Goods and Services Tax (GST) is a multi-stage tax on domestic consumption which is charged on all taxable supplies of goods and services in Malaysia and on importation of goods and services into Malaysia, except those specifically exempted under the Goods and Services Tax Act 2014 [Act 762] ("the Act").
A person who is registered under the Act is required to charge GST on his supply of goods and services. He is also allowed to claim input tax credit for GST incurred on the purchase or acquisition of goods and services for the purpose of making a taxable supply in the course or furtherance of his business. In the event where the output tax charged exceeds the input tax incurred, the registered person is required to account for the difference to the Royal Malaysian Customs Department ("RMCD").
In this alert, we seek to provide our readers with an insight into understanding the liability of a taxable person to account for GST, specifically in the context where goods and services are sold by an agent and where property is sold to recover debt owed by a taxable person. To this end, it is instructive to first have a general understanding of when GST is chargeable.
B. Circumstances in Which Goods and Services Tax is Chargeable
Section 9 of the Act is the overarching GST charging provision in Malaysia. Specifically, Subsection 9(1) states that:
A tax to be known as goods and services tax, shall be charged and levied on —
- any supply of goods or services made in Malaysia, including anything treated as a supply under this Act; and
- any importation of goods into Malaysia.
Subsection 9(2) further provides that:
Except as otherwise provided in subsections 13(3) and 72(5), tax shall be charged on any supply of goods or services made in Malaysia where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.
A perusal of the above provisions shows that in order to charge GST, the following four circumstances have to be present:
- There is a taxable supply;
- The taxable supply is made by a taxable person;
- The taxable supply is made in Malaysia; and
- The taxable person makes the taxable supply in the course or furtherance of his business
"Taxable supply" is defined to mean a supply of goods and services which are standard-rated supply and zero-rated supply and does not include an exempt supply.
"Taxable person" means any person who is or is liable to be registered under the Act.
C. General Liability to Account for GST
Subject to the above and in the event where GST is chargeable, the liability of a taxable person to account for GST is governed by subsection 9(3) of the Act in the following terms:
Except as otherwise provided in subsections 65(4) and 65(5) tax chargeable on any supply of goods or services is a liability of the person making the supply and subject to Part V, becomes due and payable at the time of supply.
In addition, subsection 41(1) of the Act provides for the payment of output tax:
Every taxable person shall, in respect of his taxable period, account for the tax in a return as may be prescribed and the return shall be furnished to the Director General in the prescribed manner not later than the last day of the month following after the end of his taxable period to which the return relates.
Reading subsections 9(3) and 41(1) together, it is clear that a person who makes a supply of goods and services is prima facie liable to account for output tax chargeable on the goods and services supplied, except as otherwise stipulated under subsections 65(4) and 65(5) of the Act which will be explored in greater detail below.
D. Liability to Account for GST Where Goods are Sold by an Agent
In the context of GST, an agent is an intermediary who is authorised by a party, the principal, to act on his behalf in making the supply of goods or services. Under such a circumstance, the supply is treated as though made by the principal as the agent merely facilitates the sale in return for an agreed amount of commission for his agency services. This is provided by section 65(1) of the Act:
Where goods or services are supplied by an agent acting on behalf of a principal, the supply shall be deemed to be made by the principal and not by the agent.
Therefore, by virtue of subsection 9(3) of the Act, the principal, as the supplier of goods and services, is liable to account to the RMCD for the GST charged and collected.
On the other hand, if an agent supplies goods and services in his own name, such as an undisclosed agent who receives and issues invoices in his own name, he is deemed to be the supplier of the goods and services. This is in accordance to subsection 65(3) of the Act, which provides that:
Where goods or services are supplied through an agent acting in his own name, the supply shall be treated as a supply to the agent and as a supply by the agent.
In such a situation, the agent, being the supplier of goods and services, is required to account for GST under subsection 9(3) of the Act.
E. Liability to Account for GST Where Property is Sold to Recover Debt Owed by a Taxable Person
Notwithstanding the general position stipulated under subsection 9(3) of the Act whereby a supplier of goods and services is prima facie liable to account for GST chargeable, in the event property is sold to recover debt owed by a taxable person, the liability to account for GST is dealt with differently under subsection 65(5) of the Act.
In this regard, subsection 65(5) reads as follows:
Where goods are deemed to be supplied by a taxable person
pursuant to subparagraph 5(7) of the First
person, whether or not he is a taxable
person, who sells the goods in satisfaction of any
debt owed by that taxable person, shall be liable for any tax due
and payable on the supply.
