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Tuesday, September 22, 2009

New stamp duty rules ease burden of construction industry

The 2009 amendment on the stamp duty chargeable on service agreement has created heated debates.

Prior to the amendment, duty levied on service agreement with security was RM10. From Jan 1, 2009, all service agreements are chargeable with an ad valorem duty of RM5 for every RM1,000; essentially 0.5% duty on the contract value.

A contract worth RM1bil, for instance, attracts duty of RM5mil. Business associations representing various industries have submitted many appeals to the authorities since the introduction of the amendment. Responding to the appeals, the Ministry of Finance (MOF) announced the following new rules on July 15:

·For a contract awarded by the Government, the first tier of contract agreement between the Government and the main contractor is exempted from duty whilst the second tier of contract between the main contractor and subcontractor is subject to ad valorem of 0.5%. Any subsequent tiers of contract agreement attract RM50 flat duty.

·For a non-government contract, the first tier of contract agreement is levied with ad valorem duty and any subsequent tiers of contract agreement are subject to RM50 flat duty.

The MOF announced further changes on Sept 9 to defer the imposition of ad valorem duty of 0.5% to Jan 1, 2011.

Thus service agreements that are executed during the period from Sept 15, 2009 to Dec 31, 2010 will be subject to a flat duty of RM50.

The changes that limit and defer the application of 0.5% stamp duty to merely one tier of the supply chain are greatly applauded and well received by businesses, particularly the construction industry, which faced the following challenges:

·A Construction Industry Development Board levy of 0.125% is currently imposed on contractors;

·A 5% service tax is applicable on professional services including project management, engineering consultancy, architectural and legal;

·Contractors that tender for new government projects would invariably factor in the stamp duty, passing the additional cost back to the government. As for private sector projects, the rakyat, house buyers for example, would be bearing the cost ultimately. Hence, despite the additional duty revenue collected, the real improvement in the Government’s purchasing power may not be significant while private consumption is certainly curbed which may result in lower demand for construction works;

·Duty has to be paid upon execution of contract agreement, ahead of the contract payments progressively received by the contractors, causing cash flow strain at the initial stages of project, additional financing requirements and higher borrowing cost. The current economic slowdown has trimmed the profit margin of the construction industry to as low as 5% or less;

·Administratively, collecting duty at different rates may be cumbersome as it is anticipated that contractors have to produce documents to support the tier of the supply chain they are engaged in. This defeats the intention of the amendment which is to simplify the duty assessment process as mentioned in the Budget 2009 announcement made on Aug 29, 2008;

·From the legal standpoint, non-stamping would not render an agreement void but in the event of legal dispute, the agreement would not be admissible in court as evidence unless it is eventually stamped with late stamping penalty imposed. It may lead businesses to avoid stamping their agreements promptly, exposing themselves to greater business risks. Some may resort to executing and keeping agreements overseas for purposes of deferring/avoiding stamping as duty is levied on agreements executed outside Malaysia when they are brought into Malaysia. Such undesirable measures would not have been considered previously; and

·The additional duty will inevitably increase the cost of doing business in Malaysia and erodes our competitiveness. The table shows the stamp duty imposed on construction contracts in the region.

The Malaysian construction industry is facing tough challenges during the economic slowdown, including acute cash flow shortage, scarcity of local projects, stiff competition overseas and difficulty in procuring project financing.

A good number of construction companies have done the nation proud by winning sizeable projects overseas, particularly in the Middle East.

Hence, more policies that are business friendly like imposing only nominal duty on service agreements beyond 2010 would certainly be welcomed by all concerned and will help in nurturing more global players.

·Yee Wing Peng is an executive director with Deloitte Malaysia’s tax and an honorary advisor to Master Builders Association Malaysia. The above represents his personal view.

By The Star (by Yee Wing Peng)

1 comment:

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