For GST registered company to claim GST input tax, the standard IRAS requirement is to ensure that the purchases satisfy the following:
1. There is a tax compliant supplier invoice supporting the purchases and GST input claim under s61(2)(a) with an invoice for an actual supply of good that complied with regulation 11(1)(f) of the GST General Regulations.
2. The purchases is made in the course of business under s20(2) of GST Act.
However in the recent GST Board Review decision of GHY vs Comptroller on 7 August 2023, a GST input claims amounting to $1.34m in 2016 was rejected by the IRAS despite fulfilling the above conditions.
The brief facts of the case. GHY a local GST registered business submitted an GST input claims of $1.34m for the purchase of SD cards and flash drives from a local GST registered supplier (which in turn purchased that from another supplier (“immediate supplier”) whom purchased from a purported manufacturer). The purchased SD cards and flash drives was sold and exported as zero-rated supply to Malaysia within 1 day to two Malaysian customers. Proper and GST compliant supplier invoices and documents including photographs of the unopened packages were kept and submitted to IRAS audit.
The GST Board of Review won in this case on the following basis:
GHY has failed to prove that the transactions were genuine under s52(3) of the GST Act which requires the GST person with GST input tax claims bears the burden of proof to show that input tax is claimable. The Comptroller does not have to prove that the transactions were fraudulent or sham transactions, or the existence of a missing trader fraud scheme, or indeed any other attempt to defraud the collection of public revenue.
Some of the major red flags raised by the Comptroller on the above case:
1 The inability to trace the goods to the purported manufacturing source or the supplier which sold the products to GHY supplier.
2 The unexplained reason why the “Osperia” brand of products is not known in the market and its purported manufacturer was not a registered member of the SD Card Association, nor listed among other licensed manufacturers under the CLA.
3 The lack of a commercial basis for the deal. GHY earned a mark-up margin of 0.96% to 2.88% in a risk-free arrangement being just a middleman. Both the Malaysian customers and supplier were introduced by a third party.
4 Both the directors of the manufacturer and its immediate supplier had no knowledge of this sale transactions. The manufacturer was only in the business of olive oil trading and was not carrying on any other businesses.
Interestingly, although this case bears similarity to MTF. This section was not invoked by the Comptroller as it was only introduced after 2016 (the period of GST input claims by GHY) on 1 Jan 2021 through s20(2A) which expands the power of Comptroller to deny GST input tax claim if a taxable person knew or should have known was a part of any arrangement to cause loss of public revenue regardless of whether actual revenue loss to IRAS. We have discussed the implication to all GST registered business on our earlier article “Too Good to be True” dated April 16, 2021 on what are the simple steps that you can prevent the risk of your GST input tax being rejected by IRAS.
Separately, it is not required for the Comptroller to prosecute GHY under the GSTA for fraud. It is the Comptroller’s discretion to be made as a matter of policy or practical considerations.
Relevant bulletin to read: