A Goods and Services Tax or GST is a tax, which is imposed on the sale of goods and services in Papua New Guinea or the importation of goods into Papua New Guinea. GST is imposed at a rate of 10% of the value of the goods and services sold (or goods imported).
Three Steps to Understanding GST
Businesses which sell goods or services collect GST and pay it to the Internal Revenue Commission less the credit on the GST the business was charged on purchasing its supplies. This is done using a monthly GST return.
GST is not like Income Tax or Salary and Wages tax where tax is calculated on earnings. GST is a consumption tax that is ADDED to the selling price (including profit) of goods and services.
A simple example is as follows.
|GST you have collected from sales||K1000|
|Less GST you have paid to suppliers||750|
|You pay to IRC||K 250|
A business with an annual turnover greater than, (or expected to be greater than) K250,000 must register for GST. Businesses with turnovers less than K250,000 per year can register for GST on a voluntary basis. Registration forms are available from any IRC GST office.
A registered business can take advantage of GST credits on the GST paid to their suppliers. The credits are deducted from the GST collected from their customers (Sales) to reduce the amount of GST payable to the IRC. Refer to the previous example.
Businesses with turnovers greater than K250,000 which do not register will be required to pay the GST that should have been collected on the sales. If turnover (not net profit) is less than K100, 000 per year then registration is voluntary. Unregistered businesses cannot charge GST.
When a registration is approved, a GST registration number will be issued. This entitles the business to charge and collect GST on sales. There is also a requirement to issue Tax Invoices. Refer to (16)-Tax Invoices for more information. Every month a GST return is completed and must be sent to the IRC by the 21st of the following month at the latest. For example, a Jan XX return is to be sent to the IRC no later than the 21 February XX.
Companies with branches in more than one province, or associated companies with a common and majority shareholding, may register all branches as a group and submit one GST return for the whole group.
A multi-province group is required to list the total sales and GST collected in each of those provinces in the GST return. This enables the IRC to distribute to the Provinces the GST collected in those Provinces according to the GST Distribution Act 2003. The form and method of calculation are on the GST return.
GST registration can be cancelled by writing to the Commissioner and providing an explanation as to why the registration should be cancelled. On deregistration a business cannot charge GST or issue Tax Invoices.
Cancellation will not occur if the business has outstanding GST returns. A cancellation of registration will not free a business from any future audit actions or inquiries.
Special provisions apply to assets retained by the business after a cancellation of registration. Refer to (43) – Sale of Business Assets.
The IRC conducts audits on businesses to ensure that they are complying with GST laws. Other taxes will be checked prior to the audit and referred if necessary to the relevant sections. Prior to an audit;
Registered persons/businesses who do not comply with the Goods and Services Tax Act may be subject to fines up to K 50,000.
Businesses incurring expenditure that exceeds the revenue generated during a month of trading will result in a credit.
The IRC examines credits for accuracy, honesty and fraud. Document examined include tax invoice/s, GST calculations, source documents or a list of suppliers to verify the refund prior to the release and/or the reassessment of the refund will be requested.
GST may be accounted for in one of two ways. When a business registers, it will automatically go on the Invoice (accruals) basis.
Businesses have an option to adopt the payment or cash basis providing certain conditions are met and requested in writing. These conditions are;
Businesses required to account for GST on the accrual (invoice) basis will account for GST on sales (output debits) on the issuing of a Tax Invoice or on receipt of income for that sale whichever occurs first.
GST in respect of expenses (input credits) are claimed on the receipt of a Tax Invoice whether the expenses have been paid or not. Input credits cannot be claimed unless there is a Tax Invoice on file to verify the claim.
Businesses accounting for their GST liability on a payments (cash) basis will record GST on sales in the month in which payment has been received.
Input credits are claimed when the payment has been made. The business must retain tax invoiceâ€™s and receipts on its file to verify the claim. A cashbook or debtors ledger should be used by the business to record income received and payments made.
Tax Invoices are the same as any other invoice a business issues but with the following requirements. The words TAX INVOICE and the GST registration number are to be clearly visible on the invoice. An invoice without these requirements is not a Tax Invoice and will not be acceptable for use as an input credit.
