Ketua Pengarah Jabatan Kastam Diraja Malaysia v Jimah East Power Sdn Bhd (W-01(A)-601-11/2020)

This is an appeal against the decision of the learned High Court Judge dated 28 September 2020.

The learned High Court Judge had allowed the Respondent's Judicial Review application to quash the Director General of Customs (“DG”) decision to only allow a nominal portion of the Respondent's claim for exceptional input tax ("Exceptional ITC Claim") under Regulation 46(1) of the Goods and Services Tax Regulations 2014 ("GST Regulations") for the sum of RM 2,231.21 instead of the full sum of RM 45,873,669.66.

The principal activities of the Respondent are to design, construct, commission, operate and maintain a 2,000 MW Coal Fired Power Plant in Mukim Jimah, Port Dickson, Negeri Sembilan (“Power Plant”). The Power Plant was to commence commercial operation in year 2019.

The Respondent had entered into a Power Purchase Agreement dated 22 July 2014 (“PPA") to sell electricity to Tenaga Nasional Berhad (“TNB”) for a period of 25 years.

The Respondent made an application to the DG for it to be registered under Goods and Services Tax Act 2014 (“GST Act”). The application was approved with the effective date of 1 March 2018.

However, the approval was cancelled on 16 June 2015. The Respondent applied again and it was approved on 20 September 2016.

The Respondent made an Exceptional ITC Claim to the DG under Regulation 46(1) of the GST Regulations for the sum of RM45,873,669.66.

The DG informed the Respondent that as the Respondent has not started to make any taxable supply, the DG would postpone his final decision on whether to allow the Exceptional ITC Claim until after the Respondent had started to make a taxable supply from its business activities.

The Respondent then applied to vary the duration of its taxable period. The DG had allowed the Respondent's application and changed its first taxable period to commence from 1 August 2016 to 31 August 2018. Following from this, the Respondent was required to file its first GST by 29 December 2018. The Respondent had filed its first GST return and claimed for input tax credits in the sum of RM360,247,062.65, which consists of the following: -

The Exceptional ITC Claim of RM45,873,669.66; and

(ii) Input tax credits paid for the transactions which took place in the Respondent's first taxable period in the sum of RM314,373,392.98. [10] The DG made his decision (“the Decision”) on 25.3.2019 and informed the Respondent that only RM2,232.21 is allowed as the Respondent's Exceptional ITC Claim in respect of item (i) above. There is no issue with regards to item (ii). [11] Aggrieved by the DG’s decision, the Respondent applied to quash the decision of the DG and sought a declaration that the Respondent is entitled to claim Exceptional ITC Claim for sum of RM45,873,669.66 pursuant to Regulation 46(1) of the GST Regulations; [12] The learned High Court Judge had allowed the Respondent's Judicial Review application to quash the DG’s decision and grant the declaratory prayers sought by the Respondent. Hence this appeal was filed by the DG of Customs. Decision of the High Court [13] The core issue identified by the High Court is whether the DG was right in law in rejecting the full amount claimed of RM45,873,669.66. [14] In allowing the judicial review application, the learned High Court Judge, inter alia, held that:

Section 38 and Section 39 of the GST Act are only applicable to general input tax claim for GST incurred during the taxable period and not towards the Exceptional ITC Claim (para [21] GOJ)

(ii) Exceptional ITC Claim is governed by Regulation 46 of the GST Act Regulations which is a separate and independent provision. In the absence of any express reference in the aforesaid provision, an Exceptional ITC Claim under Regulation 46 of the GST Regulations should not be subject to the requirements set out in Sections 38 and 39 of the GST Act (para [21] GOJ).

(iii) To satisfy Regulation 46, there is no specific or other requirements needed, except what has been stated in Regulations 46(2) to 46(5). The DG’s decision to impose an additional requirement of a taxable supply is without any legal basis. In such circumstances, the DG had wrongly exercised his discretion in respect of the Respondent's Exceptional ITC Claim (para [22-23] GOJ).

