This is a welcome move (to tax imported services) as it can ensure that local service providers such as architects, graphic designers and software developers can compete on a more level playing field with foreign service providers.
Currently, foreign service providers providing similar services do not need to charge Malaysian service tax, unlike the local service providers who are Service Tax registered. Based on the proposal, the mechanism may be similar to the previous Goods and Services Tax (GST) regime where the onus is on the recipient of the services (which are businesses) to account, declare and report the tax. It remains to be seen what the reporting mechanism is for businesses who are currently not registered under the Service Tax regime.
This move to tax the digital economy is in line with the intention of other countries and it is a bold move as Malaysia will be one of the first to introduce such system. There are further areas that need to be clarified such as how the foreign service providers will register with Royal Malaysian Customs Department (RMCD), and what enforcement rules and reporting mechanism are in place. It is noted that a new provision will be introduced in the Service Tax Act 2018 to cover this. As this proposal is proposed to be effective from Jan 1, 2020, the RMCD has one year to study, analyse and come up with an efficient mechanism.
KPMG further notes that the Service Tax exemptions to specific services provided by registered businesses to other registered businesses will address the Service Tax cascading issue that has been the concern of a lot of businesses, since the Sales Tax and Service Tax was implemented on 1 September 2018.
This means that the government is aware of the issues faced by businesses and is trying to address them. However, the conditions for the exemptions needs to be seen to ensure it is feasible to businesses.
To alleviate the compounding of Sales Tax and decrease the cost of doing business, the credit system for small manufacturers who purchase their products from importers (and thus could not claim the Sales Tax exemption under the existing legislation) instead of directly from registered manufacturers is another welcome relief. The next steps that a lot of the small manufacturers will want to know are the conditions attached as well as the reporting mechanism, as the credit mechanism will be introduced from Jan 1, 2019.