The GST charged must be shown on the Tax Invoice or alternatively, the words â€œThis invoice includes GST charged at 10%â€ must be clearly written on the Tax Invoice. The person who receives your invoice may want to claim GST as a credit and can only do so if the Tax Invoice meets the requirements.
These requirements apply to all Tax Invoices issued. \
Unregistered persons cannot issue tax Invoices. Tax Invoices issued by non-registered persons are illegal. This is a serious offence and action will be taken against offenders as well as requiring payment of the GST charged to the IRC without the allowance of any input credits.
Credit notes are raised when the price for a supply is reduced after a Tax Invoice was issued or goods returned.
Credit notes must have the registration number of the business issuing the credit note and the Kina amount of the credit note and the GST applicable.
Debit notes are issued when the price is increased after a Tax Invoice was issued.
Debit notes, as above, require the trade name and registration number of the supplier including the amount of the increase and the GST applicable.
An agent is a person or a business that buys or sells goods and services on behalf of someone else (the principal). The principal is still the buyer or seller and not the agent.
A taxable activity is the conducting of a business activity whether or not that activity results in a profit. It involves the acquisition of and the provision of goods or services for a consideration, that is the purchase or sale of goods or services for money or trade, for instance the trade of one good for another.
Zero rated supplies are supplies taxed at zero percent. Zero rating differs from being exempt. Zero rating is a taxable activity while the supply of exempt goods and services are not taxable activities.
Registered persons making zero rated supplies do not add GST to their zero-rated sales and do not return GST on zero rated income. Being a taxable supply, they may claim input credits for GST paid on producing those supplies. Zero rated suppliers may find that they may be in a GST refund situation.
Zero rated supplies include:
This list is not conclusive. Further information on zero-rated supplies is available from your accounting professional or the IRCâ€™s GST Advisors.
The sale of a going concern is the sale of a business that is sold â€œlock, stock and barrelâ€ with the business being operative and able to carry on as usual at the time of sale.
The sale of a going concern is zero rated only between registered people. Both parties must agree to zero rating in writing for the sale to be zero-rated. There is no legal requirement for an operative business to be zero-rated if the vendor does not want the sale to proceed as a zero rated sale. In this instance, the sale is a taxable supply.
If part of a taxable activity is sold and that part is capable of separate and independent operation, that sale may be zero-rated. If part of the business is sold in more than one part and that part is not capable of separate and independent operation then the sale of that part will be subject to GST.
Before a sale is executed, both parties should contact the IRC for advice. If the sale is executed and we deem the sale taxable then a reassessment may result.
Exports or goods intended for export are zero-rated. Zero-rating will occur if the goods are exported within 28 days, unless unforeseeable circumstances delay the shipment of goods. Goods not exported within the 28-day period will be charged with tax unless the Commissioner allows an additional time for export.
Goods purchased for export by international travellers from duty free shops (at airports or ports) are zero-rated.
Tourists purchasing goods from a retailer (outside of a bonded area) are entitled to zero rate their purchases providing the retailer packs and dispatches those goods to a place outside of PNG and can provide satisfactory documentary evidence to the IRC that the goods have left the country.
Goods imported by diplomatic missions for use by the missions or imports by a diplomat for personal use are exempted from GST. Goods purchased within Papua New Guinea for the use of missions and those for diplomats and their families use are charged GST at the point of sale. Both missions and approved diplomats are to register for GST to claim the input credits on purchases.
To qualify for an input tax credit, the credit will be subject to the same processes of verification that apply to all registered people. The records are to be supplied to an officer of the Internal Revenue Commission on request.
GST at the rate 10% is imposed on goods imported into Papua New Guinea. GST is payable on the CIF value â€“ Cost Insurance and Freight. GST is collected at the port of entry. The customs entry (Form 15) is a â€˜Tax Invoiceâ€™ for which an input credit deduction can be claimed.
Goods imported temporarily into Papua New Guinea under the relevant provisions of the customs law, are zero rated for GST purposes and will not have any import duties applied.
