Goods and Services Tax (GST) Accounting for GST, Adjustments and Partial Exemption

Goods and Services Tax (GST) Accounting for GST, Adjustments and Partial Exemption Presenter : Mohd Zaidilharis JKDM, Putrajaya

AGENDA PART 1 INTRODUCTION PART 2 RELEVANT LAWS PART 3 ACCOUNTING FOR GST PART 4 ADJUSTMENT PART 5 PARTIAL EXEMPTION AND ANNUAL ADJUSTMENT

PART 1 : INTRODUCTION Adjustment under GST - Input Tax and Output Tax When the taxable person issues/receives debit notes / credit notes Payment not received after 6 months (Bad Debt Relief) Debtor has become insolvent before expiry of 6 months (Bad Debt Relief) Payment not made for the acquisition after 6 months Change of use of assets (e.g. from exempt to taxable) over-deducted of input tax due to change of use (Reg. 34) Short claimed of input tax due to change of use Over-deducted of input tax due to change of use Change of accounting basis e.g. payment basis to invoice basis Annual Adjustment for mixed supplier Capital Goods Adjustment (change in the proportion of use) Cont

PART 2 : RELEVANT LAWS 1. Section 35 Credit Note & Debit Note 2. Section 58 Bad Debt Relief 3. Regulation 25 Credit Note & Debit Note 4. Regulation 34 49 Input Tax & Partial Exemption 5. Regulation 70 74 Bad Debt Relief Cont

PART 3 : ACCOUNTING FOR GST 1.Credit Note 2.Debit Note 3.Bad Debt Relief Cont

CREDIT NOTE A credit note is issued when the amount previously invoiced is reduced or a transaction is cancelled for whatever reason. When a credit note is issued, the taxable person must reduce his output tax for the corresponding amount stated in the credit note in the return for the taxable period in which the credit note was issued. The customer who is a registered person on the other hand, must reduce his input tax in the return for the taxable period in which he received the credit note. Adjust by deducting the related GST to the input tax in GST - 03

CREDIT NOTE EXAMPLE: Goods sold on 20/1/16 by company A to company B, amount RM 1,000. plus GST 6%. Goods returned on 10/2/16 to company A, amount RM212. Credit note issued on 25/2/16 by company A. Company A (Seller) Jan 16 Output tax : RM1000 x 6% = RM60 Feb 16 (Adjustment) Decrease output tax : RM212 x 6/106 = RM12 Company B (Buyer) Jan 16 Input tax RM1000 x 6% = RM60 Feb 16 (Adjustment) Decrease Input tax RM212 x 6/106 = RM 12 OUTPUT TAX INPUT TAX

CREDIT NOTE Dr Sales Returns - RM200.00 Dr GST output tax - RM 12.00 Cr Trade Debtors - RM 212.00

DEBIT NOTE A debit note is issued when the amount previously invoiced is increased for the same supply. When a taxable person issues a debit note, he must increase his output tax for the corresponding amount stated in the debit note in the return for the taxable period in which the debit note was issued. The customer who is a registered person on the other hand, can increase his input tax in the return for the taxable period in which he received the debit note.

DEBIT NOTE EXAMPLE: On 20/3/16 WUB Enterprise issued a tax invoice to BHX Enterprise for RM 10,600 inclusive GST 6% (RM10,000 + RM600 GST). In March taxable period, WUB Enterprise includes the output tax of RM600 (i.e. RM10,000 x 6%) for that particular transaction, while BHX Enterprise claimed an input tax of RM600 (i.e RM10,000 x 6%) On 10/4/16 WUB Enterprise raised a debit note for the amount of RM 1,060 inclusive GST 6%.

DEBIT NOTE EXAMPLE: To clearly reflect the actual liability, in the April taxable period, WUB Enterprise has to make an adjustment by increasing the output tax by RM60 (i.e. RM1,000 x 6%) because his actual sales has increased by RM1,000. Correspondingly, BHX Enterprise has to make an adjustment by increasing the input tax by RM60 (i.e RM1,000 x 6%) since the price increased by RM1,000 compared to the initial tax invoice.

