Facilities provided under Sales Tax to Registered manufacturers, Non registered manufacturers and Traders

SALES TAX (PERSONS EXEMPTED FROM PAYMENT OF TAX) ORDER 2018 

Sales Tax Registered Manufacturers, Non-Registered Manufacturers and Businesses engaged in Trading locally or in the Export market need to take note of provisions in the above legislation to take advantage of facilities provided. The provisions are designed to ensure that Sales Tax being a single stage tax on local consumption is not added more than once into a locally manufactured product and that it isnt added to costs on goods exported ensuring our Traders may competitively price products in the Export market.

1.     For example item 38 in Schedule A of the above order:

Item No.

Persons

Good Exempted

Conditions

Certificate to be signed by

38.

Manufacturer in the Principal Customs Area

All goods transported to a Free Industrial Zone or moved to a licensed manufacturing warehouse or 65A of the Customs Act 1967 for subcontract work and subsequently re-imported or returned

(a) That prior approval of the Director General must be obtained by the manufacturer; (b) that the goods belong to a category that has been approved by the Director General; (c) that the said goods are exported or moved and re-imported or moved by the same route; (d) that the said manufacturer shall furnish not later than the 10th of each month to the customs a return in such form and manner as the Director General may determine; (e) that in issuing such approval the Director General may impose such conditions as he may deem necessary.

The Manufacturer

2.     A registered Sales tax manufacturer located in the Principal Customs Area ie in Malaysia outside

 a FIZ may send his goods(transport his goods) to a person in the FIZ Area or to an LMW for 

subcontract work and he must acquire back the same goods that has been worked on. Movement of 

goods to FIZ is considered export and bring back the goods is considered an Import.

3.     All goods exported except in some exceptional cases can be exported without being charged Sales 

tax.If the manufacturer exports by himself a Customs Export Declaration Form (Customs No 2) is to 

be used:

56.

Registered Manufacturer

All goods, exported from Malaysia

That the exportation is supported by Customs Form No 2 and other documents if required by the Director General.

Certificate not required

4.     Item 57 applies to cases where a Sales tax manufacturer may not want to export himself or a trader buys goods that he intends to export himself. There are certain approvals to be obtained and the goods need to be exported within 6 months.

57.

Any person approved by the Director General

All goods locally manufactured or manufactured by any manufacturer licensed under section 65A of the Customs Act 1967 or by any manufacturer in the Free Industrial Zone under the Free Zones Act 1990 for export

(a) That the goods are purchased from a registered manufacturer or from any licensed manufacturing warehouse or free industrial zone; (b) that the goods be exported within 6 months from the date of purchase; (c) that the goods shall not be sold or otherwise disposed of in Malaysia except as approved by the Director General and upon payment of the appropriate tax; (d) that the person approved shall pay all the taxes on any goods that cannot be accounted for; (e) that if the goods are not exported within six (6) months from the date of purchase the person approved shall be liable to pay all the taxes on the goods not exported.

The person approved by the Director General

5.    Can a registered Sales tax manufacturer send goods that he manufactures, either raw materials and components lightly manufactured or cut, to be further worked upon by a business or person who is not required to be registered under Sales Tax? Yes- see as below:

Item No.

Persons

Good Exempted

Conditions

Certificate to be signed by

62.

Any person approved by the Director General

All goods (including packing materials) obtained from a registered manufacturer for subcontract work and subsequently returned

(a) That the goods belong to a category that has been approved by the Director General; (b) that the goods are for further manufacturing or to complete its manufacture by any person who is not registered under the Sales Tax Act 2018; (c) that the goods received shall, without delay, be acquired back by the registered manufacturer from the person approved in column (2); (d) that the person approved in column (2) shall pay all the taxes on any goods that cannot be accounted for; (e) that in issuing such approval the Director General may impose such conditions as he deems necessary.

The person approved by the Director General

In my next post I shall quote some decisions made under the earlier legislation - Sales Tax Act 1972 that will be applicable too under the new legislation although much depends on the Authorities interpretations. 

Preparation of Food at Same premises Or Central Kitchen By Fast Food Outlets

 PREPARATION OF MEALS (FOR IMMEDIATE CONSUMPTION THEREOF OR TO BE   SOLD BY RETAIL AT SAME PREMISES:

 The following is a decision that should interest businesses that prepare edible products(food or drinks) that are subject to Sales tax as to whether the preparation of it at the immediate premises would be considered 'manufacturing' and therefore subject to registration. In this case it was decided such activity is exempted as products manufactured are to be sold at the same premises.The same premises could however be subject to registration under the Service Tax Act if sales of food and drinks is or exceeds RM1.5m per year:

1.