Goods supplied in connection with temporary imports e.g., repairs and maintenance on an overseas ship, the repair of an overseas container, re-stocking of provisions etc are zero-rated.
Temporary imports remaining in Papua New Guinea for a period longer than permitted by Customs, will be liable to duty and GST. Customs may require security in the form of a bond for goods brought into Papua New Guinea under the temporary import provisions of the Customs law. A bank cheque payable to PNG Customs will be held in trust. A tax invoice (Customs F15) will not be issued immediately.
Should the temporary import leave Papua New Guinea within a 12-month period, the bond is returned to the importer.
If the temporary import remains in the country for longer than 12 months it is deemed a permanent import and the bond and GST will be forfeited. A Tax Invoice will then be issued by Customs for the supply. Anyone importing goods or services, as a temporary import must keep a copy of Import Entry issued by IRC Customs.
Sales of goods to prescribed foreign aid providers are zero-rated. Purchases by contractors for use in aid projects are generally subject to GST but this can be reclaimed as input tax credits if the contractor is registered for GST. The same rules apply to imports of goods for aid projects.
Aid donors who are prescribed foreign aid providers under the GST law, or who have designated aid status, will not pay GST to Customs on imports. Aid donors or contractors involved in aid projects should contact the GST Division of the IRC if they require more specific advice about how the GST affects them.
Fine metal is defined as:
Exempt supplies are supplies where GST is not added to the sale price of goods or services. A person who makes an exempt supply cannot claim input tax credits for purchases of business inputs they make in respect of that supply. nor can GST be claimed back on the GST paid on acquiring those goods. Exempt supplies are not the same as zero-rated supplies. A person who makes a zero-rated supply can claim input tax credits for purchases of business inputs they make in respect of that supply. A business that makes only exempt supplies cannot register for GST.
Some exempt supplies include:
Certain rules apply to businesses involved with taxable and exempt supplies.
Apportionments are required to separate GST paid on goods and services used in making taxable supplies and exempt supplies.
An example would be rentals and electricity on premises used for pokies (an exempt supply) and a bar (a taxable supply). A proportion of turnover for the bar and pokies is made and that taxable percentage (the bar) when applied to the GST on inputs will result in the portion of the inputs credits claimable.
The provisions dealing with the financial services sector are broad and complex. Detailing all the options within this category is beyond the scope of this guide. Questions relating to this sector may be directed to the IRCâ€™s GST Division or your tax adviser.
Supplies of medical and related services by hospitals, doctors, dentists, opticians, nurses or aid post orderlies are exempted from GST. GST cannot be charged on services provided.
Supplies of prescription drugs and medical prostheses by a medical practitioner or prescription lenses with or without frames by an optician are zero-rated.
The export of unprocessed and processed timber is zero-rated. Unprocessed or processed woods are subject to GST if sold within PNG.
Educational institutions receive GST inclusive funding from the Government. An educational institution can claim GST paid only on the purchase of goods purchased specifically on items directly relevant to a pupils education, such as textbooks, tuition, boarding services and writing materials. GST cannot be claimed on repairs and maintenance to the school or for purchases of items like water, electricity and telephone service.
Educational institutions will not charge GST on school fees. However, they must charge GST if they sell educational goods to persons other than children attending the school or their parents.
GST is charged on all vehicles sold by GST registered motor vehicle dealers (MVDs). Registered MVDs purchasing second hand motor vehicles or trade-ins from unregistered persons can claim an one-eleventh of the value of the vehicle as input tax credit. Dealers purchasing vehicles from GST registered persons must pay GST on those purchases and request a tax invoice from the vendor.
GST input credits can be claimed only on commercial vehicles with the exception of dealers in motor vehicles or vehicle rental operators.
Commercial vehicles are defined as trucks, utilityâ€™s or vans that carry 1 tonne or more or buses that carry 9 or more passengers. Vehicles outside these specifications are regarded as private vehicles even though a vehicle may be used partly or totally for business. No GST on the purchase can be claimed on private vehicles.