Subparagraph 5(7) of the First Schedule refers to the event where goods, forming part of the business assets of a taxable person, are sold by a person who has the power to do so for the purpose of recovering any debt owed by the taxable person. Under such a circumstance, the goods are deemed to be supplied by the person owing the debt.
Reading these two provisions together, it is clear that although the goods are treated as though supplied by the taxable person owing the debt, the liability to account for GST does not fall on the supplier but on the person who sells the goods instead, regardless of whether the seller is taxable or not, as provided by subsection 65(5) of the Act.
To better understand the operation of the abovementioned provisions, it is instructive to see how they play out in the circumstances where property is sold to recover a debt by way of a court order and a deed of assignment.
i. By way of a court order
Selling a piece of property for the purpose of recovering a debt by way of a court order is generally known as a judicial foreclosure proceeding. Upon a default of payment by a taxable person, a financial institution applies to either the High Court or the Land Office to sell the said property by way of a public auction so as to recover the debt owing to the financial institution in pursuance of the procedures stipulated under Chapter 3 of Part Sixteen of the National Land Code 1965 ("the NLC").
When a foreclosure proceeding takes place, and assuming that the person owing the debt is a taxable person carrying out a business,1 subparagraph 5(7) of the First Schedule applies and the person owing the debt will be deemed to be the supplier of the property when the property is sold in a public auction.
Following from the above, subsection 65(5) of the Act will be invoked and the person selling the property is liable to account for the GST charged. In this regard, the Supreme Court in Kimlin Housing Development Sdn Bhd (Appointed Receiver & Manager) (in liquidation) v Bank Bumiputra (M Bhd & Ors)  2 MLJ 805 and M & J Frozen Food Sdn Bhd & Anor v Siland Sdn Bhd & Anor  1 MLJ 294 held that in a forced sale under the NLC, a chargee (usually a financial institution) is to be regarded as the vendor of a property to which his charge relates and is entitled to obtain an order for the sale of a property for the purpose of recovering an owing debt. These two cases have been subsequently followed by a number of High Court decisions. In light of this, a chargee, who is the vendor selling the property, is thus required under subsection 65(5) of the Act to account for GST to the RMCD.
ii. By way of a deed of assignment
In the event where security for a loan is created by way of a deed of assignment and where the assignor, who is a taxable person, defaults in his repayment, the assignee (usually a financial institution) is contractually entitled to sell the property by way of a public auction or otherwise. The assignee, having a chose in action in the property, has the power to sell the said property to recover debt from the assignor. Accordingly, the assignee, being the person selling the property, is required by subsection 65(5) of the Act to account for any GST charged.
In light of the above, it is important for the charge and/or assignee selling property, either by way of a court order or under a deed of assignment, to ensure that the payment of GST is the liability of the purchaser in addition to the purchase price. A sample contractual clause to achieve this could read as follows:
Goods and Services Tax (GST)
- Unless specified to the contrary herein, the purchase price of the property is exclusive of Goods and Services Tax ('GST') to the extent that it is a taxable supply within the meaning of the Goods and Services Tax Act 2014 ('the GST Act').
- In this clause, a word or expression defined in the GST Act has the meaning given to it in that Act.
- If a party (Supplier) makes a supply of property under or in connection with this Contract in respect of which GST is payable, the recipient of the supply, namely the purchaser (Recipient) must pay to the person selling the property (Seller), an additional amount equal to the GST payable on the supply (GST Amount).
The general position under subsection 9(3) of the Act is that a person who supplies goods and services has the liability to account for any GST charged and collected. However, where property is sold for the purpose of recovering a debt owed by a taxable person, the liability to account for GST is treated differently from the general position. In this regard, even though a taxable person owing the debt is deemed to be the supplier of the property, it is the person who sells the said property in satisfaction of a debt, usually to a financial institution, that is required to account for GST. Therefore, it is important for the person selling the property to expressly stipulate in the terms and conditions of a proclamation of sale or a contract of sale to pass on the liability to pay GST to the purchaser.
1. Note that GST is only chargeable when a taxable supply is made by a taxable person in Malaysia in the course or in furtherance of a business by the taxable person (See subsections 9(1) and 9(2) of the GST Act).
In the event where a foreclosure proceeding involves a person carrying out a business (regardless of the type of the business), and if the sale of the property for the purpose of recovering a debt is part of the termination or intended termination of the business carried out by that taxable person, then by virtue of subsection 3(3) such a sale is treated as being done in the course or in furtherance of that business, and thus GST is chargeable.
However, where a foreclosure proceeding involves an individual who is not carrying out any sort of business, no GST will be chargeable as the sale of the property for the purpose of recovering a debt is not in the course or in furtherance of a business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.