance industry without the looming fear of the imposition of excessive additions to the cost of banking. According to the guidance supplied by RMCD, the sale of an asset by an Islamic bank is exempt from GST and any input tax incurred on other transactions made to fulfil the process of financing are fully claimable by the bank.
Much of the antipathy displayed towards the GST comes from the lack of awareness regarding the specifics of the tax, according to Yap. “There may be an inflationary impact witnessed in April 2015 with the introduction of the GST, however the apprehension shown with regard to the introduction of the new tax is due to a lack of understanding and awareness of its parameters. The GST, in replacing the country’s current limited consumption tax from 10% in the form of service tax to 6% across the board, should in theory reduce certain costs. However it will be down to suppliers as to whether this saving will be passed on.” Given that the GST rate of 6% is one of the lowest in the world, the Malaysian government has allocated RM100 million (US$31.06 million) for an information campaign regarding the implementation of the impending tax. — RS