Community, Economy, Featured, General, Govt, Politics

PRESS: GST will create a tax burden for charities and non-profit NGOs, making charity more expensive

Media statement by Steven Sim, MP for Bukit Mertajam and Zairil Khir Johari, MP for Bukit Bendera

27 JANUARY 2015 | KUALA LUMPUR

The upcoming implementation of the Goods and Services Tax (GST) on 1 April 2015 will no doubt have great impact on the Malaysian economy, as it will essentially result in a six per cent increase in taxes across the board.

However, while the economic impact has been widely discussed, few have noticed the social consequences of the GST, especially with regards to its impact on charities and the non-profit sector.

Charities will be subject to GST

Charity is a social cause that is often undertaken by selfless volunteers who are doing work that the government should be doing but is not. Such activities should be supported and encouraged by the authorities.

Instead, the planned implementation of the universal consumption tax will create numerous obstacles and complexities for charities. According to the Royal Malaysian Customs’ Goods and Services Tax: Guide on Societies and Similar Organizations booklet, almost all activities carried out by charities, non-profit organisations and NGOs – including those currently enjoying tax-exempt status – will be subject to GST.

Cash donations

Under the GST regime, only cash donations “without any benefits” to donor is not regarded as a taxable supply and hence not covered by the GST.[1] However, cash donations are subject to GST if there are benefits to the donor, with benefits defined as:

  1. Advertising or promoting the donor’s or sponsor’s name or its products in the programme booklet;
  2. Naming the event after the donor or sponsor;
  3. Displaying the donor’s or sponsor’s name on shirts worn by a team.[2]

This raises many concerns as such practices are common in Malaysia, especially where corporate sponsors are concerned.

Donations in kind

Meanwhile, donations in kind are subject to further limitations. For sponsorship in kind “without benefits” to the donor, only goods that do not exceed RM500 in cumulative value over a year are considered a “business gift” and therefore exempt from GST. If, however, the sponsored goods total more than RM500 a year, it would be regarded as a supply and have to be accounted for GST.[3]

For donations in kind that are reciprocated with “benefits” to the donor, such as coffee mugs bearing the donor’s corporate logo, then GST must be accounted based on the open market value for providing advertising space.[4]

Fundraising events

Charities seeking to organise fundraising events would be eligible for relief from charging GST on their supplies. However, the organiser has to not only submit a list of supplies to be used in the fundraising event to the Director-General of Customs for prior approval, but also keep full records or accounts of the supplies used. This effectively means additional operational costs for organising such events.

Furthermore, tax relief for fundraising events will be limited to only four events a year. Standard GST rates will apply for the fifth and subsequent fundraising events in the same year. In addition, tax relief will also not be granted if the event is organised by a professional fundraiser.[5]

Proceeds from other activities

It is often the case that charities and non-profit organisations engage in other activities to supplement their income for operational expenses. However, all such services such as the rental of halls, sale of products, dialysis or other medical treatments, training workshops, translation work, and sale of advertising space will be subject to GST, even if the proceeds are used for entirely charitable purposes.

Type of activity GST Treatment
Cash donation without benefits. No GST.
Cash donation with benefits. GST applicable.
Donation in kind without benefits. No GST up to RM500 in a year. If more, GST applicable.
Donation in kind with benefits. GST applicable.
Fundraising events. GST relief limited to four events a year. GST applicable for fifth event onwards.
Proceeds from hall rental, merchandise sale, training workshops, advertising space, paid ambulance service etc. GST applicable.

Table: Summary of GST treatment for charities.

Negative impact on charities

GST makes charity more expensive

It is clear from the above that the GST will essentially make both the act of giving charity and the operation of charitable organisations more expensive. This in turn may discourage contributions, further aggravating the often cash-strapped situation of the non-profit sector in Malaysia.

Instead of giving, government will be taking from charity

Many charities in Malaysia receive little or no aid from the government and are thus reliant on support from individuals and the corporate sector. With the GST, instead of providing funding, the government will in fact be taking a share of donations and proceeds meant for charity. This ironic reversal will reduce the real value of contributions.

Increased costs in order to comply with complex GST bookkeeping

The GST will also create an additional and unnecessary tax burden on NGOs and charities, particularly smaller ones. Not only would they suffer cash flow problems from the potential reduction in contributions, they would also be hard-pressed to cope with increased operational costs arising from the need to hire professional accountants in order to maintain and process complex records for input and output tax credit purposes.

Overall cost increase due to GST

Charities and non-profits will, like everyone else in Malaysia, face cost inflation due to the introduction of the new consumption tax. Furthermore, the peculiar nature of its operations such as the element of volunteerism would make it harder for charities to claim input tax credits like regular businesses for supplies and services received to support its activities. Even if a charity is able to claim input tax credits, the delay in recouping refunds may affect its cash flow.

Even without the above limitations, contributions and donations are already set to drop in the face of a bleak economic outlook, what more with the expected impact of the GST on the economy as a whole. As such, these limitations will only serve as additional roadblocks, creating a tax burden for charities and making charity more expensive.

Recommendations

Defer GST

In light of the potentially negative impact of the GST on charities and non-profit organisations, the government should immediately consider deferring the implementation of the GST until we become a mature, high-income economy with proper government funding structures for NGOs and charities.

Exempt GST on existing tax-exempt charities

However, if the GST is going to be implemented anyway, then it is suggested that organisations currently enjoying tax-exempt status should, as a matter of principle, also be exempted from GST treatment.

Create new categories of GST-exempted charities and non-profits

As government support is often lacking, most charities cannot afford to wait passively for donations. Instead, active fundraising is required, sometimes via “business-like” activities, such as selling merchandise and providing services such as the rental of halls.

Some non-profits actually sustain themselves through a cross-subsidy model where profits earned from business activities are used to cross-subsidise the disadvantaged. For example, a dialysis centre may charge commercial rates to patients who can afford it in order to cross-subsidise those who cannot.

While it is important that the government ensures no profiteering occurs behind the façade of charity, genuine charities must be assisted and should not be burdened unnecessarily. In this respect, the government should consider creating certain categories of non-profit organisations or charities that are exempted from GST altogether.

If government is unable to exempt charities from GST, the prescribed threshold for charities and non-profits should be raised to RM2 million

If, however, the government is unable to exempt charities from GST for whatever reasons, then it should increase the taxable turnover threshold for GST-exempted charities and non-profits to at least RM2 million from the current RM500,000.[6] This will help to relieve smaller charities from some of the negative consequences discussed above.

Steven Sim Chee Keong
Member of Parliament for Bukit Mertajam
DAPSY National Political Education Director

Zairil Khir Johari
Member of Parliament for Bukit Bendera
DAP Assistant National Publicity Secretary

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Notes

[1] Section 23, Royal Malaysian Customs’ Goods and Services Tax: Guide on Societies and Similar Organizations, as at 18 December 2014.

[2] Section 25, op. cit.

[3] Sections 20 and 24, op. cit.

[4] Section 29, op. cit.

[5] Sections 32-35, op. cit.

[6] In Singapore, the threshold is SGD1 million. See https://www.iras.gov.sg/irashome/page04.aspx?id=1268

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