GST Rules Or Ruins? From A Ship Financier's Perspective

Author:Mr Datuk Naban and Jennifer James Ilango
Profession:Lee Hishammuddin Allen & Gledhill

The hype is over! The long-debated goods and services tax ("GST") was implemented on 1 April 2015 by virtue of the Goods and Services Tax Act 2014 [Act 762] ("the GST Act"). Introduced as part of the government's tax reform programme to enhance the efficiency and efficacy of the taxation system, the rationale for GST is to eliminate inherent weaknesses in the now-abolished sales and service tax, which had a cascading effect due to what is known as "double taxation".1 That said, like many other sensational political issues in Malaysia, there are several differing schools of thought on its economic implications on a larger scale.

The key objective of this article is to provide an overview on the mechanics and dynamics of GST that a financier in Malaysia may face in connection with ship financing.

Inconsistency in definition of 'ship'

In accordance with s 2 of the Merchant Shipping Ordinance 1952 ("MSO"), the meaning of a "ship" includes every description of vessel used in navigation not propelled by oars. For the purposes of GST, however, the GST Act does not provide any definition as to what constitutes a "ship". In this regard, the Zero-Rated Supply Order 2014 comes to its rescue. Despite incorporating the interpretation of a "ship" as reflected in the MSO, the Zero-Rated Supply Order 2014 goes a step further to exclude vessels that are "designed or adapted for recreation, pleasure or other than freight or passenger transportation".2 The GST Guide on Shipping Industries, on the other hand, provides a list of vessels that do not constitute a "ship" for the purposes of GST. Among the excluded vessels are powerboats and yachts, although passenger liners are accepted as "ship". Why a distinction has been drawn between these vessels is unclear.

Notwithstanding the distinction drawn by the Zero-Rated Supply Order 2014 and the Guide on Shipping Industries, there is a string of established authorities that show pleasure crafts, motor boats and yachts come within the definition of "ship".3 One may argue that powerboats and yachts are expressly excluded from the definition for GST purposes due their private nature primarily designed for recreation or pleasure. We are unable to agree with this reasoning. It will be naïve to ignore the fact that powerboats or yachts can also be utilised to transport passengers in international waters for commercial purposes.

In this context, we took the liberty to consider the definition of "ship" under s 21(4)(a) of the Singapore Goods and Services Tax Act 1993. Prior to July 2010, a ship for the purposes of the Singapore GST Act was defined as one that is not designed or adapted for use for recreation or pleasure. Consequently, prescribed services did not enjoy zero rating. We can see the similarity between the Malaysian and Singapore GST Acts in this regard.

However, that definition was subsequently amended on 1 July 2010 to include ships used or adapted for recreation or pleasure, provided that they are wholly internationally bound.4 This means any services by ship used or adapted for recreation or pleasure that is used within international waters is now zero-rated in Singapore.

With respect, the haphazard distinction in regards to the definition of a "ship" provided in the Zero-Rated Supply Order 2014 and the Guide on Shipping Industries causes difficulty within the shipping industry. Our view is that the Zero-Rated Supply Order 2014 should be rectified to reflect established authorities. Alternatively, it will be worthwhile to explore the expansion of the definition of a "ship" as has been done in Singapore to maintain competitiveness within the shipping industry.

Overview of GST within shipping industry

A "ship" will fall within the ambit of movable property under the definition of "goods" provided by s 2 of the GST Act, following which any service within the shipping industry is subjected to GST at either the standard rate which is at 6%,5 or zero rate.6 The latter was introduced with the intention of boosting Malaysia's competitiveness abroad where GST registrants in such circumstances can claim input tax credit from the government for the...

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