The business of SME manufacturers often involves a substantial volume of imports and exports. They have to pay GST on imports, but do not need to charge GST on their exports. This may cause some cash flow issues for the businesses, which IRAS alleviates through the Major Exporter Scheme (MES). Under this scheme, qualifying companies can have the GST on their imports suspended.
IRAS would like to highlight the following common mistakes:
1. Zero-rating goods delivered locally
Even though goods may be sold to an overseas customer, the sale of the goods cannot be zero-rated if they were delivered to a local address. Unless the manufacturer is delivering the goods directly overseas or has arranged with a freight forwarder to export the goods, and the manufacturer possesses the necessary export documents, the goods must be standard-rated.
Example:
Company M is a manufacturer of automation machines and precision components. It contracted with a number of overseas clients to manufacture moulds and machines in Singapore. The moulds and machines produced were to be delivered either locally or overseas, depending on the overseas clients’ instructions.
In the billing system of Company M, the tax code for whether to charge GST was set based on the address of the customer. If the address of the customer is in Singapore, it is treated as a standard-rated supply; if the address is an overseas one, it is treated as a zero-rated supply.
IRAS discovered during its audit that Company M had wrongly zero-rated the supply of moulds and machines to its overseas clients, Companies X and Y, when the clients had in fact instructed Company M to deliver the moulds and machines to their local customers in Singapore. Accordingly, Company M had to back account for GST on the supply of moulds and machines that were delivered locally. Company M has since rectified the accounting system to define the tax code based on the delivery address of the goods, instead of the address of the customers.
2. Zero-rating services performed on goods located in Singapore
Generally, services performed for overseas customers may be zero-rated, subject to specific zero-rating conditions for international services. Specifically, a service supplied directly in connection with goods can only be zero-rated if it is supplied to an overseas customer and if the goods are exported (Section 21(3)(g) of GST Act). Hence, services performed on goods physically located in Singapore do not qualify for zero-rating as an international service if the goods are subsequently delivered locally.
Example:
Company T deals in the manufacture and repair of computer disk drives and provides repair services to its customers. Sometimes, its overseas customers may send faulty disks for repair and thereafter request for the disks to be delivered to their local customers. Company T wrongly zero-rated such repair services as “international services” thinking that these qualify as they were performed for overseas persons.
Services supplied directly in connection with goods can only be zero-rated if supplied to an overseas person and if the goods are exported. Repair services undertaken by Company T do not qualify for zero-rating as an international service as the goods are delivered locally in Singapore.
3. Using MES status belonging to another company
An approved MES person can only use its MES status to suspend GST on its own imports, or imports belonging to his overseas principal if it were acting as its agent. Businesses are not allowed to use their MES status to import GST-free goods belonging to other companies even though the goods are subsequently sold to them after importing into Singapore.
Example:
Company A buys goods from various overseas suppliers and GST is suspended on its imports under its Major Exporter Scheme (MES) status. One of its overseas suppliers, supplier B has a Singapore subsidiary – Subsidiary C. Company A went into a Just-in-time (JIT) arrangement where Company A would purchase the inventory from Subsidiary C instead.
Subsidiary C would import the inventory from Supplier B using Company A’s MES status and keep the inventory in its own warehouse. Upon the release of the inventory to Company A, Subsidiary C would then invoice Company A for the goods.
An approved MES person can only use its MES status to suspend GST on its own imports or on imports made as an agent on behalf of its overseas principal. In this instance, Subsidiary C had wrongly used the MES status of Company A to import GST-free goods. At the time of importation, the goods belong to Subsidiary C, not Company A.