GST and Islamic Banking

Come 1st April 2015, the Goods Service Tax (GST) will be in full force. The financial service industry, including Islamic finance is also impacted by the GST.

Officially, GST is a consumption tax that is imposed on goods and services at every stage of the supply chain, which typically begins at the manufacturing stage and ends at the retail stage. GST is based on the “valued-added” concept to avoid duplication in tax collected from sales and service taxes.

GST is actually not a new tax given that the government will reduce or gradually eliminate sales and service taxes.  See Table 1 below. While GST will amount to RM21.7 billion (USD5.8 billion) in 2015, sales and service tax will be reduced by 75 percent and 72 percent respectively in the same year. Sales taxes are those taxes we pay based on the price tags or receipts of the goods we buy, while service tax is imposed on services that range from hotels, restaurants to legal and insurance companies.

Direct taxes such as corporate and individual income tax will also see some slight decline in the near future to offset GST.

On the Islamic banking front, the GST Industry Guide issued by the Royal Malaysian Customs did not evidence severe impact on bank’s earnings.  See Table 2. Most the transactions involving underlying assets are exempted from the tax while not for fee-based products contract under wakala andkafala.  In a way, the true sale character of Islamic banking product in say, commodity murabaha seemed lacking as GST does not see the bank and the commodity vendor as the supplier of goods, thus treating them as a non-supply.

In Bai-inah, the cancellation of the inter-conditionality clause (ICC) has allowed the customer to sell the asset to a third party, thus triggering GST charges both from bank to customer and customer to the third party as both are now true-sale in nature.

New bank ‘s Investment Account products, namely the RIA and URIA will showcase an expansion of Islamic banking fund management services and is subject to GST at standard rate while profits distributed to the account holders are exempted. We are looking forward for government to reduce the GST rate on the management fees in the coming 2016 budget. This should incentivise Islamic banks to promote Investment Accounts in a more efficient manner.

Investment Account products will also see more GST charges if they were structured similar to the unit trust products. Reference to the Federation of Investment Managers Malaysia provides (FIMM), shows that GST applies to application fee, management fee (charged at fund level), switching fee, transfer fee and exit fee (if the fee is for a service) and any other fee that may be applicable in the future.

Finally, profits derived from financing operations are still subject to prevailing corporate taxes and zakat.  From the Shariah point of view, GST may be considered similar to extra-Zakat taxes such asJizya and  Kharaj, which the authority can collect based on changing circumstances and events.

By Prof. Saiful Azhar Rosly

Tags GST

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