Non-commercial vehicles used in the course of business can claim GST input credits on fuel, repairs and maintenance, etc. All private usage of vehicles requires an apportionment (private use adjustment) between business and private use.
Small holders and farmers with turnovers less than K100,000 per annum are permitted to increase their prices to buyers by 1%.
The buyers then claim as an input tax credit the 1% paid to growers, providing the buyer issues a receipt stating who the seller was and the amount paid for the produce plus the extra 1% paid.
Non-profit bodies or charities involved with community work may be granted zero-rated status. Zero-rated status applies to local purchases and goods imported for use in the organisations charitable activity.
Charitable organisations conducting commercial activities must charge GST on the goods and services sold if their annual turnover of commercial activities exceeds K100,000. An organisation not registered for GST and involved in a commercial activity where the turnover is greater than K100,000 per annum, must register.
Donations are unconditional gifts. A donation is defined as a gift that will not recognise, promote, advertise or have any benefit to the donor. The donor cannot claim an input tax credit on a donation. If the donor gains some tangible benefit or the donation it is not an unconditional gift and the recipient, if registered for GST, will pay 1/11 of the value of the donation as GST to the IRC.
Publicly acknowledging an individual or company as a donor by way of mention is acceptable. The donor must not gain or obtain any commercial or collateral benefits by the donation and its public reference. Donations may be in the form of money or goods. Sponsorship is not a donation.
Commercial sponsorship of an event in whole or in part is not a donation. Classified as a conditional gift, sponsorship results in publicity and promotion for the sponsor, and is commercial in nature. In these circumstances, the recipient of sponsorship money is regarded as making a supply of a service (for example, general publicity or specific advertising) to the sponsor. If the recipient is registered for GST it is required to pay 1/11 of the value of the sponsorship to the IRC as GST.
The supply of second-hand goods between GST registered people is a normal supply of goods between two or more registered persons. GST is charged and the supply supported with a Tax Invoice. The second-hand goods provisions do not apply.
GST registered persons buying second hand goods from unregistered persons for use in the business can claim an imputed GST input credit of 1/11th of the amount paid.
Livestock and primary products are not second hand goods.
To claim a GST input credit for second hand goods the following requirements apply.
Lay-by sales are determined by the â€œtime of supply rulesâ€. The goods remain the property of the vendor until final payment is made. When payment for the goods has been made, the title or ownership of those goods pass to the purchaser.
Retailers will account for GST on the lay-by sale when the final payment has been made, resulting in the ownership of the goods passing to the purchaser. This also allows the goods to be returned to stock without a GST adjustment if the lay-by sale is cancelled.
Where a lay-by sale is cancelled and the vendor retains a portion of an amount paid by the purchaser then that portion retained is subject to GST.
Private usage of business assets are calculated as a percentage of the overall use. GST relating to private use cannot be claimed as an input credit and instead the value is entered in line 16 of the GST return.
The sale of business assets is a sale by the company and GST is payable on the sale.
Assets purchased for business use and subsequently used in full or in part for private or exempt use are subject to an adjustment based on the private usage. A Line 16 adjustment is required.
Insurance policies other than life insurance are subject to GST. Businesses making claims to an insurance company for compensation for loss or damage are required to return 1/11th of the insurance moneys received as assessable income.
Insurance companies can claim 1/11th of any non life insurance money paid out on a policy. Should the insurance company recover any money from a paid out policy then the insurance company has to return 1/11th of this as output tax.
Leases, residential and commercial rents are subject to GST on the proviso that the lessor is registered for GST. Lessorâ€™s whose turnover exceeds K100000 must register and will be liable for GST if they do not register. Lessorâ€™s whose turnover is less that K100000 may choose not to register. If they donâ€™t register they cannot charge GST or claim input tax credits on things they buy to lease to others. The lessor is required to register for GST if total â€˜salesâ€™ (rents received and any other sales) are greater than or are likely to exceed K100, 000 per annum.
There is no GST on the sale of land. It is an exempt supply.
GST applies to the sale of improvements on land. Improvements refer to the improvements to land by the placement of buildings or other structures. The value of improvements is the value of those improvements at the time of valuation and not the difference in value between last sale and the present sale.
