Over the last one year, there have been pressure from the marketing teams (obviously driven by broking distribution sectors) to push for the waiver of service tax supposedly apply for all insurance policies issued to Joint Management Body (JMB) and Management Corporation (MC) formed under either the Joint Property Act (Maintenance And Management) 2007 or the Strata Titles Act to manage residential apartments and condominiums.
The established practices in the past, the insurance industry had agreed to waive such service tax for individuals, NGOs, taxable services that are exported and those businesses located within the Free Zones (Langkawi, Labuan and Tioman Island).
In recent times, the markets were further pushing for the waiver of service tax during those phases where property developer is running the management requirements for the property’s unit owners. How can…. you would be saying but then this is not without reasons. Imagine, if the Group PA policy that is partly paid by the company and the balance paid by the employees, those portion which wre due from the latter are not subject to service tax (PIAM actually issue a circular back in Feb 11, 1992 – MC 66 of 1992 after the 1992 Budget). We shall discuss this further in another write-up…..
Coming back to the issue of “Should we waive service tax for policies issued in the name of JMB or MC?” While we should not be quoted as representing the authority, we are in the opinion that the answer is YES if the policy is issued in their name with the relevant financial institutions and the unit owners. The appointed managers must not be part of the named Insured in the policy. The main reason is to better reflect the position of the JMB or the MC being a non-taxable person and does not provide any form of taxable services. Another important aspect is that those apartments and condominiums must not be an integral part of any shoplots or prescribed business outlets, otherwise the JMB and MC cannot escape from indulging in certain forms of taxable services. Under Schedule 2 of the Service Tax Regulations, 1975 it seems JMBs and MCs do not fall under the list of taxable persons and the nature of services rendered is also not deemed as taxable services.
Service tax is charged and levied on:-
- Taxable Service – any service which is prescribed to be a taxable service, and means any service referred to in Second Schedule of the Service Tax Regulations 1975 in respect of which service tax is chargeable under the Service Tax Act, 1975.
- Taxable Person – any person who is prescribed to be a taxable person and means any person referred to in Second Schedule of the Service Tax Regulations, 1975, in respect of which service tax is chargeable under the Service Tax Act, and includes an individual, a firm, an association of persons, a company and every juridical person.
We really can’t find anything within those relevant Service Tax Act(s) and Regulations to justify those service tax levies on insurance premiums. JMBs and MCs are made up of elected office bearers (or committees) to oversees the day to day wellbeing of the apartment’s common properties. The set-ups are also non-profitable and their incorporations are done through the Commissioner of Buildings (COB) and not under any Company Act nor through the Registrar of Societies.
However, and before we are fast to conclude a decision, it is perhaps prudent to review the exemption aspect of this Act.
Accordingly, the Minister may exempt, in any particular case, any person or class of persons from the payment of the whole or part of the service tax chargeable, subject to such conditions he may deem fit to impose. Similarly, the Minister may also exempt any service or class of service from the whole or part of the service tax payable. There is no provision in the Act for the Minister to exempt any service tax or penalty due and payable by way of an order, as such, individuals or organizations are required to apply to the Minister, on an ad hoc basis to be exempted. This looks like the JMBs and MCs should apply for an exemption before commencing works in respect of their management obligations. This was further reinforced by a new ruling in 2007 as depicted below:
An amendment to the Service Tax Act, 1975 which came into effect on 8 February 2007 provides a legal framework for obtaining rulings from Customs. In this respect, application to determine whether a service is taxable may be forwarded to the Service Tax Authorities in a prescribed form together with the necessary documentation and a prescribed fee of RM200.00. The Director General of Customs shall make a ruling under section 6B of the Service Tax Act 1975. Such ruling is legally binding to both the applicant and customs for a period of three years. However, the Director General may amend, modify or revoke such ruling under the following circumstances:
• if it contains an error that needs to be rectified;
• if the customs ruling was based on an error of fact or law;
• if there is a change in law relating to service tax; or
• if there is a change in the material fact or circumstances on which the ruling was based.
Customs rulings which may be given in advance provide the business sector a greater degree of certainty and predictability in planning business activities.
Many practitioners have had written to the Royal Customs & Excise Department but there was no concrete reply….. Accordingly why no reply was because the Department wanted to treat the application on a case by case basis???
Wonder why can’t the Department allow a blanket approval for those JMBs and MCs that manage residential apartments and condominiums….
So the best practice as of today and in view of the intensified competition out there, it is worthwhile for insurers wanting a piece of those actions resort to allowing those waivers of service tax but requesting the JMBs and MCs to sign some form of discharge or indemnity in the event the Customs get agitated by this “jumping the gun” activities. How this letter of discharge or indemnity is worded, it is best left to the insurers themselves – afterall someone is to be answerable for such action for waiver in the event the Customs is not in favour of such practice.
Don’t quote me but happy hunting for more business… Remember don’t deviate too much otherwise you may lost your steering and direction very fast.
Update (16 October 2009) – Latest on application of service tax on insurances issued to management corporation…..