However in the following case it was decided that the preparation of edible food products that were subject to Sales tax at this premises was considered as a 'Central Kitchen' and therefore a manufacturing activity that needs to be registered. The Central Kitchen is not required to register under the Service Tax Act if no sales to Customers of prepared goods (food or drinks ready for consumption) takes place at such premises. The basis of the decision is that the edible food items prepared here were then distributed to other branch outlets or francised outlets:

2.

Fast Food Restaurants too should take note that preparation of intermediate goods or  food ready for consumption that is packed and kept frozen for ease of delivery and later easy preparation at restaurant outlets is a taxable activity under the Sales Tax Act. While the final product leaving the 'Central Kitchen' would be subject to payment of Sales tax, such businesses would also be able to source raw materials, ingredients and packing materials free of sales tax provided such goods are used at the same premises in the preparation and packing for delivery to company's own outlets or francised outlets:

3.

Manufacturing 'Operations' that are given Exemption under Sales Tax Act 2018

SALES TAX (EXEMPTION FROM REGISTRATION) ORDER 2018

This is a law enacted under the Sales Tax Act 2018 which defines certain Operations which can be captured under the definition of ‘Manufacture’ and therefore mandates application for registration under the Sales Tax Act. However these kind of Operation are given ‘Exemption from Registration’ by this Order. My comments follow after the Order :

IN exercise of the powers conferred by subsection 20(1) of the Sales Tax Act 2018 [Act 806], the Minister makes the following order:

Citation and commencement

1.       (1)     This order may be cited as the Sales Tax (Exemption from Registration) Order 2018.

(2)     This Order comes into operation on 1 September 2018.

Exemption

2.       (1) Persons whose manufacturing operation solely is any one of those specified in Schedule A are exempted from registration under subsection 13(1) of the Act irrespective of the total sale value of taxable goods in the period of twelve months.

(2)     If any question arises as to whether any manufacturing operation constitutes a manufacturing operation under this Order, such question shall be decided by the Minister.

SCHEDULE A

1.       The developing and printing of photographs and the production of film slides.

2.       The engraving of articles with the name of the recipient, his sports record or other circumstances under which the article was donated or awarded.

3.       The incorporation of goods into buildings.

4.       The manufacture of ready mixed concrete.

5.       The preparation of meals.

6.       The preparation of tarred metal, tarred screenings, and hot mixed preparations of bitumen and metal for roadmaking.

7.       The production of copies of documents by the photocopy or similar copying process.

8.       The repacking of bulk goods into smaller packages by a person other than a registered manufacturer.

9.       The repair of second hand or used goods.

10.     The testing of eyesight, the prescription of suitable lenses and the fitting of such lenses into frames.

11.     The following operations when performed by a person other than a registered manufacturer—

(i)  the varnishing and/or polishing of finished pieces of furniture.

(ii) the fitting of glass tops and/or glass doors to pieces of furniture otherwise complete.

12.     The reduction of size and/or changing of the shape of taxable materials without changing the nature of such materials, provided that the sizing and/or shaping is not part of the normal process in the manufacture of a separate article.

13.     The rendering of personal tailoring service but excluding the manufacturing of garments and other textile articles on the basis of bulk and not personalised production by a firm or company engaged in the business of manufacturing garments and other textile articles.

14.     The printing of logo, knitting, crocheting or embroidering on readymade garments supplied by another person.

15.     The colouring of cloth supplied by another person without changing the size or shape of the said cloth.

16.     The manufacture of batik fabrics using traditional techniques of manual block printing, manual screen printing and/or hand drawing or painting and the articles thereof.

17.     The installation of air conditioners in motor vehicles.

18.     The manufacture of jewelry and goldsmiths wares.

19.     The extraction of gold from mineral ores.

20.     The recovery of gold from jewelry and/or the refining of gold.

Made 28 August 2018

[Perb. R.0.3865/356/1 Jld. 1(SK. 8); PN(PU2)751]

MY COMMENTS

The Sales Tax (Exemption from Registration) Order 2018 is an exact copy of a similar Order that prevailed under the previous Sales Tax Act 1972. It was then known as Sales Tax (Exemption from Licensing Order 1997 (came into effect on 17 Oct 1997). It was obviously drafted and implemented after the Dept found the law had unintended consequences. This caused manufacturers of certain processes(I shall refer to them as ‘Operations’) of taxable goods to be classified as ‘manufacturing goods’ but they were actually retailers producing personalized goods according to customers’ requirements or in a similar situation.

