GST on Digital Economy

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Category: GST System Changes Articles

Australian Taxation Office has started to apply GST on digital economy. It is possible that Malaysia will start to amend and introduct new GST laws on digital economy as soon as the coming budget announcement and Parliament season. The following is some points after initial research is done on how Australian Taxation Office adopts GST on digital economy and Malaysia may adopt the same concept. 

There are 7 components to look into the definition of digital economy. Please click the image to see enlarge view.

1. Offshore and overseas business identification: Malaysia requires a business to register with a threshold of MYR500,000. As such, any non-resident businesses which make supply to Malaysia are liable to register when the threshold is reached. Tax authorities may use big data analytics and third party sources such as credit card transactions to identify those business entities. Tax authorities may communicate via email, phone and letter to the businesses to inform the liability to register for Malaysian GST.
2. Registration of Non-Resident Businesses: It shall either direct register via GST Portal or engaging a local licensed GST agent to handle GST registration. Licensed GST agents may render GST submission on behalf of these overseas businesses that make supply into Malaysia. Alternatively, overseas businesses may appoint local distribution agent for its supply within Malaysia.
3. Definition of Digital Services - It includes all forms of download, ebooks, entertainment related such as movie, songs, gaming, application, mobile and others. Currently GST is unable to track the purchase by consumer who pays to overseas businesses. 
4. Definition of Low Value Goods - Businesses will pay duties and GST upon collection by freight forwarder. However, if consumers purchase low-value goods from e-commerce sites, it is now charged by the merchant for GST instead of border control when the goods reach Malaysia. The threshold for low value goods may be MYR500. Any accumulation that is more than the threshold shall subject to GST upon consumption by consumer.
5. Target Audience - Tax authorities are targeting consumers instead of businesses. As the consumption of goods is reasonable belief to be made by the consumer, the business operator shall charge GST on the prevailing rate of 6%. As for the business who acquires digital goods and services, it shall indicate GST Registration No to the vendor so that GST is not applicable. Overseas vendor may hook up the "Look Up for GST Status" in tax authorities web site to verify the status of the business.
6. Compliance on Non-Residents - It maybe difficult to ensure compliance on non-resident businesses as they belong to a country other than Malaysia.Therefore grace periods shall grant for the registration of non-resident businesses who provide supply into Malaysia. Once the grace period is lapsed, the enforcement shall take effort to make the businesses for GST compliance. If the non-resident businesses refuse to co-operate, penalty and assessment will impose to these businesses. Tax authorities may go through double taxation agreement and any multi-lateral agreement with overseas tax authorities to collect GST from the businesses in their origin country. 
7. Abolishment of Reverse Charge Mechanism for Digital Products - Since the digital services shall focus on consumers, then the reverse charge mechanism for imported services for GST registered business will be redundant. It may exclude from the disclosure as deemed supply and input tax credit in GST-03. At the same time, for those non-GST registered businesses in Malaysia, it shall not account for output tax via GST-04. Section 13 of GST Act shall amend to de-activate for digital services.

Please click this image to see enlarge view.