MARKET DEVELOPMENT
GST Impact on Palm Oil
GST Impact on Palm Oil
25/10/2014 (The Star) - Traditional, crude palm oil (CPO) has been subject to taxes. Come April 1, 2015, we will have the 6% goods and services tax (GST). What are your thoughts on this?
Tek: The palm oil industry is generally blessed with no GST exemption items across its supply chain. It is either zero-rated (especially for exports) or standard rated which will involve passing on the supply chain, claimable and subsequently refundable from the Customs Department. However, there will be a transitional phase in managing the changes at the initial stages including registering claims and getting the refunds.
There will be no impact from GST?
Tek: We are not anticipating any material financial impact from GST. For now, we are estimating that there will be marginal increase in cost of production while some experts reckon it can affect us at around half i.e. 3% from the standard rate, while others argue that it will be less than that. There will also be “blocked input tax” transactions from GST refunds and thus the company would have to absorb the cost.
Wong: There could be cash outflow issues for big refineries because you have to bear in mind that the Government has a rule that says within 14 days they will be refunded. The moment we buy the CPO, you have to pay the suppliers within a few days but in the meantime we have to process and export them, hence, the timing for shipment and collection will take up a period of time. The timing difference between when you pay the GST to your supplier and when you claim back from the Government will be the funding period. So refiners will need to have more facilities to bridge over that period, which is considered a cost for the company. That will increase the cost of doing business.
The Palm Oil Refiners Association of Malaysia (PORAM) did mention that they want to appeal to the Government to try to look at the whole process to see if they can be exempted. So, the cash flow impact is there.
Yong: The refiners do not charge GST on the buyers (for exporting). They have to claim back the taxes from Customs. So, the efficiency of the refund is very important.
Wong: As an example, if I buy something on Aug 1, I need to submit my monthly claims in September. In the meantime, I need to pay GST within two to three days to the supplier(s). But within 14 days, say on Sept 14, the Government will give back the money that you claimed for, so that period is the funding period.
Yong: Actually it is more than that because if you incur GST for the purchase of goods and services in August, you can make a claim for refund at the end of the following month (end-Sept). And then it takes 14 days for the Government to disburse the refund. So, it is actually about two months (for the process) and therefore, additional working capital will be required.
Wong: So, you are talking about funding 6% for GST for the period of about two months to 2½ months at interest rates of 5% to 6% – that is substantial. For those with a huge turnover, say in the billions per annum, there will be a financial impact.
So it is important for the refund process of zero-rated items to be efficient and the lag time shortened to reduce the financial impact?
Yong: There is one area that needs clarification or guidance. As you know, agriculture land is tax-exempt. Clarification needs to be made in terms of the transactions of sale, lease and rental of agriculture land. Treatment of the sale of land depends on the usage stated in the land title. However, there are cases where the land title does not specify land usage.
As the plantation business is a taxable activity, will a one-off sale of agriculture land alter the position in terms of refund of input tax? As an example, if your taxable turnover is RM100mil, and in the same month you sell land for RM100mil, the question that arises is, will you only be able to claim 50% of input tax incurred? Some clarity has to be made in cases like this.
Tek: There are still some grey areas in the GST which I believe the relevant stakeholders are still engaging with the Customs. Examples may include items such as transactions involving crop purchases from smallholders, CSR contributions, gift ruling limit, deemed supply issues to employees, etc. Moving forward, an important GST pre-requisite is to be able to roll out effective software or those developed by the vendors to incorporate all the required changes to capture GST correctly. These would need to be thoroughly tested and eventually certified before its implementation. Time is critical as the dateline is just around the corner.
How much tax do the planters incur now?
Lee: The industry has been bearing a lot of taxes, at 30+% or 40% of profit (for those in Sabah and Sarawak).
Tek: It has been said that for every ringgit we earn, we have to pay almost 45 sen to the federal and state governments in taxes. This covers statutory corporate taxes, cesses for both MPOB and MPOC, palm oil stabilisation fund and others. The differences between peninsular Malaysia, Sabah and Sarawak are the State Sales Taxes (applicable in Sabah and Sarawak) and Windfall Profit Levy at different price threshold. Set against our commodity business, we must also appreciate the burden of increasing cost of production arising from higher input costs including amenities and benefits for employees, cost of guest workers legislation and minimum wage, other capitalisation charges and contributions.
