cch2024-08-3010 min read
Service Tax and Its Recent Implications on the Logistics Industry
Technical Insights by Pugaleshwaran Raja Kumaran, Executive Director, Tax at ThinkTx
Introduction
Service tax is an indirect tax imposed on specific services, with service providers being responsible for collecting and remitting the tax to the Royal Malaysian Customs Department (RMCD). The recent amendments to the service tax regulations, which now includes logistics services, have brought the tax back into the public spotlight despite its introduction in September 2018.
Amendments to the Service Tax Policy for Logistics Services
The RMCD has announced several improvements to its service tax policy for logistics services in Service Tax Policy No. 4/2024 dated 29th March 2024. These changes aim to:
- Eliminate double taxation
- Eliminate cascading effects in the logistics supply chain
- Provide tax exemptions for export-oriented companies
The Ministry of Finance (MOF) has refined the scope of service tax exemptions to alleviate the direct impact on people's living costs and the cascading tax incidences in the logistics sector. The Government aims to mitigate the tax's effect on people's cost of living and maintain the competitiveness of the nation's service sectors by providing service tax exemptions for logistics sector and maintenance services. To further preserve the country's competitiveness, the Government will also not impose service tax in free zones.
Additional Service Tax Exemption Scope for Logistics Sector
In order to ease the tax impact on daily logistics operating activities, and ultimately the consumers, the Government has agreed on the following:
- Amendments to Group J: Logistics Services in First Schedule, Service Tax Regulations 2018, whereby Item 1(a) in relation to logistics services, and Item 1(b) pertaining to delivery or distribution or transporting services have been merged into a single item. By combining these two items into one, the exemption scope for Business-to-Business (B2B) activities has widened, whereby logistics service providers classified under Item 1(a) are now no longer required to incur service tax for acquiring delivery, distribution or transporting services that previously had been listed under Item 1(b). Prior to this amendment, logistics service providers under Item 1(a) were entitled to tax exemptions for acquiring services under the same item only.
- All services under Group J: Logistics Services provided in or between Special Area / Designated Area, between Special Area and Designated Area, or vice versa are not subject to service tax, except for Customs Agent services which remains taxable for service tax. Kindly refer to diagrams in the link below.
Special Areas include:
- Any Free Zone under Subsection 2(1) of the Free Zones Act 1990;
- Any Licensed Warehouse under Section 65 of the Customs Act 1967;
- Any Licensed Manufacturing Warehouse under Section 65A of the Customs Act 1967; and
- Joint Development Area under Section 2 of the Malaysia – Thailand Joint Authority Act 1990.
Free Zone means any part of Malaysia declared under the provisions of Subsection 3(1) of the Free Zones Act 1990 to be:
- A Free Commercial Zone; or
- A Free Industrial Zone.
The following are the Free Zones in Malaysia:
(kindly refer to the table in the link below)
Furthermore, Designated Areas include:
- Tioman
- Labuan
- Langkawi
- Exemption for ocean freight charges for all goods delivered by sea mode, limited to these routes / destinations:
- Peninsular Malaysia to Sabah / Sarawak / Labuan;
- Sabah / Sarawak / Labuan to Peninsular Malaysia; and
- Between Sabah, Sarawak and Labuan.
These enhancements are additions to the widening of service tax exemption scope for logistics sectors as announced on 11th March 2024.
Additional Service Tax Exemption Scope for Maintenance Services
The Government has also agreed to provide service tax exemptions for maintenance services for the following items:
- Maintenance services related to land or buildings for residential purposes provided by developers, joint management bodies or resident associations
- Repairs of residential buildings
- Sinking funds
With this, all maintenance and repair services at residential premises such as roof upgrades or for any items and/or fixtures attached to or part of the residential premise’s structure such as lifts, air conditioners and water heaters are not subject to service tax.
The service tax rate’s increase from 6% to 8% that came into effect on 1st March 2024 is concentrated on services that are discretionary in nature and B2B activities that do not directly impact the people. The increase does not involve key essential services that are part and parcel of people’s lifestyle such as food and beverage, telecommunications and vehicle parking.
