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Industry Guide:

Commercial Banking

 
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FREQUENTLY ASKED QUESTIONS

GST Registration

1. Banks and financial institutions provide financial services. Since most financial services are exempted from GST, are banks and financial institutions required to be registered?

Even though most financial services are exempt supplies, banks and financial institutions also provide fee-based services which are subject to GST at standard rate. If the amount of these taxable supplies exceeds the prescribed threshold, then it is a mandatory requirement for the banks or financial institutions to be registered. 

2. Can several banks under the same holding company be registered under group registration?

No. GST Group registration is restricted to businesses which make wholly taxable supplies. Banks being suppliers of exempt supplies are not eligible for GST group registration. 


Tax Invoices

3. My customers perform many banking transactions in a taxable period. Must I issue a tax invoice for every banking transaction?

No, you need not issue a tax invoice for every transaction. You can apply to the Customs Department for approval to issue a monthly statement covering every banking transaction that has taken place within the calendar month.

4. Do I have to issue a tax invoice to an individual customer who is a nonregistered person?

Generally a registered person must issue a tax invoice in respect of taxable supply. If there is no taxable supply, then it is not required. The bank can apply to the Customs Department for approval to be exempted from issuing a tax invoice to a non- GST registered person. However, the bank is required to issue serially numbered receipts for audit purposes. Alternatively, instead of issuing receipts manually, electronic receipting is also allowed, as long it is captured and recorded.

5. Do I have to issue tax invoices for transactions to customers abroad with zero-rated supplies?

You need not issue a tax invoice for a zero-rated supply.


Input Tax Recovery

6. As a registered person, I am eligible to recover my input taxes on my acquisition. To what extent can I recover my input tax?

Generally banks, financial institutions and development financial institutions (DFI) make both exempt and taxable supplies. In principle, only input tax directly attributable to taxable supplies can be recovered in full. Input tax that is attributable to exempt supplies is not recoverable. Furthermore, for inputs which can be directly attributed to taxable and exempt supplies (i.e. residual input), the bank needs to use a standard method to apportion the input taxes that are claimable. To simplify the process of recovering the input tax and to reduce the high administrative compliance costs of tracking each input to a particular product, only banks and other financial institutions which give loan to the businesses and other exempt financial services be relieved from the task of attributing their input taxes by opting to use fixed input tax recovery (FITR) method. However banks and other financial institutions which provide financial services but do not provide loan (to businesses) are not entitled to recover their input tax in full and FITR method.

7. Can I claim input tax incurred in respect of medical and hospitalisation benefits of its employees?

No, the bank is not entitled to claim the input because medical and hospitalisation benefits for the employees are blocked inputs.

8. Can I claim the input tax incurred in relation to entertainment expenses to employees?

Yes. The bank may claim the input tax incurred since business entertainment expenses to employees are not blocked inputs.


Accounts Operation (savings, current, fixed deposit or other similar accounts)

9. When a customer deposits or withdraws money from his savings, fixed deposit or current account, are they subject to GST?

Deposits or withdrawals from the savings, fixed deposit or current account are not subject to GST.

10. Is interest paid to or received from a bank subject to GST?

No, interest paid to or received from a bank is not subject to GST. 

11. Bank charges its customers certain fees such as half yearly service charge for current account and fifth cash ATM withdrawal charge. Are they subject to GST?

Yes, these charges are subject to GST at standard rate. Any fee based charge in the form of explicit fees imposed by any bank or financial institution are subject to GST at standard rate.

12. I charge my customers a fee on the replacement for the lost of savings account passbook or ATM cards. Is this subject to GST?

There are fees and charges being imposed to compensate for lost or damaged savings account passbook or ATM cards. Such fee is subject to GST at standard rate. 


Provision of Loans, Advances or Credits

13. Is the provision of loans subject to GST?

When a bank provides loan to its customer, it would enjoy interest payment. The interest with regards to the provision of loan is not subject to GST. However, any fee or charges in relation to it, for instance processing fee, advisory services fee or charges on making copies on the document are subject to GST at standard rate.

14. Are repayments of the principal amount subject to GST?

The repayment of a loan, i.e. the instalment of the principal amount with or without interest is also not subject to GST. 

15. Is late payment penalty subject to GST?

No, late payment penalty is not subject to GST. 

