Introduction

The contra system service tax malaysia mechanism allows eligible taxable persons to deduct service tax previously paid but later refunded to customers. This deduction can be offset against future service tax payable through Form SST-02. This guide explains how the Contra System works, eligibility conditions, timelines, and compliance requirements under the Service Tax Act 2018.

What Is the Contra System?

The Contra System is a deduction facility approved by the Director General (DG) of Customs that allows a taxable person to set off service tax previously paid but later refunded to customers due to cancellation, termination, or other valid reasons.

Instead of applying for a cash refund, the taxable person can deduct the amount directly from the next service tax payment.

Eligibility Conditions for Contra System

To qualify, all the following conditions must be met:

✔ 1. Service tax was already paid to RMCD

The taxable person must have charged and paid the service tax in a prior taxable period.

✔ 2. Service tax was refunded to the customer

Refunds must be due to:

• Cancellation of services
• Termination of services
• Price adjustments
• Other reasons approved by the DG

✔ 3. Application to DG is required

The DG must approve the business before Contra System can be used.

✔ 4. Deduction must be made within 1 year

You must deduct within one year from the date of service tax payment, unless the DG grants additional time.

How the Contra System Works (Step-by-Step)

Step 1: Refund service tax to customer

Your business must refund the exact service tax amount to your customer.

Step 2: Apply to the Director General

Submit an approval request to RMCD. Once approved, you may proceed with deductions.

Step 3: Deduct refunded tax in SST-02 return

Report the deduction under Column for Deduction / Contra in the SST-02.

Step 4: Set-off against payable tax

If deduction ≤ tax payable → reduce SST payment.
If deduction > tax payable → balance carried forward to next taxable period.

Excess Deduction: Refund Option (Section 34A(2))

If there is still a balance after contra, the taxable person may apply for cash refund under Section 34A(2) of the Service Tax Act 2018.

Requirements:

• Submit a written refund application
• Provide proof of service tax paid and refunded
• Ensure imported or local services meet all criteria

Transactions Eligible Under Contra System (Practical List)

In practice, RMCD accepts Contra claims for:

1. Termination of agreed transactions

E.g., customer cancels yearly subscription halfway.

2. Discounts given AFTER service tax payment

E.g., credit note issued after SST already paid.

3. Price reduction or adjustment

E.g., correction of overbilling.

4. Cancellation of insurance policy before expiry

5. Reduction of insurance premium due to lower risk coverage

Compliance Tips for Businesses

• Always keep evidence of refund (bank-in slip, credit note, invoice).
• Maintain communication trail with customers.
• Apply for DG approval before making any contra.
• Ensure contra appears clearly in SST-02.
• Keep documentation for 7 years as required by RMCD.
  

Key Takeaways

• Contra System allows service tax refunds to be offset against future SST payable.
• Requires Director General approval before use.
• Deduction must be claimed within 1 year from tax payment.
• Excess deductions may be carried forward or refunded under Section 34A(2).
• Only certain transactions are allowed under RMCD practice.

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If you need professional tax advisory services regarding the Malaysia Income Tax Act 1967, our team is ready to assist you. Contact us here to discuss how we can support your business.