Service Tax Policy No. 4/2024 has been amended on 23rd August 2024 as follows:
- All services under Group J: Logistics Services provided within and between Special Areas / Designated Areas or between a Special Area and a Designated Area or vice versa are not subject to service tax.
- However, logistics services provided by any person whose principal place of business is located in Malaysia and who provides logistics services in a Designated Area or in a Special Area or any person whose principal place of business is located in a Designated Area or in a Special Area who provides logistics services to customers whose principal place of business is located in Malaysia are subject to service tax.
Tax Treatment on Export and Import Activities
(kindly refer to table in the link below)
Recommendations to Use the Following Incoterms in Contracts or Terms of Sale
All logistics services rendered for import or export shipments including logistics management services, warehousing or warehousing management services, freight forwarding services, haulage, Customs agent, port or airport services, shipping services (domestic), aviation services or cold chain facilities services that are borne fully by the foreign supplier or foreign buyer will not be subject to tax as the logistics service providers will be invoicing / billing the foreign importer or exporter. To benefit from this exemption, businesses are encouraged to utilize the following Incoterms in contracts or terms of sales:
- For exports using the Incoterms Free Carrier (FCA): The Malaysian seller / exporter is responsible for export Customs clearance and delivering the goods to the carrier at the specified place of delivery. The seller is only responsible for loading the goods if their place of business is the same as the delivery location. The foreign buyer / importer assumes all risks and responsibilities, including all logistics services from the factory / warehouse to their own premises. Since the foreign buyer is responsible for logistics services, even if they use local service providers, no service tax is levied on the services rendered in this transaction.
- For imports using Incoterms Delivered at Place (DAP): When using DAP for importing goods, the foreign seller / exporter is responsible for delivering the goods to the specified destination, ready for unloading. All risks and costs up to unloading are borne by the seller. However, the Malaysian buyer / importer is still responsible for import Customs clearance and duties, and other import formalities. Since the foreign seller / exporter covers the logistics costs, even if they use local service providers, no service tax is levied on the services rendered in this transaction.
Threshold Value for Sales and Service Tax (SST) Registration
The threshold value for service tax registration for taxable persons providing logistics services is RM500,000 over a 12-month period. Service providers who exceed this prescribed threshold value of taxable services are required to register under the Service Tax Act 2018. The application for registration must be submitted to the RMCD not later than the last day of the following month. Once registered, the registered persons are obligated to collect, file and pay the taxes to the RMCD regularly.
Penalties for Non-Compliance
Failure to submit SST returns
- A fine up to RM50,000;
- A prison term of up to 3 years; or
- Both the fine and imprisonment.
Failure to satisfy SST dues
- A fine amounting to RM50,000;
- Imprisonment for up to 3 years; or
- Both.
Furthermore, penalties will be imposed for late payments. Below is a tabulation of the penalty rates charged for varying durations of late payments:
- 1 - 30 days: 10%
- 31 - 60 days: 15%
- 61 - 90 days: 15%
- 91 days and above: Maximum 40%
Conclusion
The attention for service tax compliance should increase following the implementation of e-Invoicing. For goods sold by a foreign seller to a Malaysian buyer, in other words for importation of goods, the reference number of Customs Form No. 1 (K1) “Declaration of Goods Imported” is required to be stated in an e-Invoice. With real-time data and an informative database, the tax authority can now swiftly carry out audits and identify discrepancies, abnormal and peculiar transactions or even potential frauds through the e-Invoicing model as it provides a clear audit trail with improved traceability. What’s more, the Inland Revenue Board of Malaysia (IRBM) had made it clear since the start that pursuant to Section 138(4)(aa) of the Income Tax Act 1967, e-Invoicing information will be shared with the RMCD. Therefore, businesses are advised to pay heed to the service tax compliance requirements as they are required to include the necessary particulars under the applicable laws, rules and regulations of the Sales and Service Tax Act 2018 for e-Invoicing purposes and to avoid imposition of multifold penalties.