ACCOUNTING ENTRY Debit Note o Eg. A trader raise a debit note for undercharge of value for an earlier invoice. The undercharged amount is RM1000.00 plus GST 60.00. His accounts should reflect Dr Debtors RM1060.00 (gross) Cr Sales - RM 1000.00 (net) Cr GST Output tax RM 60.00

BAD DEBTS RELIEF Conditions For Relief Of Bad Debts tax account and paid on the supply; no payment has been received in 6 months from the date of supply; or the debtor has become insolvent before the period of six months has elapsed; and reasonable efforts have been made by such person to recover the tax (shall notify the debtor of his intention to claim bad debt).

Conditions For Relief Of Bad Debts (continue) Have written off the debt in GST accounts Have transferred the debt to a separate debt account (Reg. 74(3)) The debt has not been sold or passed to a factoring company You are still entitle to receive relief even though bad debt is not written off. Entitlement of supplier Claim within 6 years from the date of supply; Claim relief as input tax BAD DEBT RELIEF Subsequently receive repayment after claiming the tax account as output tax in return for the taxable period he receives the payment of the tax from the customer

Formula for bad debt relief Supplier has not received any payment claim for the whole of the tax paid Supplier received part payment for taxable supply claim for an amount calculated accordance to this formula A1 x C B Where A1 the payment not received for the taxable supply B the consideration for the taxable supply C the tax due and payable on the taxable supply

BAD DEBTS Payment not received after 6 months 1. ARBUS Sdn Bhd made a supply and issued a tax invoice on 5/2/2016 to RBS Sdn Bhd for RM 21,200 inclusive GST 6% (RM 20,000 + RM1200 GST). 2. ARBUS Sdn Bhd accounts for output tax for the month of February. 3. ARBUS receives part payment of RM12,000 (inclusive of tax RM 679) for the supply was received on 12/5/2016. 4. Balance payment of RM 9,200 was received after six months from the date of tax invoice was issued. 5. ARBUS Sdn Bhd can claim bad debt relief in the month of August. 6. The claimable bad debt relief is as follows:- RM9200 x RM1200 = RM 521 RM21200 16

ADJUSTMENT BAD DEBTS Buyer (taxable person) fails to pay GST within six months from the date of supply : If he has claimed input tax on that supply: pay back the input tax by accounting an amount equal to the input tax as his output tax. account the output tax in his taxable period immediately after the six month period If he subsequently pays the supplier: claim back the output tax he pays to supplier as his input tax for the taxable period in which he made his payment.

Formula for repayment Supplier has received the claim Buyer subsequently paid the debt to Supplier Supplier has to repay an amount calculated with the following formula Where A2 the payment received in respect of the taxable supply B the consideration for the taxable supply C the tax due and payable on the taxable supply Declare in GST-03 A2 x C B

ADJUSTMENT BAD DEBTS If only part payment received after six months Please refer to the same example of ARBUS. Assuming the customer pays only RM 3900 (inclusive tax ) in 5/11/2016 (after the expiry of 6 months from the date of supply), ARBUS Sdn Bhd must account for output tax calculated as follows:- RM3900 x RM1200 = RM 221 RM21200

PART 4 : ADJUSTMENT 1.Change of Use 2.Change of Accounting Basis Cont

CHANGE OF USE A change of use will result if there is a change in the intention or there is an actual change in use. If there is a change in use, the registered person shall make an adjustment to the input tax that has been claimed earlier. The amount of input tax claimed must reflect the actual taxable use of the supply acquired. This may lead to over deduction or short claim of input tax. Over deduction will occur when the percentage of usage for taxable supply has decreased. On the other hand, short claim refers to situation where the percentage of usage has increased.

