the impact of GST and SST on the construction industry

Request for Feedback from MBAM Members on the Impact of GST and SST on the Construction Industry

In view of the recent notice of the Royal Malaysian Customs Department Director General’s Decision on SST 1/2018 on Item : 1: Issuance of Tax Invoice On Or After 1/9/2018 and SST: 3/2018 on Item 3: Retention Payments (GST Transitional Issue) dated 7 September 2018, MBAM has formed a Special Committee to study the impact of the Goods and Services Tax (GST) transitional issue and Sales and Service Tax (SST) on the Construction Industry.  A copy of both the Royal Malaysian Customs Department Director General’s Decision on SST 1/2018 and SST 3/2018 are enclosed for your information.

This Special Committee has met on 1st October 2018 and come up with several issues to be raised up with the Royal Malaysian Customs Department.  The issues are as follows:-

  1. Retention Payments

At the moment the DG’s notice only allow the Contractor to issue a tax invoice relating to the retention sum up to 31 August 2018.

  1. We will appeal for the Government to allow a two (2) years grace period for the issuance of the tax invoices. This will provide some flexibility for the Contractor to finalize the Project Final Accounts and also Retention Sum payment.
  2. Nominated Sub Contractors (NSC) normally deal direct with the Clients, their payment figure is normally unknown until the project is completed.
  3. We will also request that the Government allows invoice not settled after 4 months be granted bad debt relief i.e. output tax paid on the tax invoice would be refunded by the government.
  1. Input Tax

(Reference : Item 3 of the DG’s Decision on SST 1/2018)

It is a norm in Construction Industry that it takes time to certify the value of work done.  If the work done during the GST era only can be certified and finalized by the main contractor/sub contractor after 31 August 2018 and tax invoice issued by main contractor/ subcontractor dated after 31 August 2018, the developer / main contractor is not eligible to claim the input tax.  This additional cost will be part of the developer/ main contractor cost and burden.

As such, MBAM will appeal to allow to claim for input tax as long as the value of work done is related to the GST eara notwithstanding the value of work done is only finalized and certified after 31 August 2018.

  1. Secondment of Staff to Subsidiary Companies

It is a norm in Construction Industry for secondment of staff to related company within the group for construction projects.  Under SST 2.0, based on the Guide on Employment Services issued by the Royal Malaysian Customs Department on 25 August 2018, secondment of staff to subsidiary companies will be subject to 6% service tax. 

As such, MBAM will be appealing to the Government to exempt the company from paying the SST for secondment of staff to subsidiary companies if the majority of the equity of the company is owned by the same shareholdings.  We will also proposed that the service tax treatment on employment services is only limited to those employment agencies which are registered under the written law as per the SST 1.0.

  1. Construction services rendered to Developers

Where the construction contract entered into with the developers took place during the GST regime, contract price had been fixed and the contractors were allowed to levy GST on the contract value. However, for contractors that are delivering construction services, either partially or fully, on and after 1 September 2018, GST is no longer applicable. Nonetheless the purchase building material/professional services by the contactor on and after 1 September 2018 would be subject to SST. In such instances, the contractors will have to bear the SST cost.

As such MBAM will be appealing to the Government that in the case of residential projects that was GST exempt, the developers that will no longer suffer GST on the purchase of construction services, pass back some of the savings to the contractors. 

We will be seeking an audience to meet with the Royal Malaysian Customs Department on this issue and would like to seek feedback from MBAM members on additional major issues faced by members to be incorporated in our proposal for submission to the Royal Malaysian Customs Department.  For those with issues please provide your feedback by completing the Feedback Form and return to MBAM Secretariat on or before 16th October 2018.

Download Circular and Feedback Form