In a recent matter, our firm successfully represented a taxpayer in overturning the decision of the Customs Appeal Tribunal.
In this case, the taxpayer was a GST registered effective 1 May 2018. However, because of the abolishment of the Goods and Services Tax (“GST”) regime effective 1 September 2018, the Director General of Customs reduced the taxpayer’s input tax claim by approximately 97%, on the basis that the taxpayer would have only been a “GST registered person” for only approximately 4 months.
Our firm, led by dispute resolution partner Donovan Cheah and associates Lim Zi-Han and Chong Ee Lyne, represented the tax payer in its appeal to the High Court. The appeal was allowed by the High Court, which ordered Customs to allow the taxpayer’s input tax claim in full without apportionment or deduction.
- Under the GST regime, GST incurred on business expenses by a taxable person in the course or furtherance of his business may be recovered by way of input tax credit.
- In certain situations, a taxable person may claim GST incurred on business expenses prior to their GST registration date. Regulation 46(1) of the GST Regulations authorises Customs to treat the GST paid prior to the GST registration date as if it were input tax. This is known as an “exceptional claim for input tax”.
- The taxpayer was GST-registered effective 1 May 2018.
- Prior to being GST-registered, the taxpayer incurred GST in excess of RM 1 million, for the construction of a warehouse for its business use.
- On 2 May 2018, one day after the taxpayer became GST registered, the taxpayer applied for an exceptional claim for input tax for the RM 1 million GST incurred.
- Due to the change of government in May 2018, it was announced that the GST regime would be abolished effective 1 September 2018.
- In August 2018, Customs issued a decision to the taxpayer stating that the taxpayer was entitled to claim input tax pursuant to Regulation 46. However, Customs only allowed a claim of approximately RM 34,000 – only approximately 3.4% of the total amount claimed by the taxpayer.
- Customs apportioned / reduced the taxpayer’s claim on the basis that the taxpayer was a GST registered person from 1 May to 31 August 2018 (4 months), since after GST is abolished the taxpayer would cease to be a taxable person under the GST Act. As such, Customs was of the view that it would be unreasonable to allow the taxpayer’s input tax claim in full.
- In July 2019, the Customs Appeal Tribunal confirmed the decision of Customs.
- Dissatisfied with the Customs Appeal Tribunal’s decision, the taxpayer lodged an appeal to the High Court in August 2019.
The High Court allowed the taxpayer’s appeal, and held that the decision of the Customs Appeal Tribunal should be set aside. The High Court further ordered that the tax payer’s exceptional claim for input tax under Regulation 46 should be allowed in full and without any apportionment or reduction.
The High Court agreed that the GST Act and its Regulations do not allow Customs to apportion the input tax claim based on the length of time in which the taxpayer is GST registered. Where Parliament intended Customs to have the power to reduce, apportion, or apply a specific formula, it would have been set out in the Act and its Regulations. It is not sufficient to imply a wide discretion into the GST Act as tax statutes must be construed strictly, and in the event of ambiguity, it should be construed in favour of the tax payer.
As at the time of writing of this article, the High Court has not issued its written grounds for this decision.
This is one of the first few court cases involving an exceptional claim for input tax under Regulation 46.
Under normal circumstances, the full GST claimed by a taxpayer under Regulation 46 would have been allowed if a taxpayer satisfied all the requirements under the law. However, this case involved a unique situation whereby the announcement of abolishment of the GST took place shortly after the taxpayer filed its application to claim input tax. The knowledge of the impending abolishment of GST had influenced Customs’ decision in reducing the input tax claim to what it felt was “reasonable”.
Neither the GST Act nor its Regulations expressly allows Customs to make this apportionment or reduction, although there is a general provision that the amount of input tax entitled to a taxpayer shall be that which is “allowable and reasonable to be attributable, as may be prescribed”. This wording is insufficient to impart a wide discretionary power on Customs to make apportionment or deductions to an exceptional input tax claim, when such powers have not been expressly prescribed by the Act.
The High Court’s decision is significant, since the abolishment of the GST regime in 2018 is unprecedented. This ruling will therefore have an impact on businesses who have made exceptional input tax claims under Regulation 46, especially if they have had their claims apportioned or reduced.
This article was written by Donovan Cheah and Ee Lyne Chong. Donovan has been named as a recommended lawyer for labour and employment by the Legal 500 Asia Pacific 2017, 2018 and 2019, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.
Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.