The Court of Appeal recently upheld the decision of the High Court which had decided in favour of our client in its judicial review application to quash the decision of the Director-General of Customs (“DGC”) to apportion and reduce its claim for refund of goods and services tax (“GST”). The Court of Appeal agreed with the High Court that Metrogold Commercial Sdn Bhd (“Metrogold”) is entitled to claim for its GST refund without any apportionment and quashed the DGC’s decision.
The DGC had apportioned and reduced Metrogold’s claim for input tax credit incurred on the purchase of 5 leases of land by applying its own formula which is not prescribed by law. The DGC’s basis for apportionment was premised on regulation 46 of the Goods and Services Tax Regulations 2014 (“GST Regulations”) and the repeal of the Goods and Services Tax Act 2014 (“GST Act”).
We had raised and successfully argued two main grounds in the High Court:
- Metrogold is entitled to claim as of right the whole input tax credit as it was a taxable person at the time it incurred the input tax. Regulation 46 does not apply;
- Alternatively, even if Metrogold cannot claim the input tax credit as of right and regulation 46 needs to be resorted to, Metrogold is similarly entitled to the whole input tax claim without any apportionment.
The Court of Appeal agreed with us on both grounds.
The Court of Appeal held that Metrogold was a taxable person at the time it incurred the input tax. This was on the basis that Metrogold was a person “liable to be registered” under section 20 of the GST Act and was subsequently approved for GST registration under section 21 before it incurred the input tax.
As Metrogold was already a taxable person, its entitlement to claim input tax credit under section 38 of the GST Act was triggered. The Court of Appeal’s decision was grounded on a reading of sections 38 and 39 of the GST Act together with regulation 39 of the GST Regulations. In summary, the Court of Appeal held that:
- a taxable person is entitled to credit for so much of his input tax as is allowable under section 39 to be deducted from any output tax that is due from him;
- the amount of input tax for which any taxable person is entitled to credit is so much of the input tax that is allowable and reasonable to be attributable, as may be prescribed, to any taxable supply made or to be made by the taxable person in the course or furtherance of any business in Malaysia;
- it is prescribed in regulation 39(2)(b) that there shall be attributed to the taxable supplies made or to be made by the taxable person the whole of the input tax incurred by the taxable person on the acquisition of goods which are used or to be used by the taxable person for making taxable supplies in the course or furtherance of its business in Malaysia;
- where there is no output tax or the input tax exceeds the output tax, such input tax is prima facie to be refunded to the taxable person pursuant to the provisions of subsection 38(3) of the GST Act;
- there is no need for the taxable person to match its purchases, in respect of which the taxable person incurs input tax, to its taxable supplies; and
- there is clearly no provision conferring discretion on or requiring the exercise of discretion by the DGC to apportion the amount of the credit of the input tax claimed by the taxable person under any circumstances.
The Court held that this means that that the whole of the input tax incurred by Metrogold shall, without any apportionment, be refunded to Metrogold.
The Court of Appeal also agreed that regulation 46 does not apply in this case.
During the relevant period, regulation 46, which provides for exceptional claims for input tax, provided that the DGC “may authorize a taxable person to treat as if it were input tax, any tax paid on the supply of goods to the taxable person before the date with effect from which he was, or was required to be registered… for the purpose of a business which was carried on or was to be carried on by him at the time of such supply or payment.”
Given that Metrogold paid the GST on a date after Metrogold was required to be registered, regulation 46 does not apply. Metrogold was entitled as of right to claim the input tax.
The Court nevertheless went on to hold that even if regulation 46 applies, the DGC similarly does not have the power to apportion the input tax claim. The Court of Appeal held that the formula applied by the DGC is neither based on any legal provisions nor was it prescribed under any GST laws. The DGC’s application of its own formula had resulted in an irrationality as the amount of input tax claim allowed on lands which had already been sold by Metrogold was less than its entitlement to input tax for lands which had not been sold.
Neither regulation 46 nor section 4 of the Good and Services Tax (Repeal) Act 2018 (“GST Repeal Act”) provides for any apportionment. It was further held that the GST Repeal Act cannot be construed to in effect retrospectively impair Metrogold’s right, already accrued, existing and vested, to be refunded with its claim for input tax credit given the conspicuous absence of any provisions authorising such apportionment.
The DGC had alluded that the apportionment for exceptional input tax claim was made in accordance with the provisions of sections 38 and 39 of the GST Act read with regulation 39 of the GST Regulations. The Court of Appeal held that while it is difficult to appreciate the nexus, these provisions do not in any case permit any apportionment of input tax. The Court reiterated that the whole of the input tax incurred by Metrogold is to be refunded.
The Court of Appeal ultimately held that the DGC’s decision to apportion and disallow Metrogold’s input tax claim was not only erroneous, but also ultra vires, in excess of the DGC’s authority, unreasonable as well as an illegality. The High Court’s decision to grant judicial review to Metrogold was hence upheld by the Court of Appeal.
This Court of Appeal’s decision is very much welcomed given the number of cases where the DGC has sought to apportion and reduce a taxpayer’s claim for GST refund since the repeal of GST.
Vijey M. Krishnan (Partner)
(T): 603 – 2632 9868
(E): mkvijey@rdl.com.my
Chang Ee Leen (Partner)
(T): 603 – 2632 9911
(E): eeleen.chang@rdl.com.my