Landmark GST Ruling – Agricultural Land Is Exempted From GST
September 14, 2020
SFSB v Menteri Kewangan & Anor
On 11 September 2020, the High Court allowed the application for judicial review by SFSB to quash the Minister of Finance’s (Minister) decision (which was made by the Director General of Customs (Director General) on his behalf). The Director General had erroneously determined that parts of the land that are intended to be used for commercial development by SFSB should be subjected to goods and services tax (GST).
SFSB was successfully represented by our Senior Partner, Datuk D.P. Naban and Tax, SST & Customs Partner, S. Saravana Kumar together with associate, Ng Kar Ngai.
SFSB is an established property development and investment holding company. In December 2016, SFSB had entered into a sale and purchase agreement to purchase five adjoining parcels of freehold land (the Land). The Land was being used for oil palm plantations and was zoned as agricultural land.
In March 2017, SFSB made a rezoning application to convert the zoning of the Land from agricultural to mixed development. Although SFSB’s rezoning application had been acknowledged, the rezoning application was subject to the fulfilment of certain conditions, including payment of the rezoning premium.
The legal titles of the Land were transferred to SFSB in September 2017. At the material time, the Land had not been rezoned from agricultural to mixed development as SFSB had appealed on the conditions imposed. Further, the rezoning premium payable had not been made known to SFSB.
The vendor of the Land subsequently issued a letter to the Director General to seek a written confirmation that no GST is chargeable for the supply of the Land. In response, the Director General held that while the sale of the Land, which was estate land used for oil palm plantations was an exempt supply, if it is found that the Land is intended to be used for commercial purposes, the Land or parts of the Land used for commercial purposes is subject to GST. On this basis, the vendor had informed SFSB that the sale of the Land is subject to GST.
Consequently, SFSB made an application pursuant to paragraph 2(2) of the Goods and Services Tax (Exempt Supply) Order 2014 (Exempt Supply Order) to the Minister. However, the Minister referred SFSB’s application to the Director General and requested the Director General to provide a response on behalf of the Minister. As a result, the Director General maintained that GST should be imposed on parts of the Land intended to be used for commercial purposes. Being aggrieved by the decision, SFSB applied for judicial review to set aside the said decision.
High Court’s Oral Decision
The High Court allowed SFSB’s application for judicial review on the following grounds:
GST treatment of the Land
Under item 1(1) of the Exempt Supply Order, a piece of land qualifies to be exempted from GST if the land is a land used (First Limb), or intended to be used and to the extent of it being used (Second Limb), or intended to be used (Third Limb), for residential, agricultural or general use purposes.
By employing the word “or”, it is clear that a supply of land qualifies as an exempt supply if either one of the above three limbs is fulfilled. In other words, if the Land falls under any one of the limbs specified, the Land would be an exempt supply.
Based on the wording of the First Limb, a supply of land would qualify as an exempt supply if the land is used for agricultural purposes. The Land in the present matter was estate land used for oil palm plantations. On the premise that the existing usage of the Land was for agricultural purposes, the Land would be land used for agricultural purposes and thus qualifies as an exempt supply under the First Limb.
By claiming that the Land is taxable based on SFSB’s future intention to develop the Land for mixed development, the Minister and the Director General are essentially invoking the Second Limb and the Third Limb to impose tax on a subject that is already an exempt supply. This would defeat the intention of Parliament in empowering the Minister to gazette the Exempt Supply Order, which is to exempt a taxable supply and not to impose tax on a subject.
Delegation of decision-making power
In the event there is a dispute as to whether a supply falls within the ambit of the Exempt Supply Order, paragraph 2(2) of the Exempt Supply Order provides that such question shall be decided by the Minister whose decision shall be final.
Paragraph 2(2) of the Exempt Supply Order is clear and unambiguous. Without any express provision to empower the Minister’s delegation, the Minister must exercise that power personally and the Minister is not empowered to delegate such authority to the Director General.
This recent decision dealt with a novel point of law in a GST case as to whether a supply of land used for agricultural purposes qualifies as an exempt supply under item 1(1) of the Exempt Supply Order.
In making its decision, the High Court expressed the view that it is essential to identify the status of the land at the time of supply. In the present matter, the time of supply is at the time when the Land is transferred or disposed of. At the material time, the Land was being used for oil palm plantations and was zoned as agricultural land. Accordingly, the Land is an exempt supply.
This decision further demonstrates that once a supply is already an exempt supply, the Minister and Director General are not allowed to wilfully disregard the exemption and look to a taxpayer’s future intention to impose tax on a subject that is already an exempt supply. Such an interpretation of item 1(1) of the Exempt Supply Order is not only arbitrary, but it also raises a further question as to when this intention should be determined.
Additionally, this case also serves as a reminder that a public authority has no jurisdiction to commit an error of law or act in a manner that is procedurally improper or in breach of the principles of natural justice. Such an error or procedural impropriety would render the decision susceptible to judicial review.