Can you get away with an illegal GST discount if you pay cash?

Can you get away with an illegal GST discount if you pay cash?

The Star Online: THE first time I heard the question “How much for cash?” was in a hardware store in a small town in the UK.

I was a child, shopping with my grandfather in the mid to late 1980s. I wasn’t sure what it meant, other than my grandfather seemed to get a discount when he asked. Then I learned it was something to do with VAT or value added tax (the UK equivalent of a GST or goods and services tax).

As I grew up, I came to understand what was happening. A cash sale means that it doesn’t have to be recorded. If the sale is not recorded, it was perceived that there is no evidence that it ever happened. It was simply a tacit two-way bargain between the consumer and the retailer i.e. let’s split the VAT between us. It was reasonably commonplace; not paying VAT was even a running joke on a hugely popular UK TV show of the same era.

I heard a similar question recently in a mall in Kuala Lumpur, but this time it was the sales assistant asking the customer “Do you need a receipt?” When the customer said no, the sales assistant manually opened the cash drawer and handed over the change.

While VAT wasn’t new in the UK in the 1980s (it was introduced in 1973), there were no electronic point of sale systems. Everything was handwritten. What this meant was that an audit was a long and laborious process. Her Majesty’s Customs and Excise (as it was then known) officers would have to trawl through handwritten records to analyse data.

It’s no coincidence that when computers and electronic systems started to become commonplace, the “How much for cash?” question began to die out in a retail environment, so much so that any time it was uttered, it was either done so, or taken to be in jest.

This is why I can understand the Royal Malaysian Customs Department’s desire to have all businesses keep electronic records. Electronic data is simply much easier to track and analyse in order to detect omissions and errors. Customs’ emphasis on electronic record-keeping is no more apparent than the requirement that certain retail sectors must operate an electronic point of sale system.

But it may not be necessary for all businesses to hold electronic records. Electronic submission of GST returns by GST registered businesses means that Customs can analyse the trend within each business. The basic premise is that a business buys a certain amount of taxable goods and resells those goods at a profit.

The tax incurred on the purchase is offset against the tax charged on the sale to arrive at a net liability. If a business decides not to report certain sales, but still claims all GST incurred as a credit, the trend will soon become apparent.

This is where I believe the UK closed the gap. Detailed analysis of simple trends by Customs allowed them to see where the gaps were. But interestingly, the UK did not, and still does not require that businesses have electronic point of sale systems.

Logically this requirement makes sense for transactions between businesses. The tax invoice allows a taxable business to recover the GST paid on the acquisition. But overwhelmingly, the customers of hardware stores, restaurants, mini-markets, bookstores, pharmacies and entertainment centres are individuals.

Other than transparency in the GST being charged, there is no benefit to the individual to receive a tax invoice. He cannot claim input tax credit. Yet the law makes it mandatory for all businesses to issue tax invoices, regardless of who the consumer is.

It may be more pragmatic to make it mandatory for a business to issue a tax invoice upon request. This means issuing tax invoices only to those who need them, or wish to see how much GST they have been charged.

The enforcement of electronic point of sale systems seems unnecessary and perhaps a little unfair. Consider your favourite open-air restaurant. Many are operated as family businesses; those in charge of the ordering and payment being the senior members of the family. The difficulties in using electronic systems for people who have spent the last 60 years using pen and paper should not be underestimated.

While computerisation and data analytics are important tools in ensuring GST compliance, care must be taken to ensure that the outcomes are justified. Transactions between businesses should require proper tax invoices. But to force the issuance, by electronic means, to individuals does not enhance enforcement.

Since GST was first implemented in April, how many of us actually look at tax invoices? How many of us take them? Thus the requirement to print a tax invoice will not increase compliance.

What’s needed is perhaps a proper mechanism by Customs to monitor and analyse various metrics which will detect non-compliance. And this will be environmentally friendly too!

Tim Simpson is senior consultant, PwC Taxation Services Malaysia.