I realise a lot of us are not used to the different concept of taxes, especially service tax in light of the latest uproar on the 6% service tax on telecommunication charges.
I used to write a lot of course notes from my time as an in-house tax trainer. It so happens that one of my stronger tax areas is indirect taxation; which also covers service tax, goods tax and Goods and Services Tax (GST, in other countries it is called VAT).
I manage to dig quickly from my course notes, so hopefully the brief notes here will help your understanding on the service tax. if there is anymore question, please post here or email me, I will be glad to answer.
WHAT IS A SERVICE TAX?
Service tax is a consumption tax levied on services, which are prescribed by the Minister as taxable services under the Service Tax Act 1975. Service tax is charged and levied on any taxable service provided by any taxable person.
WHAT IS TAXABLE PERSON?
Taxable person is defined as any person who is prescribed to be a taxable person and taxable service is taken to mean any service, which is prescribed to be a taxable service.
(Note: Ha2 this is how tax law is usually written. Basically it means everyone and everything that the Finance Minister so decides to levy. Jadi kalau Dato’ Seri Najib bangun tido dan nak kecualikan prabayar dari cukai perkhidmatan, maka tiadalah cukai perkhidmatan atas prabayar)
WHAT’S THE DIFFERENCE BETWEEN DIRECT AND INDIRECT TAXES?
Direct taxes are taxes you pay on income and profits. You have to earn a certain level of income and profits before you become taxable. Examples of direct taxes are personal income tax, corporation income tax and petroleum income tax.
If your business do not make profit or your income is below the taxable level, you don’t pay taxes. It is meant to tax the share of wealth created in the economy.
Indirect taxes are taxes you pay irrespective on level of income or profits, hence why it is also usually referred to as consumption tax. You pay when you consume or use the service or buy something, irrespective whether you are poor or the richest person in the world. Examples are sales tax, goods tax, duties or hybrid forms of taxations; and all encompassing consumption tax such as GST/VAT.
Indirect tax is designed to tax consumption. One of the ways in which it can deliver a result is by targeting certain services or goods or type of activities – the level of taxes prescribed can have an impact on the activity/consumption.
But generally indirect taxes are also used side by side with direct taxes because its collection is more effective. Since it has to be paid by everyone, it is easier to administer and less complicated.
SO WHAT ARE TAXABLE SERVICES IN MALAYSIA?
Service tax was initially charged and levied on prescribed goods sold or provided either by or in any prescribed establishment and on prescribed services provided by or in any prescribed establishment or prescribed professional establishment. Over the years, amendments to the act and its regulations have increased the scope of service tax by increasing the number of prescribed services and prescribed establishments and prescribed professional establishments.
The main categories of taxable services are:
- Consultancy services
- Management services
- Employment services
However, over the years the government has increased the list of services that fall under the taxable services. As at October 2010, the services provided by the following companies/establishments will attract service tax payable to the government:
- Operators of hotels with more than 25 rooms (subject to some exclusions)
- Operators of restaurants, bars, snack-bars, coffee houses or places located in hotels with more than 25 rooms
- Operators of restaurants, bars, snack-bars, coffee houses or places located in hotels with 25 rooms or less
- Operators of restaurants, bars, snack bars, coffee houses or places located outside hotels (subject to some exclusions)
- Operators of food courts
- Operators of night-clubs, dance halls and cabarets
- Operators of approved health-centres and massage parlours
- Operators of private clubs
- Licensed private hospitals
- Insurance companies
- Telecommunications companies
- Approved forwarding agents
- Operators of parking space for motor vehicles
- Courier-services companies
- Operators of motor vehicle service and/ or repair centres
- Licensed private agencies
- Employment agencies
- Public Accountants
- Advocate and Solicitors
- Professional Engineers
- Licensed or Registered Surveyors/Registered Valuers, Appraisers and Estate Agents
- Consultants (subject to some exclusions)
- Private veterinary clinics
- Hire-and-drive car and hire-car service companies
- Management companies
- Advertising companies
- Operators of golfing and golf-driving ranges
HOW MUCH DO WE PAY IN TAX TO GOMEN THEN?
Well, the rate has been 5% all along, until our mendahulukan rakyat Prime Minister increased it to 6% effective 1 January 2011.
It is very easy to estimate the total revenue from service tax – by estimating the size of revenue of the services provided that are taxable. A good example is from one of the largest contributors i.e. telecommunication & broadcast industries in Malaysia.
The 2007 Annual Report of SKMM estimates that the combined revenue of the telecommunication companies and ASTRO stood at RM35 billion. Assuming everything is taxable for service tax (which is a fair assumption), the government collected up to RM1.7 billion in service tax in these two sectors alone.
A fair estimate of service tax collection is in between RM4 billion to RM6 billion annually.
These are not monies paid by companies to the government. These are taxes paid by rakyat, collected by the companies and passed to government. Companies can say that they absorb or whatever, but the truth is they always keep their margin and pass the tax back to the people.