Tek: The palm oil industry is generally blessed with no GST exemption items across its supply chain. It is either zero-rated (especially for exports) or standard rated which will involve passing on the supply chain, claimable and subsequently refundable from the Customs Department. However, there will be a transitional phase in managing the changes at the initial stages including registering claims and getting the refunds.
There will be no impact from GST?
Tek: We are not anticipating any material financial impact from GST. For now, we are estimating that there will be marginal increase in cost of production while some experts reckon it can affect us at around half i.e. 3% from the standard rate, while others argue that it will be less than that. There will also be “blocked input tax” transactions from GST refunds and thus the company would have to absorb the cost.
Wong: There could be cash outflow issues for big refineries because you have to bear in mind that the Government has a rule that says within 14 days they will be refunded. The moment we buy the CPO, you have to pay the suppliers within a few days but in the meantime we have to process and export them, hence, the timing for shipment and collection will take up a period of time. The timing difference between when you pay the GST to your supplier and when you claim back from the Government will be the funding period. So refiners will need to have more facilities to bridge over that period, which is considered a cost for the company. That will increase the cost of doing business.
The Palm Oil Refiners Association of Malaysia (PORAM) did mention that they want to appeal to the Government to try to look at the whole process to see if they can be exempted. So, the cash flow impact is there.
Yong: The refiners do not charge GST on the buyers (for exporting). They have to claim back the taxes from Customs. So, the efficiency of the refund is very important.
Wong: As an example, if I buy something on Aug 1, I need to submit my monthly claims in September. In the meantime, I need to pay GST within two to three days to the supplier(s). But within 14 days, say on Sept 14, the Government will give back the money that you claimed for, so that period is the funding period.
Yong: Actually it is more than that because if you incur GST for the purchase of goods and services in August, you can make a claim for refund at the end of the following month (end-Sept). And then it takes 14 days for the Government to disburse the refund. So, it is actually about two months (for the process) and therefore, additional working capital will be required.
Wong: So, you are talking about funding 6% for GST for the period of about two months to 2½ months at interest rates of 5% to 6% – that is substantial. For those with a huge turnover, say in the billions per annum, there will be a financial impact.
So it is important for the refund process of zero-rated items to be efficient and the lag time shortened to reduce the financial impact?
Yong: There is one area that needs clarification or guidance. As you know, agriculture land is tax-exempt. Clarification needs to be made in terms of the transactions of sale, lease and rental of agriculture land. Treatment of the sale of land depends on the usage stated in the land title. However, there are cases where the land title does not specify land usage.
As the plantation business is a taxable activity, will a one-off sale of agriculture land alter the position in terms of refund of input tax? As an example, if your taxable turnover is RM100mil, and in the same month you sell land for RM100mil, the question that arises is, will you only be able to claim 50% of input tax incurred? Some clarity has to be made in cases like this.
Tek: There are still some grey areas in the GST which I believe the relevant stakeholders are still engaging with the Customs. Examples may include items such as transactions involving crop purchases from smallholders, CSR contributions, gift ruling limit, deemed supply issues to employees, etc. Moving forward, an important GST pre-requisite is to be able to roll out effective software or those developed by the vendors to incorporate all the required changes to capture GST correctly. These would need to be thoroughly tested and eventually certified before its implementation. Time is critical as the dateline is just around the corner.
How much tax do the planters incur now?
Lee: The industry has been bearing a lot of taxes, at 30+% or 40% of profit (for those in Sabah and Sarawak).
Tek: It has been said that for every ringgit we earn, we have to pay almost 45 sen to the federal and state governments in taxes. This covers statutory corporate taxes, cesses for both MPOB and MPOC, palm oil stabilisation fund and others. The differences between peninsular Malaysia, Sabah and Sarawak are the State Sales Taxes (applicable in Sabah and Sarawak) and Windfall Profit Levy at different price threshold. Set against our commodity business, we must also appreciate the burden of increasing cost of production arising from higher input costs including amenities and benefits for employees, cost of guest workers legislation and minimum wage, other capitalisation charges and contributions.