By Mohd Noor Musa, Research Analyst, Institut Masa Depan Malaysia
The introduction of the 10 percent sales tax on imported low-value goods (LVG) below RM500 sold online effective Jan 1 next year, is said to level the playing field for businesses in Malaysia, especially for small and medium-sized enterprises (MSMEs). Or will it result in the other way round?
Is it fair for small-time enterprises to be imposed with such a tax to address tax treatment disparity between goods sold by retail businesses and online businesses?
The imposition of sales tax on LVG may not be beneficial to small-time enterprises, after all.
While the government’s intention to level the playing field between traditional brick-and-mortar retailers and online marketplaces is good, the impact on MSMEs could be disproportionate.
Small-time businesses – particularly those operating in the e-commerce space, for instance – may face additional costs and administrative burdens. These businesses often operate on thin margins and may not have the resources to absorb the increased costs.
Moreover, small-time enterprises may find it challenging to compete with larger retailers that have more resources and economies of scale in this challenging time.
The government should think of other revenues than impose this tax which will particularly affect the M40 and the B40 groups. These groups are mainly the ones who run small enterprises.
Not as advantageous
Some critics argue that the new tax could disproportionately impact low-income consumers, who are more likely to purchase LVGs online.
All this will only exacerbate income inequality and further disadvantage vulnerable communities.
The Malaysia Association of Tax Accountants stated that the Sales Tax (Amendment) Bill 2022 would further affect consumers, beleaguered by rising costs due to higher inflation and the weakening of the ringgit.
Some experts have suggested that alternative solutions be explored to address the tax treatment disparity between traditional retailers and online marketplaces.
For example, they suggest that a value-added tax (VAT) system would be more effective in capturing digital revenues and addressing tax treatment disparities as it applies to all goods and services, regardless of their sale channel.
Some ambiguities on the goods or classes of goods to be taxed need to be explained and addressed clearly. The type of products classified as LVG must be identified or listed by the government or the relevant authorities to avoid irregularities.
Tax evasion remains a significant issue in the country’s tax system, with estimates suggesting that up to 30 percent of taxes go uncollected each year.
This is despite the government taking various measures to combat tax evasion, such as increasing penalties for non-compliance and implementing stricter enforcement measures.
However, some critics argue that more needs to be done to address the root causes of tax evasion such as corruption and lack of transparency in the financial system.
Ample time is required for small businesses to understand the system, to enable them to transition to this new requirement.
In terms of competitiveness, MSMEs in this country may become less competitive compared to their regional counterparts as neighbouring countries such as Singapore and Thailand do not impose similar taxes on LVGs.
As such, the imposition of this tax could result in a loss of market share and reduced demand for MSME products, especially for bumiputera entrepreneurs.
MSMEs also may face additional administrative burdens in complying with the new tax regime such as tracking and reporting low-value imports, which could be time-consuming and costly.
It could also impact the cash flow of those businesses as they may need to pay the tax upfront when importing or selling LVGs, which could put a strain on their working capital.
In the end, consumers may change their purchasing behaviour, opting to buy LVGs from neighbouring countries or online retailers that do not charge the sales tax. This could result in a decrease in demand for SME products and further impact their sales and profitability.
The implementation of the sales tax will increase the costs for MSMEs that import or manufacture such goods. This vicious cycle will affect just everyone – higher prices for consumers and negatively impact MSMEs’ sales and profitability.
Ultimately, any policy decision should take into account the potential impact on small-time enterprises and vulnerable communities for equitable distribution of wealth and economy.
Although the intention of imposing this tax is good to provide a more level playing field to help retail businesses, the mechanism of imposition must be put in place to avoid confusion, especially among consumers and business owners.