Introduction to GST – Part 2

  • GST Basics

In the previous article, Introduction to GST – Part 1, I mentioned the term “taxable supply”. This is a key term as all GST details flow from this concept and is therefore a key to understanding GST.

There are four types of GST supply:

  • Standard-rated supply means taxable supply of goods and services which are subjected to a standard rate (proposed at 4%)
  • Zero-rated supply are taxable supplies which are subject to a zero rate (for example, foodstuff and exports)
  • Exempt supply are supplies which are exempted from GST (for example, education, housing, health)
  • Out-of-scope supply are supplies which does fall outside the scope of GST (for example, rates, taxes) Technically, it is not a supply.

Knowing whether a supply falls under one of these terms is important as it will determine a business ability to claim input tax credits.

For a standard-rated supply, a taxable person or entity will be able to claim input tax credits on his business inputs (purchases) in making taxable supplies.

For a zero-rated supply, although there is no GST to be imposed, a taxable person or entity is eligible to claim input tax credits on his business inputs in making taxable supplies.

For an exempt supply, a taxable person or entity is not eligible to claim the GST incurred on his business inputs.

“Input” means acquisition of goods / services.

“Output” means sale of final products.

Basically all inputs and outputs are subject to GST.

“Input GST” are GST incurred during the acquisition of goods / services (business inputs). Input GST incurred can be claimed as Input Tax Credit (ITC).

“Output GST” are GST imposed on sale of final product and can be offset against ITC.

We can summarize as follows:

Output GST less Input GST equals Net Tax

If the Net tax is positive, that is Output GST is more than Input  GST, the Net tax is payable to the government.

If the Net tax is negative, that is the Output GST is less than the Input GST, the Net tax is claimable by the taxable person or entity.

Illustration:

Company DEF purchases from Company ABC goods valued at RM104 (RM100 + RM4 GST).

Company DEF sells to Customer XYZ goods valued at RM130 (RM125 + RM5 GST).

For Company DEF, the Input GST is RM4 and the Output GST is RM5. In this illustration, the Net tax is RM1 which is the net result of RM5 (Output GST) less RM4 (Input GST), which is payable to the government.

This illustration is, of course, simplified to 2 levels but in real life, there are many more levels involved.

For imported goods, GST is charged on importation. For imported services, GST is charged by using a reverse charge mechanism that is

  • the recipient of the service is treated to have made the supply to himself and accounts for the output GST
  • the taxable person or entity may claim the corresponding Input GST.

It must be noted that GST collected by a business from its customers periodically gets paid to the tax authorities. In principle, a registered business is able to get back the GST it has to pay on its acquisitions / purchases. Thus GST is not a tax on the business but is pass on to the customers (consumers). GST is not a business cost.

Output GST has to be accounted for and Input GST (Input tax credit) may first be claimed.


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