To determine whether a subcontractor needs to register for sales tax, we must analyze whether the subcontracting activity falls under manufacturing. According to Section 3(1) of the Sales Tax Act 2018, manufacturing involves:
"in relation to goods other than petroleum, the conversion by manual or mechanical means of organic or inorganic materials into a new product by changing the size, shape, composition, nature or quality of such materials and includes the assembly of parts into piece of machinery or other products, but does not include the installation of machinery or equipment for the purpose of construction; and
in relation to petroleum, any process of separation, perification, refining, conversion and blending."
Once we establish that your business fits the definition of manufacturing, we delve into what constitutes a "subcontract" in the context of sales tax.
Subcontractors normally do work that are given by another manufacturer. The manufacturer supplies raw materials or semi finished goods to the subcontractor for further work to be done to complete the goods.
Registered manufacturer can apply to appoint subscontractors by submitting an application through the MySST system.
Subcontractor work to another person comprises of the following:
1. Subcontract to another registered manufacturer
Unfinished goods sent from a registered manufacturer to another registered manufacturer to manufacture and complete. The finished goods are subsequently acquired back by the same registered manufacturer and
subject to sales tax unless an exemption is claimed by the registered manufacturer under item 5 Schedule C of the Sales Tax (Person Exempted from Payment of Tax) Order 2018.
2. Subcontract to non-registered manufacturer
- Goods transported from a registered manufacturer to any non-registered manufacturer for further work or to complete the manufacturing process. The finished goods are later acquired back by the same registered manufacturer and subject to sales tax unless an exemption is claimed by the non-registered manufacturer under item 62 Schedule A of the Sales Tax (Person Exempted from Payment of Tax) Order 2018.
- Semi-finished goods transported from a manufacturer in the Free Zone (FZ) which is in Special Areas (SA), to any non-registered manufacturer in Principal Customs Area (PCA) for further processing or to be completed as finished goods, is as if importation of goods into Malaysia. Any goods imported is subject to sales tax unless an exemption is claimed by the manufacturer under item 54 Schedule A of the Sales Tax (Person Exempted from Payment of Tax) Order 2018. Goods returned to the manufacturer in FZ is as if such goods are exported from Malaysia to a place outside Malaysia under paragraph 58(1)(b) Sales Tax Act 2018 and exemption from payment of tax can be claimed by the exporter under item 56 Schedule A of the Sales Tax (Person Exempted from Payment of Tax) Order 2018.
3. Subcontract to Licensed Manufacturing Warehouse / Free Industrial Zone
Goods transported from a manufacturer in PCA to the Free Industrial Zone (FIZ) or moved to a Licensed Manufacturing Warehouse (LMW) under Section 65A of the Customs Act 1967 for subcontract work and subsequently re-imported or returned via the same route to the manufacturer in PCA, are subject to sales tax unless an exemption is claimed by the manufacturer under item 38 Schedule A of the Sales Tax (Person Exempted from Payment of Tax) Order 2018.
Therefore, a subcontractor involved in manufacturing activities must register for Sales Tax when their revenue over a 12-month period exceeds the registration threshold of RM500,000.
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