GST - a matter of interpretation

In 10 more days, Malaysia shall enter into a new era where the price tags that you are familiar with will never be the same. While it is certain that no consumer shall escape from the fate of the Goods and Services Tax (GST), not everyone fully understands the implication of the GST at this juncture. This is inevitable as even the authorities themselves are sharing the similar conflicting views on many concerns and apparently grey areas.

If you have not realised by now, the Royal Malaysian Customs Department (RMCD) is the authority to implement, supervise and collect GST. On the other hand, income tax and stamp duty, where most income earners are well versed with, are in the jurisdiction of the Inland Revenue Board (IRB). Besides submitting online income tax forms through IRB’s website, one may pay a visit to RMCD’s official GST webpage, where, despite the issued guidelines, there are also a panel and the director-general’s decisions published to act as guidance of the RMCD’s interpretation of the GST legislation. There is now a third dimension on how you conduct your business in Malaysia, from how you earn to how you spend.

Interpretation in its very own nature has never been universal. It is universally subjective at best. The fact that residential property is exempt supply and commercial property is a standard rated supply, couple with the fact that residential usage of commercial property is permitted under the law, will be an issue of constant challenges under GST.

Small office home office (SoHo) is one such mutant that evolved with the creativity demanded in the market. It was only in 2007 that SoHo is categorised formally as a residential product regulated by the Housing Ministry, notwithstanding its commercial half. RMCD, however, in Para 7 of its published Guide on Property Developer has clearly provided for SoHo as a standard rated supply subject to GST. This in itself contradicts Para 8 of the same guide where actual usage shall take precedent. The question is, therefore, whether SoHo predominantly used for residential purpose is subject to GST?

The habitual instinct of a legal practitioner is to always look into precedent cases to form a basis for interpretation. This has led to an interesting landmark case on GST, formally Value Added Tax (VAT) in UK. In Procter & Gamble UK v Revenue and Customs Commissioners, the question was whether Pringles falls within the exception from the general zero-rating food products in respect of “potato crisps… and similar products made from the potato, or from potato flour, or from potato starch…”.

Upon it hangs the multi-million dollar question, as much as £100mil of tax for the past and about £20mil a year for the future, according to the counsel for Revenue and Customs who took the stand that Pringles is within such exception. Thus, standard VAT rate applies while Procter argued otherwise by stating only 42% of its content is potato. The tribunal view was in line with Revenue and Customs, but upon appeal, the High Court ruled in favour of Procter. Nonetheless, the Court of Appeal overturned the High Court’s decision and upheld that Parliament has never intended for a minimum percentage of potato content as a determining factor for products made from potato.

From the above, we may foresee that when there is uncertainty on interpretation, the court shall step in to have a final and binding decision on the lawmakers’ intention. One may have noticed that the tribunal has applied the reasonable man test as its justification that Pringles is product made from potato – a test of actual usage of Pringles.

This is the similar approach taken by RMCD – the treatment of any land transaction with a building or structure attached, will depend on its usage. Thus, if residential building is built on the commercial land title, it will be treated as residential and exempted from GST. The hybrid SoHo is subject to GST unless proven to be used for solely residential. Nonetheless, there has not been a definition for the boundary of “residential” nor any test case in that manner and such an issue will definitely arise in this wireless mobile generation where the trend of individual, whose preference is to work from home, may capitalise on such uncertainty.

Nonetheless, there should be a period of initial leniency on implementation of GST to be accorded by the RMCD akin to that of the Personal Data Protection Act and Competition Act. Leniency aside, no one has the foresight of what sort of enforcement shall take place by the RMCD. Nonetheless, the discretion shall lie with the prosecuting party and as a self-protective measure, it is more important to take a stand substantiated by our GST legislations and UK precedents which may withstand the test from court.

Only on entering into the new era that the hypothesises of GST may rest in its rightful place, clearing the doubts in the businesses and consumers’ mind. While UK case law serves as the perfect lighthouse, we are certainly not ready for their high rate of VAT.

Chris Tan is the founder and managing partner of Chur Associates - By The Star