CHANGE OF USE (over-deduction) Adjustment of input tax over-deducted due to change of use Change in use of goods or services purchased during a period of 6 years Input tax has been claimed, therefore need to reverse the entry. Taxable Supplies Taxable & Exempt Supplies Taxable & Exempt Supplies Exempt Supplies Adjust by adding the related adjustment to the output tax in GST Return

ADJUSTMENT CHANGE OF USE (short claimed) Adjustment of input tax over-deducted due to change of use Change in use of goods or services purchased during a period of 6 years Input tax has been claimed, therefore need to reverse the entry. Exempt Supplies Taxable Supplies Taxable & Exempt Supplies Taxable &Exempt Supplies Adjust by adding the related adjustment to the input tax in GST Return

CHANGE OF ACCOUNTING BASIS Requirement as a result of change from an invoices basis to payment basis or vice versa Registered person has to prepare up to the last day of the taxable period before change takes effect: List of creditors amount due by the registered person List of debtor amount due to the registered person Calculate the tax payable or refundable Make adjustment of tax by including the tax payable or refundable in the first return where the change of accounting takes effect 24

Change from invoice basis to payment basis Calculation of tax payable due to change from an invoice basis to payment basis. Determined in accordance to this formula: [C D] C An amount equal to the amount of input tax deducted in relation to the amount due as shown in the list of creditors D An amount equal to the amount of output tax accounted in relation to the amount due as shown in the list of debtors Amount will be refunded if net tax is negative 25

CHANGE OF ACCOUNTING BASIS FROM INVOICE TO PAYMENT BASIS Must pay the difference if GST on creditors is higher than GST on debtors Include the amount as output tax payable in the first return where the change in the accounting basis takes effect If GST on debtors is higher than GST on creditors, you are entitle to a credit. Can increase your ITC Once under the payment basis, you can only claim a credit when you pay for the supply and account for output tax only when you receive payment for the supply.

Sample calculation: changing from invoice to payment basis Creditors list as end of the month Co. Amount Paid Balance A 1600 400 1200 B 2100 1200 900 C 1600 900 700 D 1500 300 1200 Total 6800 2800 4000 Debtors list as end of the month Co. Amount Paid Balance AA 1300 1000 300 AB 1900 700 1200 AC 1800 900 900 AD 1600 500 1100 Total 6600 3100 3500 Tax payable when change from invoice basis to payment basis Amount of input tax deducted - A 4000 X 6/106 226.42 Amount of output tax accounted - B 3500 X 6/106 198.11 Tax payable C - D 28.31 27

Change from payment basis to invoice basis Determined in accordance to this formula: D - C D An amount equal to the amount of output tax would have been deducted in relation to the amount due as shown in the list of debtors required to be prepared in invoice basis C An amount equal to the amount of input tax would have been accounted in relation to the amount due as shown in the list of creditors required to be prepared in invoice basis Amount will be refunded if net tax is negative 28

CHANGE OF ACCOUNTING BASIS FROM PAYMENT BASIS TO INVOICE BASIS Must pay the difference if GST on debtors is higher than GST on creditors Include the amount as output tax payable in the first return where the change in the accounting basis takes effect If GST on creditors is higher than GST on debtors, you are entitle to a credit. Can increase your ITC Once under the invoice basis, you can claim a credit when you receive a tax invoice for the acquisition and must account for output tax when you issue invoice for the supply.

Sample calculation: changing from payment to invoice basis Creditors list as end of the month Co. Amount Paid Balance A 2100 1100 1000 B 1400 900 500 C 1900 900 1000 D 2300 1300 1000 Total 7700 4200 3500 Debtors list as end of the month Co. Amount Paid Balance AA 1500 900 600 AB 1900 700 1200 AC 2100 900 1200 AD 1800 1000 800 Total 7300 3500 3800 Tax payable when change from payment basis to invoice basis Amount of output tax accounted - C 3800 X 6/106 215.09 Amount of input tax deducted - D 3500 X 6/106 198.11 Tax payable D - C 16.98 30

PART 4 : ADJUSTMENT PARTIAL EXEMPTION & ANNUAL ADJUSTMENT Cont

OVERVIEW Mixed Supplier a person who makes both taxable and exempt supplies Partial Exemption mixed supplier has to apportion the amount of residual input tax claim in respect of making taxable and exempt supplies using an approved partial exemption method Eligible to claim full amount of input tax credit if the input tax incurred is exclusively attributable to the taxable supplies Not entitled to claim input tax incurred if the input tax incurred is exclusively attributable to the exempt supplies

