The Malaysian government has confirmed the imposing of the digital tax initiative. Finance Minister Lim Guan Eng said during his Budget 2019 speech that the service tax will be imposed on online services imported by any Malaysian business, which will be required to account for and pay for the tax from 1 January 2019 onwards.
For online services imported by consumers, Lim said foreign service providers will be required to register with the Royal Malaysian Customs, charge and remit the relevant service tax on the transactions with effect from 1 January 2020. Such services include but are not limited to downloaded software, music, video or digital advertising. According to Lim, these measures will neutralise the cost advantage faced by physical retailers against their virtual storefront counterparts, especially those operated by foreign entities.
Meanwhile, imported services will be subjected to service tax beginning 1 January 2019, so as to ensure that local service providers such as architecture, graphic design, IT and engineering design services are not “unfairly disadvantaged” against their foreign competitors.
In a statement to A+M, Shopee’s regional managing director, Ian Ho, said e-commerce in Malaysia is still in infancy, since online retail only accounts for 2% of total retail sales in Malaysia, as compared to the above 10% e-commerce penetration in markets such as China, US and South Korea. As such, a digital tax may discourage MNCs and corporations from adopting e-commerce and make it “especially difficult” for SMEs to bring their businesses online. Also, Ho said the increase in prices of online goods could potentially restrict the growth of online shopping, thereby impeding the growth of Malaysia’s digital economy.
The online retail ecosystem thrives because of the lower barrier to entry and low operating costs for businesses, which also benefits consumers with lower prices.
As such, introducing a tax at this time may “discourage the strong growth momentum” in e-commerce in Malaysia in the past few years, and weaken the ability of all businesses to expand online, Ho said.
“Malaysians and local businesses already pay a 6% sales and service tax. An added on digital tax will lead to an increase in cost that may discourage both buyers and sellers. Furthermore, a digital tax may encourage users to seek alternative digital platforms which are less regulated, potentially leading to more fraud cases,” he said. Ho added:
Without a proper system in place, a digital tax may end up causing more harm than good not only for the Malaysian economy but for the society as well.
Also weighing in on the issue is Alvin Gill, country general manager of ShopBack Malaysia, who hopes the government would “tread carefully” on the introduction of the digital tax. “Negatively impacting the environment will only encourage the movement of talent and funding to other markets with higher potential,” Gill said.
Meanwhile, executive director of online payment solutions iPay88, Chan Kok Long, said in an online statement prior to Budget 2019 that Malaysia’s digital industry is not ready for a digital tax as it is “still struggling to make profits”. Like Shopee’s Ho, Chan described the marketplace to still be in infancy stage and several companies within the digital industries are still attempting to breakeven.
“At the same time, these new tech companies are taking risks while continuously investing in R&D to stay ahead. Taxing them now may even push them to collapse or seek other countries as their base,” Chan said.
He added that the introduction of the digital tax will hinder innovation and the growth of the industry, in comparison to international players entering the market. While tax is no doubt an important revenue for the government, Chan suggested the government to tax based on profits rather than imposing an industry based tax. For example, international players should be taxed as they have established themselves and are able to expand into different countries, he said.
Gaurav Bhasin, CEO, Mudah.my said that Mudah.my welcomes the various policies that are aimed at boosting ownership of properties below RM500,000. This will help more Malaysians, especially those within the low-middle-income group own their first home.
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