(iv) Under the GST Act, the Government's revenue is in the form of output tax charged by the taxable persons (in this case is the Respondent) to their customers or clients. The input tax must, upon application and compliance with the provisions set out in the GST Act and GST Regulations, be refunded to the taxable persons (para [24] GOJ);

If the GST Act was not repealed, the Respondent would have been entitled to claim for the Disallowed ITC as the Power Plant had been commissioned and started producing electricity, which is regarded as a taxable supply under paragraph 4 of the 1st Schedule to the GST Act. There is no significant provision in the GST Act (Repeal GST Act) which states that the Respondent could not claim after the GST Act has been repealed (para [27] GOJ)

(vi) Since the Respondent has submitted all relevant supporting documents via a letter dated 8 January 2019, therefore there is a legitimate expectation that the Exceptional ITC Claim would be allowed in its entirety. Unfortunately, only a nominal sum was allowed which is not in accordance with Regulation

This is beyond the Respondent's legitimate expectation (para [28-29] GOJ).

(vii) Since there is no formula prescribed in Regulation 46(1) of the GST Regulations in considering the Respondent’s Exceptional ITC Claim, the DG’s decision to allow the input tax for the furniture and equipment purchased is inconsistent with the exceptional input tax incurred for the construction of the Power Plant itself. The inconsistency shows that the decision is unreasonable to the extent of Wednesbury unreasonableness and therefore ought to be quashed by the Court (para [30] GOJ). Appellant’s Grounds of Appeal [15] For the purpose of this appeal, the Appellant DG submits as follows:

Regulation 46 which provides for ‘exceptional claim for input tax’ must be read together with and subject to sections 2, 38, 39 of the GST Act and Regulation 39 of the GST Regulation;

(ii) the formula devised and relied upon by the Appellant embodies the basic principles and criteria regulating input tax claim as spelt out in sections 2, 38, 39 of the GST Act and Regulation 39 of the GST Regulation; Our Decision [16] In paragraph 6 of the DG’s affidavit affirmed on 19 November 2019, the DG has explained that GST is a tax system based on value-added or margin. To achieve the concept of value-added taxation, output tax is imposed on the total value of supply, while input tax incurred on acquisitions is allowed to be reclaimed as input tax credit. The difference between output tax and input tax is the tax value within the concept of value-added or margin taxation. Based on this concept, the tax incurred on business acquisitions can be reclaimed as input tax. Therefore, this input tax does not become a cost to the business. [17] The DG added that through the GST Taxation system, end users will bear the tax charged and cannot claim it back. End users include individuals and businesses that are not registered for GST. The government will collect revenue through these end users. Businesses eligible to recover input taxes and able to impose output tax are referred to as taxable persons. [18] In paragraph (7) of his affidavit, the DG gave the following illustration: [19] In other words, under the GST regime, business making taxable supplies have to be registered under GST (taxable person) if their annual sales turnover has exceeded the prescribed threshold (RM500,000.00). Only a registered person can charge and collect GST on the taxable supplies of goods and services made by him. GST is charged on the value or selling price of the products. The amount of GST incurred on input (input tax) can be deducted from the amount of GST charged (output tax) by the registered person. If the amount of output tax is more than the input tax in the relevant taxable period, the difference shall be remitted to the Government. However, if the input tax is more than the output tax, the difference will be refunded by the Government. [20] The relevant terms, input tax, output tax and taxable person are statutorily defined in section 2 of the GST Act: “Input tax means-

tax on any supply of goods or services to a taxable person; and

tax paid or to be paid by a taxable person on any importation of goods, and the goods or services are used or are to be used for the purposes of any business carried on or to be carried on by the taxable person: Provided that where the goods or services are used or are to be used partly for the purposes of any business carried on or to be carried on by the taxable person and partly for other purposes, tax on the supply and importation shall be apportioned so that only so much as is attributable to the purposes of his business is counted as his input tax; "output tax" means tax on any taxable supply of goods or services made by a taxable person in the course or furtherance of his business in Malaysia; “taxable person” means any person who is or is liable to be registered under this Act; [21] In the GST regime, the basic rule is that a ‘taxable person’ is only entitled to claim input tax credit to be deducted from any output tax due from him after registration under the Act, that is, ‘at a time when he is a taxable person’. This is provided in s.38(1) of GST Act: “Credit for input tax against output tax

38.