OVERVIEW Residual input means input that is not directly attributable to eithertaxable or exempt supply, ex. electricity, water, rents, etc. Residual input tax need to be apportioned according to taxable supply. (Apportionment rule)

APPORTIONMENT DIRECT ATTRIBUTE INPUT A INPUT B PROCESS Taxable Non-Taxable OUTPUT A OUTPUT B Claimable Non- Claimable INDIRECT ATTRIBUTE - Apportionment INPUT A PROCESS OUTPUT A OUTPUT B Taxable Non-Taxable

APPORTIONMENT METHOD Mechanism for ITC Apportionment Turnover-based method will be used as a standard method for apportioning any residual input the proportion must correctly reflect the use to which the inputs are put must reflect the range of the taxable person s activities adjustment to the initial input tax claim should be made annually based on the change of the use of the asset Cont

APPORTIONMENT METHOD STANDARD METHOD Reg.39 (4) IRR = T O¹ X 100% T + E - O² R = recoverable percentage of residual input tax T = total value of taxable supplies E = total value of exempt supplies 36

APPORTIONMENT METHOD O = total value of all excluded amount Excluded Supplies O¹ O² Supply of capital goods Imported services Self Supply Incidental financial supply Supply of land for general use 37

APPORTIONMENT EXAMPLE : ABC Co. Sdn. Bhd., whose current tax year ends on 31/12/2016, his current taxable period is May 2016, made some mix supplies and at the same time incurred residual input tax as follows : RM T Value of all taxable supplies (exclusive tax) 200,000.00 O Value of a capital goods disposed off (exclusive tax) 50,000.00 E Value of exempt supplies 40,000.00 Residual input tax 10,000.00

APPORTIONMENT Residual input tax recovery rate percentage for May 2016 200,000 50,000 200,000 + 40,000 50,000 x 100% = 78.95% Amount of residual input tax that ABC Sdn. Bhd can be claimed for May 2016 Residual input tax recovery rate % x residual input tax incurred 78.95% x RM10,000 = RM 7,895.00 ABC Sdn. Bhd. Can only claim RM 7,895 out of the RM 10,000 of residual input tax incurred by him in that taxable period (i.e. May 2016)

APPORTIONMENT METHODS Other Alternative Methods Floor Space method Transaction-based method Input-based method Cost Centre accounting method Employee Time Method Use of these methods need prior approval

APPORTIONMENT METHODS Example Finance company Arbus Sdn Bhd. deals in taxable leasing and exempt personal loans services. The value and number of transaction of taxable and exempt supplies are as follows: Activities Leasing agreements entered into No. of Transactions % Value (RM) % 75 60 750,000 42.9 Personal loans entered into 50 40 1,000,000 57.1 TOTAL 125 100 1,750,000 100

DE MINIMIS RULE

De Minimis Limit Exempt input tax can be recovered in full in any taxable period or a longer period if satisfies the following conditions: Prescribed amount of de minimis limit: total value of the exempt supplies does not exceed an average of $5,000 per month and 5% of the total value of total supplies (all taxable and exempt supplies) made in that period (taxable / longer period) Rationale: To relieve small companies from the partial exemption requirements. Exclude all incidental exempt supplies

Example 1 Taxable period = One month Value of taxable supply = RM200,000 Value of exempt supply = RM 50,000 Input tax attributable to taxable supply = RM 10,000 Input tax attributable exempt supply = RM 2,000 Residual input tax = RM 1,000 Test for deminis rule first. Value of exempt supply does not exceed RM 5,000 and 5% of total supply? If yes, All exempt input can be claimed. Otherwise use the formula. In this case deminimis rule is not fulfilled. Therefore residual input tax that can be claimed = 200,000/(200,000 + 50,000) x 1,000 = RM 800 Total ITC can be claimed in January = RM 10,000 + RM 800 = RM 10,800

