Partial Exemption (IRR)

Explanation

Ref : [[http://gst.customs.gov.my/en/rg/SiteAssets/specific_guides_pdf/Revised/Partial%20Exemption%20revised%20as%20at%20041113.docx.pdf]]

6. A person who makes both taxable and exempt supplies is known as mixed supplier. The term “partial exemption” is used to describe the situation of a mixed supplier who has to apportion the amount of residual input tax claim in respect of making taxable and exempt supplies using an approved partial exemption method. The input tax claimed is provisional and has to be adjusted annually or at the end of a longer period. This is to give a fairer and more reasonable apportionment as the amount deducted in some periods may be unfairly affected due to various reasons, e.g. due to festive season sales.

7. A taxable person is eligible to claim the full amount of input tax as his input tax credit if the input tax incurred by him is exclusively attributable to taxable supplies made by him, except for those which the input tax credit are disallowed under the GST Act 20XX. Input tax which can be recovered by a taxable person is referred to as “taxable input” while taxable supplies means supplies on which GST is charged at standard rate or zero-rate.

8. On the other hand, a person is not entitled to claim input tax incurred on his acquisitions if the input tax is exclusively attributable to his exempt supplies. Input tax which is attributable to exempt supply and not recoverable as tax credit is referred to as “exempt input tax”. Exempt supplies are those supplies listed under the GST (Exempt Supplies) Order 20XX.

9. The process of identifying the input tax used exclusively in making taxable and exempt supplies is known as direct attribution and is provided under the GST General Regulations 20XX.

10. In the case of a mixed supplier, he would have incurred residual input tax in the course or furtherance of his business. Some examples of residual input tax are general overheads such as utilities charges, professional fees, rental and etc. Only the proportion of residual input that is attributable to taxable supplies is recoverable by a mixed supplier. The standard method for the residual input tax claim is the turnover method. This method is provided u n d e r t h e G S T G e n e r a l R e g u l a t i o n s 2 0 X X .

11. When a mixed supplier incurs residual input tax, he cannot claim the full amount of the residual input tax that he has incurred, unless his amount of exempt supply is within the limit which is specified under the de minimus rule. He must apportion the residual input tax incurred in the course or furtherance of his business based on the standard method or alternative methods of apportionment

11.1 Standard method of apportionment

11.1.1 This is the default method applicable to all mixed suppliers unless the Director General of Customs specifically directs or allows otherwise. Under this method, the percentage of recoverable residual input tax for a taxable period is basically obtained by dividing the value of taxable supply (including supplies outside Malaysia which would be taxable supplies if made in Malaysia) with the total value of all supplies (including supplies outside Malaysia which would be taxable supplies if made in Malaysia) made in the taxable period.

11.1.2 However, it must be noted that certain value of business supplies is excluded from the standard method so as not to significantly distort the result of the calculation. Those values of supplies that are excluded from the standard method are:

(a) the value of any supply of capital assets used by the taxable person for the purposes of his business. If an asset or part of an asset is disposed off as Transfer of Going Concern (TOGC), such value also should be excluded from the standard method.

(b) the value of any supply which, under or by virtue of any provision of the Act, the taxable person makes to himself;

(c) the value of any supply referred as incidental exempt supplies in the GST Regulations that are made by him where such supply is incidental to one or more of his business activities.

(d) Value of any supply of imported services.

11.1.3 Thus, the formula is as below :

 
a = ( t – o ) / ( s - o) x 100% 

Example: 1
Mix Co. Sdn. Bhd., whose current tax year ends on 31st December 2016, has in his taxable period of May 2016, made some mixed supplies and at the same time incurred residual input tax as follows:

(a) Mix Co. Sdn. Bhd. residual input tax recovery percentage for the taxable period of May 2016 is calculated as follows:

[ 200,000 – (50,000+20,000) ] / [ 240,000 – (50,000+20,000) ] X 100% = 76.47%

(b) The amount of residual input tax that Mixed Co. Sdn. Bhd. can claimed for the period is,

Residual input tax recovery % X Residual input tax
or 76.47 % X RM10,000.00 = RM7,647.00

(c) Mixed Co. Sdn. Bhd. can only claim RM7,647.00 out of the RM10,000.00 of residual input tax incurred by him in that taxable period.

Part A: Filing Residual Input Tax

Step 1 : Control Panel > EMP Configuration > Tax > Purchase (Input Tax) : set the Default GL Code for IRR Adjustment

Step 2 : Extended Module > Malaysia GST > Tax Filing > Input Tax Filing

Note : You will need to calculate the Input Recovery Ratio (IRR) on your own (based on the explanation above / the formula below). In order to get the accurate IRR, you will need to make sureall Output Tax first, as Output Tax for the period has been filed, as Output Tax amount is needed for the IRR calculation.

IRR formula :
* DMR = (ESN43 + ES) / (FR + SR + ZR + DS + OS + RS + GS + ESN43 + ES) ==> Use the Amt Excluding Tax for these Tax Codes
* DMR Status = If ( DMR<=0.05 && (ESN43 + ES)<=5000 ) then QUALITY, else NOT QUALITY
* IRR = If ( DMR Status = QUALITY) then 1
         Else (FR + SR + ZR + DS + OS + RS + GS) / (SR + ZR + DS + OS + RS + GS + ESN43 + ES) ==> Use the Amt Excluding Tax for these Tax Codes

• When filing documents with TX-RE tax code, click Edit link. A popup like the one below will appear.
• Key in the pre-calculated IRR, then click Save, and proceed to file the document as per normal
• Once the document is filled, a Journal will be created to account for the difference in the residual input tax claimed as compared the the input tax amount originally calculated in the document

Part B : Report for Residual Input Tax Claimed ( Extended Module > Malaysia GST > Reports > Input Tax Credit Claimed )

In this report, you will be able to list all documents with TX-RE tax code which have been filed. From here you will be able to check the IRR and ITC (Input Tax Credit) claimed based on the IRR.