New digital tax might see backlash from online retailers

IDEAS says tax could affect start-ups and SMEs, as well as raise prices for consumers

By SHAZNI ONG / Pic By TMR

The government’s intention to implement a new tax system on digital transactions could result in a backlash in the online retail sector, which could lead to price increases that could hurt consumers.

Institute for Democracy and Economic Affairs (IDEAS) said the introduction of the tax could affect start-ups and small and medium enterprises (SMEs).

“Although it could increase revenue in the short term, a new digital tax in Malaysia would increase the costs of digital goods and services, which in turn would raise prices for local consumers and businesses.

“This could slow the development of the digital economy in Malaysia, particularly for start-ups and SMEs,” IDEAS said in a statement yesterday.

According to IDEAS, there are two new proposed taxes — namely the “direct taxes” that target the profits of foreign digital companies doing business in Malaysia and the “indirect taxes” that apply consumption taxes (like the Sales and Services Tax or SST) to foreign companies selling digital goods and services into Malaysia, paid by the users.

“If Malaysia introduces a direct digital tax, that might encourage other countries to do the same, which would be damaging for Malaysian firms looking to export to those markets.

“As an open trading nation, Malaysia stands to benefit more from a pro-trade, pro-in- novation approach to the digital economy,” IDEAS said.

It added that an “indirect tax” on digital activity (ie applying SST to digital purchases from abroad) is less controversial than a new “direct tax” and many countries have already taken this approach.

“Doing so in Malaysia would also level the playing field between foreign and Malaysian companies, as local digital firms are already subject to SST.

“It would, however, still increase the costs of digital goods and services in Malaysian and drive up prices. Also, with the recent switch from the GST (Goods and Services Tax) to SST, implementation would have to be handled with care,” IDEAS said.

Meanwhile, online retailers strongly opposes the government’s consideration in introducing a new digital tax system as there are already too many taxes going on.

Malaysia Retail Chain Association VP Datuk Liew Bin (picture) said the government should address minimising tax leakages instead of charging more taxes.

“How many times do we need to be taxed? First of all, we all pay taxes. Income tax, the 10% withholding tax which is imposed on ads on social media, GST (previously) and SST (only for those who import goods and materials from overseas).

“I feel this would be unfair if the government decides to introduce the digital tax. This would greatly affect the online e-commerce community,” said Liew.

He also urged the government to clearly define the digital tax before introducing it.

“Running and surviving in the e-commerce industry is not as cheap as the government thinks.

“We spend a lot on online advertising in order to promote our products. Without advertising, our products will not get sold.

“If the government decides to introduce the digital tax, more costs would be incurred,” added Liew.

Liew, who is also CEO of Bagman Corp Sdn Bhd, said he will bring up the matter further among the association members and will observe the situation closely.

Christy Ng Sdn Bhd founder Christy Ng echoed Liew’s viewpoint and described the tax as “ridiculous for online business”.

“This tax on e-commerce businesses is not practical. We already spend so much on SST and with the addition of a new tax, this would squeeze all the business dry. How many tax systems do we need?,” Ng said, adding that she finds this whole tax on online business as “vague”.

Ng also raised the question on how the tax would help in modernising the economy in the country.

“Firstly, they need to properly define what is an online business. I can be an old aunty selling nasi lemak, but I have an online website which you can place your booking. Are you going to tax me just because I adopt technology to modernise my business?

“And how does this tax on online businesses encourage us to work towards becoming a digital nation? It doesn’t make sense,” Ng said.

She added that online retailers in the e-commerce industry use a lot of Facebook and Instagram ads and the possible implementation of the tax would incur additional cost.

“When the government taxes Facebook or Instagram, they won’t pay this additional charges. Malaysian companies end up paying this extra tax on this services.

“As Facebook and Instagram are based in Ireland, this tax will be passed on to the user instead.

“As such, everyone won’t adapt to websites because they would need to pay a different set of tax,” Ng said.

IDEAS has also pointed out that there is no definitive evidence that digital companies pay less tax than traditional companies, but there are disagreements over where that tax should be paid.

“It is important that agreement on this issue is made by all countries collectively, to avoid double taxation (companies being taxed on the same profits twice) and a slow down in the digital economy,” said IDEAS.

Last Wednesday, Deputy Finance Minister Datuk Amiruddin Hamzah said the move is expected to strengthen and expand the government’s revenue base, in light of the growing digital economy.

He added that the tax rate on digital revenue has yet to be decided as the government is still studying the matter.