Latest Updates on e-Tax Guide: Partial Exemption & Input Tax Recovery
July 5, 2021
Partial exempt person and incidental exempt supplies
The IRAS has updated the GST Guide on Partial Exemption and Input Tax Recovery on 22 June 2021.
This is a critical update that can affect businesses that make incidental exempt supplies under regulation 29(3) of the GST General Regulations. Businesses that don’t meet the new clarification provided by the IRAS would have a GST exposure.
Making exempt supply is no good for GST registered businesses as it likely means that the GST registered business is unable to recover its input tax in full (subject to conditions).
However, the IRAS recognises that a taxable person would still somehow make some exempt supplies (e.g. receiving interest income from bank deposits or issuing shares to raise capital in an initial public offering) in the course of running a fully taxable business and restricting the input tax claims of businesses that make such exempt supplies would be unfair.
Hence, there is a list of exempt supplies under regulation 33 of the GST General Regulation which the IRAS sees as necessary and integral to the making of taxable supplies. To put it simply, if your business only makes regulation 33 exempt supplies (regardless of the value), your business would not need to apportion the input tax incurred.
The IRAS also recognises that businesses can make other exempt supplies (e.g. the provision of intercompany loans to local related entities, disposal of shares in a corporate restructuring) that are not necessary and integral to the making of taxable supplies.
But where the making of such exempt supplies are incidental to the main business of making taxable supplies (i.e. incidental exempt supplies), the GST Act provides for a special formula for the calculation of input tax apportionment.
Essentially, the special formula increases the ratio of the input tax recovery rate by allowing the business to deduct the value of incidental exempt supplies from the denominator of the formula.
In order for the exempt supplies to qualify as incidental exempt supplies, one of the conditions is that the making of exempt supply does not amount to a separate business.
The IRAS has in the past stated that if the exempt supply occurs infrequently (i.e. not more than four occurrences of the same nature of supply over a longer period) or if the exempt supply ceases when the main taxable activities of your business cease, the condition of it not being a separate business would be satisfied.
Businesses have been evaluating against that condition by looking at how many times an exempt supply is being made in a tax year. Using interest income from an inter-company loan as an example, if the number of inter-company loans provided to a local person is not more than four in a year, that condition of the exempt supply not being a separate business would be satisfied.
However, with effect from 22 June 2021, other than looking at the number of inter-company loans provided to a local person, the taxable person must also include the number of inter-company loans provided to an overseas person to determine whether the making of exempt supply amount to a separate business.
If the total number of inter-company loans provided to both overseas and local persons are more than four times a year, you would not be able to use that as reasoning to argue that the exempt supply does not amount to a separate business and you cannot treat the interest income received from a local person as incidental exempt supplies. In other words, your input tax recovery rate will be lower.
Please note that this revision has an effective date of 22 June 2021 and it’s not often that the IRAS will put an effective date on the revision unless it is critical enough.
Have a read at the new e-tax guide and speak to us to see how you can overcome the new clarifications provided by the IRAS.