Any 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.” [22] Section 39 of the GST Act provides that: “Amount of input tax allowable

The amount of input tax for which any taxable person is entitled to credit in any taxable period shall be so much of the input tax for the period that is allowable and reasonable to be attributable, as may be prescribed, to the following supplies made or to be made by the taxable person in the course or furtherance of any business in Malaysia:

any taxable supply, including a taxable supply which is disregarded under this Act;

any supply made outside Malaysia which would be a taxable supply if made in Malaysia; or

any other supply as may be prescribed.” (emphasis added) [23] Regulation 39 of the GST Regulations 2014 provides that: “Attribution of input tax to taxable supplies

Subject to regulation 43, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.” [24] Therefore, from the reading of sections 2, 38 and 39 of the GST Act as well as Regulation 39 of the GST Regulations, we can summarise as follows:

the amount of input tax claimable must be ‘allowable and reasonable’ (section 39(1) of GST Act);

(ii) it must be ‘attributable to taxable supplies’ (Section 39(1) GST Act and Regulation 39(1) of GST Regulation);

(iii) the attribution must be ‘used or are to be used’ for a ‘taxable supply’ (see definition of ‘input tax’ in section 2 of GST Act);

(iv) the ‘taxable supply’ was made by the taxable person in the course or furtherance of any business in Malaysia’ (section 39(1) of GST Act) [25] However, with regards to input tax incurred before the date with effect from which a person becomes a "taxable person", that is, the date with effect he became liable to be registered or from which he was registered, the registrant can make a claim under Regulation 46 of the GST Regulations for an exceptional claim of input tax credit. [26] In other words, a registered taxable person may apply to claim the input tax incurred on supplies made to them before their registration under the GST Act. This exception is provided in Regulation 46(1) of the GST Regulation 2014. Once registered for GST, the taxable person can claim the input tax incurred on pre-registration supplies that were intended for use in subsequent taxable supplies after registration. These claimed GST amounts are considered as "exceptional input tax", which is allowable under Regulation 46 of GST Regulations, which reads as follows: “Exceptional claims for input tax

(1) Subject to subregulation (2), the Director General may authorise 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, or paid by him on imported goods before that date, 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.

No tax may be treated as if it were input tax in respect of--

goods which had been supplied or consumed;

goods which have been used partially or incorporated into some other goods; or

goods held for other than business use, by the person referred to in sub-regulation (1) before the date with effect from which such person was, or was required to be, registered.

A claim under sub-regulation (1) shall, except as the Director General may otherwise allow, be made on the first return the taxable person furnishes pursuant to section 41 of the Act and, as the officer of goods and services tax may require, be supported by tax invoices and other evidence.

A taxable person making a claim under sub-regulation (1) shall keep and preserve for seven years from the latest date to which the records relate in respect of goods, a stock account showing separately quantities purchased, quantities used in the making of other goods, date of purchase and date and manner of subsequent disposals of such quantities.