Sales of Property
The valuation of property is at open market value. Valuations by the Land Transfer office are not acceptable for valuation purposes.
A recent valuation by a registered valuer is required in all instances of the sale of property. Commercial property sales require a minimum of two valuations by independent valuers. If the IRC doubts or questions the valuation of a property, the IRC may request an additional valuation by a valuer of its own choice, the cost of which will be borne by the vendor.
The valuation must separately show the value of the land and the value of the improvements.
General Rules of GST in Property Transactions
Sale of a Going Concern
A sale of a going concern is a zero-rated transaction only if sold between two GST registered persons, or a person who will become registered immediately after transfer. Zero rating only applies where that concern can be operated as an independent business immediately after the sale.
Zero-rating will apply if one of the following criteria is met-
An employee housing scheme or similar home owning scheme providing all or part of the employees housing finance may not claim an input credit for the GST (if any) that applied to the purchase of the houses. The housing scheme operators are acting as agents and financial service providers for the purchaser.
Real Estate Agents, Lawyers
Sale of Property â€“ Other issues
Money paid as bond money is not subject to GST until all or part of that money is used. If the bond is refunded in full, GST will not apply. If all or a part of the bond money is used, the amount deducted from the bond will be treated as a GST inclusive amount. This deemed as income to the bondholder.
Persons who pay a bond cannot claim GST on the payment of the bond to the bondholder. If all or a part of the bond is used then the payer of the bond can claim GST on the amount that has been used.
GST is payable as hire purchase payments are made. The following rules apply:
A hire purchase agreement will clearly show the principal amount borrowed, the monthly hire purchase charge and/or the interest charged.
Leases are not hire purchase agreements. GST is payable on the value of each lease payment at the time the payment is due or when actually received, whichever is the earlier.
The GST law states that all businesses must keep and maintain accurate records and full accessibility of those records for checking purposes. The Internal Revenue Commission (IRC) is an independent government department appointed to examine accounting/business records on behalf of the Government of PNG. Records must be held in Papua New Guinea, written in English and must be kept for a period of seven years.
Records may include:
The record keeping requirements of a business will depend on the type of business it is. Some businesses do not generate much paperwork, others do.
The IRC requires access to and examination of Tax Invoices, proof of payment and proof of earnings. Businesses without evidence of earnings and expenditure businesses are not only committing an offence, but will be subject to reassessment of their monthly returns and may incur penalties.
If a business has doubts about the records or methods of record keeping required, an accountant will assist in setting up a method of recording appropriate for the business and its obligations under the law.
If income and expenditure cannot be determined accurately due to poor record keeping, or we regard income and expenditure as being unrealistic for the business, IRC auditors will determine what the income and expenditure should be. This will result in a reassessment of the businesses income and expenditure and the recalculation of the monthly returns.
A Tax Invoice is a record of a purchase or a supply of goods or services and must show certain additional information.
A supply of more than K50 is to be supported by a Tax Invoice to claim a GST input on a purchase. For supplies less than K50, a receipt is acceptable.
A registered person can only issue one Tax Invoice for each taxable supply. Lost invoices can be replaced by requesting the supplier to provide a copy of the invoice in which they have 28 days to provide. The copy is to be marked â€œCopy Onlyâ€.
For supplies of more than K200 the Tax Invoice must clearly show the following:
For supplies of K200 or less (GST inclusive),a simplified Tax Invoice is permitted. It must show:
A Tax Invoice is not required for supplies of K50 or less. To claim GST back, a receipt for the purchase is required showing the suppliers GST registration number and details of the goods purchased.
The GST return has all the instructions you need to complete the return. The back of the return has more detailed instructions if any explanation is required. If you have difficulty understanding the form or difficulty completing it, phone the IRC Advisory Section for assistance.
Where a business operates in more than one province, total sales for each province are to be declared on the page of the GST return containing the remittance advice. The back of the return has an example of the calculation. This will ensure that the sales in more than one province are allocated to the province in which they occur. This ensures that each province receives its correct share of the Provincial Distribution of GST.