GST is not merely confined to external business transactions but also internal transactions between the employer and employee and this includes employee benefits: goods and services provided free to employees. This issue is only applicable to employers who are taxable persons (GST registered person who annual taxable turnover exceeds RM500,000). As money is not regarded as either goods or services, GST does not apply to salary or other cash payments. There is also a specific exemption in the second schedule of the GST Bill 2014 which states that any contribution made to a pension, provident fund or social security fund shall not be treated as a supply of goods or services. Therefore contributions to EPF, SOCSO and similar organisations will not be subject to GST. GST is charged on all taxable supplies (includes zero rated and standard rated i.e. 6%) of goods and services except exempt supply. Employee benefits fall within the scope of GST and if such benefits are taxable, who accounts for the GST: employee or employer? The employer has to account for the GST and not the employee. Employee benefits includes any goods (mobile phones, computers , food, drinks etc.) or services provided free to employees which include any right, privilege, service or facility provided free of charge to employees and examples are leave passage, accommodation, transport, meals, bus passes, meal vouchers, retirement gifts, long service gifts, prizes at annual dinners etc. Employee benefits also cover benefits given by a third party on behalf of the employer to the employee: e.g. a supplier provides free goods or services to an employee on behalf of the employer. It is important that businesses review all the benefits they currently provide or plan to provide in the future, to understand the implications of GST otherwise you could get it wrong and consequently you will need to pay the taxes and penalties during any future audit by the Royal Malaysian Customs (RMC). Money and any monetary awards given to employees in the form of salary or a cash allowance are not subject to GST as money is neither a good nor a service. It is important to note that an employer does not have to account for the output tax (tax charged on any taxable supply) for any employee benefits stated in the contract of service of the employee, and given free to the employee. Therefore it is advisable for the employers to review the employment contracts to consider whether employee benefits currently provided are covered within the employment contract because any left out will be subject to the GST output tax (tax charged on the supply of goods or services) and subject to the gift rule of RM 500 (gift of goods given to the same person in the same year up to RM 500 is not a supply and hence is not subject to GST). GST is not imposed on free services provided to employees since it is not regarded as a supply. The exception here is where free services are provided to connected persons or for the benefit of sole proprietors or directors of a company. Output tax needs to be accounted for based on the open market value of the services provided. The same principles apply to free goods provided to above persons. In summary output tax needs to be accounted for by the employer for free goods except in the following circumstances: 1. free goods provided to employees as stated in the contract of employment. 2. exempt supply 3. zero rated supply 4. supply under the RM500 gift rule 5. supplies where the input tax is blocked (e.g. club subscriptions, medical and personal insurance, family benefits, supply of a passenger car and rental of passenger car etc.) Can the employer claim the input tax incurred to acquire the goods or services to provide the employee benefits? Yes, he can recover the input tax as such benefits are regarded as used for the purpose of the business except where the supply to the employee is an exempt supply or where the input tax has been blocked as stated above or where the goods or services have been acquired from suppliers who have not registered for GST. Business goods say for example an office van, is provided free of charge to an employee but is also used by the employee for his private use, such use by the employee will be deemed to be a supply of services and hence subject to GST. The value of any goods provided free to employee but not covered by the contract of employment or the gift rule, will be based on the open market value. The above merely sets out the basic GST principles applicable to benefits provided to employee and connected persons. It must be reiterated here that it is very important to understand the impact of GST on each and every benefit an employer provides to the employee and mechanics of accounting for the input and output tax and finally the type of records you need to retain for seven years. All the above should ideally be integrated with your accounting system and related software. S.M. Thanneermalai is president of Chartered Tax Institute of Taxation Malaysia and a senior executive director of PwC.