2.  Over the course of years following the enforcement of that Order, the Dept made several decisions       that could have a bearing on Companies engaged in similar activities now under the Sales Tax Act 2018. I shall focus on certain ‘Operations’ that were disputed as to whether these qualified for Exemption under this Order either because of the nature of the ‘Operation’, the party that carried out such an ‘Operation’ or whether the goods that were the subject had been sold. The particular ‘Operations’  are:
         item 3 : The incorporation of goods into buildings;

item 5: The preparation of meals;

item 8: The repacking of bulk goods into smaller packages by a person other than a registered manufacturer;

item 9 : The repair of second hand or used goods;

item 11 : The following operations when performed by a person other than a registered manufacturer—(i) the varnishing and/or polishing of finished pieces of furniture. (ii) the fitting of glass tops and/or glass doors to pieces of furniture otherwise complete;

item 12 : The reduction of size and/or changing of the shape of taxable materials without changing the nature of such materials, provided that the sizing and/or shaping is not part of the normal process in the manufacture of a separate article; and

item 15 : The colouring of cloth supplied by another person without changing the size or shape of the said cloth.

3.  In the case of item 3 : the incorporation of goods into building, the problem is likely faced by manufacturers of built in furniture; Fabrication of aluminium components and sheet  glass in factories to produce for example Transome and Mullion and installation on site as Curtain walls in buildings, and  Aluminium doors and windows.

4.  In the case of item 5: the preparation of meals, Would businesses engaged in preparation of taxable food items like pre-cooked and frozen Rice preparations, Sweet biscuits, Waffles and Wafers, Prepared vegetable Frozen, Sweetened biscuits and Cookies, Frozen Readymade Menu meals, Burgers etc delivered from Central Kitchen to own chain of Outlets or Francised outlets be required to register and charge Sales Tax on such preparations? (Such preparations attract Sales tax of 5%)

5.  In the case of item 8: The repacking of bulk goods into smaller packages by a person other than a registered manufacturer. This activity carried out by a manufacturer would be taxable but similar activity carried out by a person who is not a registered person is not taxable. However business today do not only engage in manufacturing but they would also be engaged in repacking bulk goods into smaller packages in the same premises but in a clearly defined area, so what happens?

6.  In item 9 : The repair of second hand or used goods, this has a bearing on Furniture and Cushion repairers/refurbishing eg where the Cushion cover is old and worn out and is replaced with a new coat and the creaking frame strengthened or the joints and worn out fasteners replaced.

7.  Item 11: (i) the varnishing and/or polishing of finished pieces of furniture. (ii) the fitting of glass tops and/or glass doors to pieces of furniture otherwise complete; has a bearing on Furniture manufacturers because quite often the final touches including varnishing and polishing and fitting of glass tops or glass doors are simple operations and practical to be carried out at distributors level and if done so would not be subject to sales tax at this level. However sometimes manufacturers outsource such operations to Specialised subcontractors who polish furniture or glue parts or bore holes and return such semi finished or nearly complete item back to Factory before quality checks and repacking is done. In such instances the cost of the workmanship and materials used or incorporated would have to be added at the manufacturer’s level and the total be subject to sales tax when the manufacturer subsequently sells the goods.

8.  Item 12 : Reduction of size or changing its shape refers to simple cutting processes eg cutting part of a roll of Tape or Wire or large roll of paper according to the size requested by a customer. This exemption does not apply where such process is part of the manufacturing of another good done at a factory.

9.  Item 15 : the coloring of cloth refer to the dyeing process of materials including subsequent washing and drying before such materials are returned to the customer to be used or used in another process which could be a manufacturing activity and subject to registration.  

In my next post I shall cite certain decisions that were made that served as a Guideline for the Department and the Taxpayers in ascertaining whether they ought to apply for Registration now or may run the risk of being detected later and be penalized with backdated taxes and late payment penalties that they would have  to cough out and be compounded  too for an offence.

19 Nov 2018