Example 2 Taxable period = One month Value of taxable supply = RM 200,000 Value of exempt supply = RM 4,000 Input tax attributable to taxable supply = RM 10,000 Input tax attributable exempt supply = RM 2,000 Residual input tax = RM 1,000 Test for deminis rule first. Value of exempt supply does not exceed RM 5,000 and 5% of total supply? If yes, All residual input can be claimed. Otherwise use the formula. In this case deminimis rule is fulfilled. Therefore all exempt input tax can be claimed Total ITC can be claimed in January = RM 10,000 + RM 2,000+ RM 1,000 = RM 13,000

LONGER PERIOD ADJUSTMENT / ANNUAL ADJUSTMENT

OVERVIEW A recovery of residual input tax in a taxable period is only provisional The proportion of residual input tax recovered may not be reflective or fairly attributed to the taxable supplies Fluctuations or high volatility in supplies from taxable period to another taxable period Therefore, mix supplier is required to make annual adjustment, which also refer to as longer period adjustment.

TAX YEAR Definition Tax years refer to the period in which a registrant remains registered under the GST Act 2014 A tax year in its ordinary meaning would constitute 12 calendar months Tax Year = 12 months or other period approved by the DG (i.e. 6 months up to 18 months) 48

TAX YEAR 1 st Tax Year The first tax year -1 st day of the registration until the day before his next tax year commences. Registrant s tax year correspond with financial year, for the convenience of registrants, in term of preparing financial statements First tax year may depend on the effective registration date Period : 6 18 months 49

LONGER PERIOD Longer period means a tax year or a period comprising of 2 or more taxable periods or part thereof. If a taxable person who incurs exempt input tax during any tax year, then a longer period shall correspond with that tax year. If he did not incur exempt input during his immediately preceding tax year, his longer period shall begin on the first day of the first taxable period which he incurs exempt input tax; and end on the last day of that tax year. 50

LONGER PERIOD If the first partial exemption period falls on the last taxable period of the tax year, longer period is not applicable to work out adjustment for that tax year. Generally, longer Period = tax year = 12 months In some cases, first longer period may be less or even more than a period of 12 months depending on the length of his first tax year. 51

LONGER PERIOD Longer Period Example 1 Monthly Taxable Period Tax year run from 1 st January 2016 to 31 st December 2016. Start to make exempt supply on 15 th August 2016. First longer period would runs from 1 st August to 31 st December 2016 1 2 3 4 5 6 7 8 9 10 11 12 1/1/2016 01/08/2016 31/12/2016 Longer Period 52

LONGER PERIOD Longer Period Example 2 Quarterly Taxable Period o Tax year run from 1 st January 2016 to 31 st December 2016. o Start to make exempt supply on 15 th August 2016. o First longer period would runs from 1 st July to 31 st December 2016 1 2 3 4 5 6 7 8 9 10 11 12 1/1/2016 01/07/2016 31/12/2016 Longer Period 53

LONGER PERIOD Longer Period Example 3 PE falls on the last taxable period Tax year run from 1 st January 2016 to 31 st December 2016 (quarterly taxable period) Start to make exempt supply on 3 rd October 2016. Longer Period not applicable 1 2 3 4 5 6 7 8 9 10 11 12 1/1/2016 03/10/2016 31/12/2016 Longer Period not applicable 54

LONGER PERIOD ADJUSTMENT EXAMPLE: ABC Sdn. Bhd. Current tax year ends on 31 st December 2016 R = T O1 X 100% T + E O2 R = recoverable percentage of residual input tax T = total value (exclusive tax) of taxable supplies E = total value of exempt supplies O = total value (exclusive tax) of all excluded value of supplies

Therefore, an adjustment of RM 201,650 RM 100,650 = RM 101,000 need to be made. Example (Annual adjustment) Taxable supplies Exempt supplies % of Taxable Residual input tax Q1 Q2 Q3 Q4 Total 50,000 300,000 100,000 600,000 1,050,000 500,000 800,000 3,000,000 400,000 4,700,000 9.1% 27.3% 3.2% 60% 18.3% 100,000 150,000 50,000 250,000 550,000 Claimable residual 9,100 40,950 1,600 150,000 201650 100,650 Total residual input tax claimed in 4 quarters = RM 201,650 Under annual adjustment claimable input is only RM 100,650.

PRACTICAL EXERCISES

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