16. I provide a loan to finance a project in Vietnam. Will this loan be subject to GST?

A loan to finance a project outside Malaysia is a zero-rated supply and the processing fee in respect of the loan given is also zero rated. The principle of GST provides that services rendered for customers abroad will be zero-rated if at the time the services are rendered, he is outside Malaysia. This is considered as an export service. Similarly, any commercial banking service rendered in connection with land and goods situated outside Malaysia is also zero rated.

17. Bank XYZ is a lead arranger for a syndicated loan. As a lead arranger, Bank XYZ enlists the support of other participating banks to provide loan to its customer. The customer pays management fee to Bank XYZ. How and who should account for the GST?

In a syndicated loan arrangement, as the lead arranger, Bank XYZ is responsible to issue a tax invoice for the management fee to the customer. Each participating bank in return issues his tax invoice to Bank XYZ for its portion of the management fee and Bank XYZ then distributes the appropriate amount accordingly. Bank XYZ then account the full GST as the output tax and claims back ITC using FITR. Meanwhile, each participating bank will account GST on the management fees received from Bank XYZ as their output tax. 


Credit, Debit or Charge Card 

18. Most banks waive the annual subscription fee on the credit card to make it competitive in the market. Is the waived annual subscription fee subject to GST?

Since there is no consideration for the supply of service, the bank need not charge GST on the waived annual subscription fee. 


Documentary Credit

19. As an advising bank, I charge a confirmation commission for confirming a Letter of Credit (L/C) in favour of a Malaysian exporter. Is this commission subject to GST?

This commission is subject to GST at standard rate as the service is performed in Malaysia.

20. I issue an L/C to a local trader for the importation of goods and charge a fee for the issuance of the L/C. What is the GST treatment on this fee?

Such fee is subject to GST at standard rate. 

21. Bank also provides advisory service in relation to the issuance of the L/C. Is advisory service subject to GST?

Advisory service is a taxable supply and is subject to GST at standard rate. 


Foreign Exchange

22. What is the GST treatment on foreign currency exchange?

Bank profits from spread resulting from the difference between the rates of selling and buying of the currency. Spread is not subject to GST. 

23. What is the GST treatment on the fee or commission charged on the issuance and encashment of traveller’s cheque within Malaysia?

The fee or commission is subject to GST at standard rate. 


Factoring

24. Can you illustrate the GST treatment in a factoring transaction? 

A seller X makes a taxable supply of goods to buyer Y for RM1,060 (to include amount of GST payable at 6%). Seller X will account RM60 as his output tax in his tax return. Instead of waiting payment from buyer Y, seller X assigns the accounts receivable to the bank for RM800 (being 80% of the accounts receivable). At this juncture, the bank acts as a factor by providing financing to seller X and undertakes the responsibility and task of recovering the outstanding amount from buyer Y. For this service, the bank charges a fee to seller X. Financing is not subject to GST but the factoring fee charged by the bank is subject to GST at standard rate. 


Safe-Keeping and Custodial Service 

25. What is the GST treatment on safe-keeping and custodial services?

Bank provides safe-keeping or custodial services to its customers by offering a safety deposit box, and charges rental on the box. This rental charges are subject to GST at standard rate. 


Treasury Services

26. Illustrate some examples of standard rated and exempt supplies with regards to bank’s treasury function in the GST regime?

Exempt supplies include any of the following activities:

• contracting as principal to sell an amount of currency for another in a foreign exchange contract;

• sale as principal of financial futures contract;

• contracting as one of the counterparties in a Forward Rate Agreement, Interest Rate Swap Agreement, Currency Swap Agreement, Commodity Swap Agreement; and

• contracting to sell securities to another party with a commitment to repurchase them.

Standard rated supplies include services related to the:

• arrangement as an agent for foreign exchange contract;

• arrangement as an agent (not as counterparty) for Forward Rate Agreement, Interest Rate Swap Agreement, Currency Swap Agreement, Commodity Swap Agreement;

• acting as agent in procuring the supply of financial future or option; • acting as agent in connection with Forward Rate Agreement, interest rate cap, floor or collar        agreement;

• arranging as an agent for the purchase and sale of an option, discount and premium securities, zero coupon bonds; and • making arrangements for underwriting services. 
 
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