Any person who has been but is no longer a taxable person may make a claim to the Director General for the payment of any amount of any tax on the supply of services to him after the date with effect from which he ceased to be or to be required to be registered and which was attributable to any taxable supply made by him in the course or furtherance of any business carried on by him when he was or was required to be registered.” (emphasis added) [27] The claim for input tax under Regulation 46(1) of the GST Regulations is an exceptional claim because the GST incurred by a person on the supply of goods to him prior to his GST registration is not an input tax and is not claimable, unless and until the DG exercised his discretion under Regulation 46(1) of the GST Regulations to authorize that person to treat the GST incurred prior to his GST registration as an input tax. [28] As such, a GST registered person cannot claim the GST incurred on supply of goods or services to him prior to his GST registration as the said GST is not an input tax. The said GST can only be claimed if the DG exercised the discretion to authorize the person to treat the said GST as an input tax under Regulation 46(1) of the GST Regulations. [29] We are therefore of the considered opinion that there is nothing in regulation 46(1) that allows the Respondent to claim, as of right, for the whole Exceptional Input tax that was allowed by the learned High Court Judge. [30] Regulation 46 merely empowers the DG to allow the Respondent to claim for the input tax that they have paid before they are registered under the GST Act as a taxable person. [31] We are of the considered opinion therefore that the learned Judge was plainly wrong in her finding that the Exceptional ITC Claim is governed solely by Regulation 46 of the GST Regulations and that the said provision is a separate and independent provision from sections 2, 38 and 39 of the GST Act. [32] The learned Judge was also plainly wrong when she held that in the absence of any express reference in the other provisions, an Exceptional ITC Claim under Regulation 46 of the GST Regulations should not be subject to the requirements set out in Sections 38 and 39 of the GST Act. In paragraph [22] of the Judgment, the learned Judge held as follows: “[22] To satisfy Regulation 46, there is no specific or other requirements needed, except what has been stated under Regulation 46(2) until 46(5). After perusing the facts of the case, this Court finds that the Applicant has complied with all the elements to an Exceptional ITC Claim under Regulation 46(1) of the GST Regulations.” [33] Regulation 46 merely empowers the DG to allow the Respondent to claim for the input tax that they have paid before they are registered under the GST Act as a taxable person. [34] Therefore, under the GST regime, the Respondent’s Exceptional Input Tax can be deducted from the amount of GST charged (output tax), once they became a taxable person. [35] However, in the present case, the respondent’s application for a refund of the exceptional input tax was rejected by the DG. In paragraph 8 of his affidavit, the DG explained the reason for the rejection: “…. Jelas bahawa GST yang ditanggung Pemohon sebahagian besarnya tidak berkaitan dengan pembekalan bercukai dan hanya sebahagian kecil sahaja yang dapat di hubungkait dengan pembekalan bercukai yang dilakukan. Section 38 dan section 39 Akta 762 jelas menyatakan cukai input hanya layak untuk dikreditkan kepada orang kena cukai dan munasabah untuk berhubungkait dengan pembekalan bercukai yang dilakukan atau tidak dilakukan. Di dalam kes ini Pemohon merupakan pengguna akhir di dalam rantaian pembekalan tersebut apabila GST dimansuhkan. Menurut section 39 Akta 762 cukai input mesti mempunyai hubungkait dengan pembekalan bercukai. Maka apabila GST telah dimansuhkan apa-apa pembekalan oleh Pemohon selepas 01.09.2018 sudah tidak dinamakan sebagai pembekalan bercukai lagi dan hanya menjadi pembekalan biasa sahaja.” (emphasis added) [36] From the above paragraph, the DG had explained that the majority of the GST borne by the Respondent is not related to taxable supplies, and only a small portion can be associated with the taxable supplies made. This is because Sections 38 and 39 of the GST Act clearly provides that input tax is eligible for credit by the taxpayer should reasonably relate to the taxable supplies made or to be made. [37] In this case, the DG had explained that the Respondent is an end consumer in the supply chain when the GST was abolished. According to section 39 of the GST Act, input tax must be connected to taxable supplies. Therefore, when the GST was abolished, any supplies made by the Respondent after 1 September 2018 are no longer considered taxable supplies, but are merely regular supplies. [38] We are therefore of the considered opinion that the GST borne by the Respondent on the construction costs of the Power Plant cannot be considered as input tax and cannot be credited as there is no direct connection to any taxable supply made or to be made from this plant throughout the Respondent’s tenure as a taxpayer under the GST legislation. Support can be found from the case of Schemepanel Trading Ltd v Customs and Excise Commission [1996] STC 871 which held that: “Input tax could be deducted only to the extent that the goods or services on which it has been paid were ‘cost components’ of a taxable transaction. A taxable transaction was a transaction that was subject to tax. In the instant case, the inputs related to outputs that are not subject to tax and they were not therefore ‘cost components’ of a taxable person.” (emphasis added) [39] This was explained by the DG in paragraph 11 of his affidavit: “11) … Disebabkan responden menjadi orang kena cukai hanya selama 761 hari sahaja iaitu dari 1 Ogos 2016 sehingga 31 Ogos 2018 dan tidak melakukan bekalan bercukai dari loji Janakuasa yang masih dalam pembinaan, adalah tidak adil dan wajar kelulusan cukai input pada amaun penuh diberikan. Oleh yang demikian pembahagian cukai input dilakukan bagi mendapatkan amaun cukai input yang layak untuk dikreditkan. GST yang ditanggung ke atas pembinaan loji janakuasa tidak adil dan tidak wajar dikreditkan kepada pemohon kerana tiada pembekalan bercukai dilakukan dari loji”. (emphasis added) [40] In Paragraph 10 of the Respondent’s affidavit to support the Judicial Review application, the Respondent had affirmed as follows: “10. Operasi awal unit satu telah bermula pada 10 Disember 2018 apabila elektrik dijanakan dan dibekalkan kepada grid nasional. Tarikh operasi awal bagi unit dua telah bermula pada 11 hari Jun 2019.” [41] The Respondent's first taxable period was between 1 August 2016 to 31 August 2018. However, the operations of the power plant in generating electricity supply only started on 10 December 2018, after the abolishment of the GST. Therefore, the DG is not statutorily authorised to allow the Respondent to treat as input tax the GST amount of RM45,873,669.66 under Regulation 46(1) of the GST Regulations because the amount incurred by the Respondent is not attributable to the taxable supply made by the Respondent and therefore cannot be treated as an input tax. [42] In the case of Seratim Sdn Bhd v. The Customs Appeal Tribunal & Anor [2020] 9 MLJ 1, it was held as follows: “[8] In the context of the present appeal before this court, it should be clear that any taxable person is entitled to credit or to submit an application for an ITR, in any taxable period, the input tax for the period that is allowable and reasonable to be attributable to the following supplies made in the course of businesses, as laid down in s 39(1)(b) of the Goods and Services Tax Act 2014:

any supply made outside Malaysia which would be a taxable supply if made in Malaysia … (Emphasis added.) [9] In short, for the appellant to succeed in its claim for an ITR for the taxable period of 31 August 2016, the appellant would need to prove the value of input tax declared must be attributable to the exportation of sawn timbers to its overseas customers. [20] ... [29] As such, I agree with the second respondent’s argument that when there is no submission of a properly filled-out K2 Form to indicate the exact details of the sawn timbers that were ‘exported’ during the taxable period of 31 August 2016 by the appellant, there is no proof that there was an export of sawn timbers as claimed by the appellant and since there was also no apparent attribution between the input tax and supply made by the appellant due to the discrepancies of the documents submitted that fulfils the requirement set under s 39(1) of the Goods and Services Tax 2014, hence, the application for ITR is erroneous. [30] There was no exportation of goods by the appellant under the governing provisions of the Customs Act 1967 and the Goods and Services Tax Act 2014 and that the first respondent had arrived at his decision correctly in rejecting the appellant’s application for ITR for the taxable period of 31 August 2016.” (emphasis added) [43] With regards to the GST borne on furniture and fittings, we agree with the DG that the same can only be considered as an input tax in part because the Respondent had used these items to make other taxable supplies from August 2016 to August 2018. Therefore, the respondent’s claim for the sum RM2,231.20 for the input tax on furniture and fittings is allowed. Conclusion [44] Based on the foregoing, we are of the considered opinion that the learned Judge has erred in law in her interpretation of the said provisions in the GST Act and the GST Regulations and this warrants our appellate intervention. The appeal is therefore allowed and the decision of the learned Judge is set aside. Dated: 28 February 2024 sgd (AZIZAH BINTI NAWAWI) Judge Court of Appeal, Malaysia Parties Appearing: For The Appellant : Mohd Izhanudin Alias/Iznie Elynna Zainal/Liew Horng Bin Jabatan Peguam Negara, Wilayah Persekutuan Kuala Lumpur For the Respondent :

Schemepanel Trading Ltd v Customs and Excise Commission [1996] STC 871

Seratim Sdn Bhd v. The Customs Appeal Tribunal & Anor [2020]