WHAT IS MIXED SUPPLY?
A person who makes both taxable and exempt supplies is known as a mixed supplier. A GST-registered business is partially exempt if it makes both taxable
and exempt supplies i.e. residual input tax claim applies, because the general input tax recovery rule is that input tax is claimable only if it is attributable to the making of taxable supplies. Input tax attributable to exempt supplies or out of scope supplies are not claimable.
The partial exemption rules are merely for the purpose of alleviating business costs that allow taxable businesses to claim some input tax incurred in the making of exempt supplies, which would otherwise be allowed under the general input tax recovery rule. According to the GST Guide on Partial Exemption issued by the Royal Malaysian Customs Department dated 4 November 2013, the input tax claimed is provisional and has to be adjusted annually or at the end of a longer period (generally the period ranges from six months to 18 months) in order to give a fairer and more reasonable apportionment This is because the amount deducted in some periods may be unfairly affected due to various reasons, e.g. due to festive season sales.
In fact, the values of exempt supplies or proportions of taxable and exempt supplies vary across prescribed accounting periods. To ensure fair and reasonable
apportionment of input tax, these periodic variations are taken into consideration over a longer period.
RATIONALE FOR LONGER PERIOD ADJUSTMENT
The average monthly value of exempt supplies and proportion of taxable and exempt supplies are used to determine whether the De Minimis Rule is satisfied in each prescribed accounting period. The proportion of taxable and exempt supplies is also used to apportion input tax claims in each prescribed accounting period. In fact, the values of exempt supplies or proportions of taxable and exempt supplies vary across prescribed accounting periods. To ensure fair and reasonable apportionment of input tax, these periodic variations are taken into consideration over a longer period. Therefore, any input tax claimed in each prescribed accounting period is only provisionally allowed and an adjustment is required to be made to the input tax claimed over a longer period.
There are different rules for determining the longer period for the registration period and for the tax year. The registration period refers to the period commencing on the date of GST registration and ending on the day before the first tax year begins. Readers are urged to refer to the Guide for better understanding.
THE DE MINIMIS RULE
As mentioned earlier, when a mixed supplier incurs residual input tax, he will not be able to claim the full amount of the residual input tax that he has incurred, unless his amount of exempt supply is within the limit specified under the De Minimis rule i.e. he must apportion the residual input tax incurred in the course or in furtherance of his business based on the standard method or alternative methods of apportionment, subject to the DG's approval.
The de minimis rule is fulfilled where the total value of exempt supplies, excluding incidental exempt financial supply, does not exceed:
a) an average of RM5.000 per month;
b) an amount equal to 5% of the total value of all taxable and exempt supplies made in that period.
The proportion is determined according to the ratio of the taxable supplies to the total supplies made by the taxable person in accordance with the formula below:
Input tax = Taxable Supplies/ (Taxable Supplies + Exempt Supplies) x Residual Input Tax
WHAT IS THE CAPITAL GOODS ADJUSTMENT?
A GST registered person who is a mixed supplier is required to account for tax in accordance with the Capital Goods Adjustment (CGA) if:
a) he acquires, imports, manufactures, produces, constructs, or appropriates for use a capital item;
b) the capital item is used for making both taxable and exempt supplies;
c) the proportion of taxable use of the capital item changes over time.
CGA are the adjustments that need to be made to the initial amount of input tax claimed, during a specified period, if there is a change in the proportion of taxable use of the capital goods.
The purpose of the CGA is merely to provide a fair and reasonable attribution of input tax to taxable supplies because capital goods can be used in the business over a period of years and taxable supplies also may vary over the years. Capital items in this context refer to those capital goods which are acquired, imported, self-supplied, manufactured, produced, constructed, altered, extended, refurbished or fitted out, of which these can be capitalised under the accepted accounting principles, used by a person in the course or furtherance of a business and not solely for the purposes of selling. In addition, such capital goods must have a value of RM 100,000 or more per "unit" exclusive of GST (but inclusive of import and excise duties). Twenty units of laptops that
cost more than RM120,000 (each unit costing RM6.000) for example, would not qualify as they are purchased to be used separately and independently of
each other. Furthermore, the value of each unit is less than the threshold of RM100,000.
HOWEVER, THE GGA WILL NOT APPLY IF:
- the registered person makes a wholly taxable supply.
- the mixed supplier acquires a capital asset to be used solelyfor making taxable supplies or exempt supplies.
- an asset is acquired or imported solely for resale.
- the asset acquired is used for non-business purposes or is an exempt supply.
- the asset acquired is excluded from input tax credit i.e. blockedinput tax, for example passenger cars.
- the value of a capital asset acquired is less than RM100,000 excluding tax.
As with the partial exemption rules, a GST registered mixed supplier who acquires and uses a capital item to provide both taxable and exempt supplies, can only provisionally claim the proportional residual input tax incurred on the item in the relevant taxable period. At the end of a tax year, a mixed supplier is required to make an annual adjustment on the provisional input tax initially claimed by him.
An adjustment period refers to a fixed period of time, consisting of intervals, during which the proportional taxable usage of a capital item is re-evaluated.
For land and building, the adjustment period consists of 10 intervals (inclusive of both the first and final intervals) and for any other capital items, the adjustment period would only consist of five intervals. Members are urged to refer to the Guide on Capital Goods Adjustment via the RMCD's website for more clarification on this and the meaning of intervals.
In the context of CGA, adjustments are made to the initial input tax claim when the proportional use of the item to make taxable supplies fluctuates from interval to interval. If the proportional taxable use decreases in subsequent intervals or the final interval as compared to the preceding interval, a certain percentage of input tax initially claimed has to be paid back to the RMCD. Conversely, if the taxable use of the capital item increases, a further amount of input tax can be claimed on the capital item. On this note, it will be important that the accounting or financial system purchased by business entities shall
be able to handle this.
Businesses are required to keep proper records and bookkeeping on capital adjustments that the entities have made for a period of seven (7) years from the date of the last adjustment made on a capital item.
SOURCE : MIA ACCOUNTANTS TODAY JULY / AUG 2014