Why The Introduction Of The Petroleum Sales Tax In Sarawak May Not Appeal To Everyone

By TMR / Pic By BLOOMBERG

IN NOVEMBER last year, the Sarawak state government announced a proposed sales tax on petroleum products to increase State revenue.

The five per cent sales tax on petroleum products include amongst others, crude oil, natural gas, LNG, chemical based fertilisers and gas-to-liquid products, and is expected to generate an estimated revenue of RM3.897 billion and diversify the State’s revenue base. Analysts say the amount, which has been factored in the State’s 2019 Budget, could be much higher.

Merely two months after, the State announced that the five percent sales tax will only be imposed on sale and delivery of petroleum products outside the State.

While introduction of a sales tax on petroleum products may result in improving the coffers of the State, in the long run the increased production cost may make the petroleum industry less attractive to investors.

It could also lead to a reduction in the Federal Government’s revenue, with Finance Minister Lim Guan Eng calling the move “unreasonable”.

Lim’s view was echoed by Economic Affairs Minister Datuk Seri Azmin Ali who said the five percent sales tax in Sarawak will have a negative impact on competitiveness and the national oil company Petronas’ earnings. As the national energy company is the nerve centre of the country’s oil and gas sector, Petronas’ earnings are critical to the wider economy. And Petronas’ level of profitability will remain important to the Federal Government as political pressures, lingering debts and uncertainties in the global trade front would see the Government hard-pressed to sustain the nation’s economic growth.

With Sarawak State posting a surplus budget every year, industry watchers are puzzled as to why is there a need to impose sales tax on petroleum products, a move that will make the sector less competitive.

More importantly, is it permissible for the State to impose sales tax on petroleum products when petroleum products come under the Federal List of the Federal Constitution?

Article 96 of the Federal Constitution states that “no tax or rate shall be levied by or for the purposes of the Federation except by or under the authority of federal law.”

According to Schedule 10 No.7 of the Federal Constitution, sales tax covers other items, as petroleum is already covered under the import duty, excise duty & export duty. Clearly petroleum products cannot again be included in the State’s sales tax. The State’s insertion of new items into the Sarawak State Sales Tax (SSST), could result in possible duplication and multiplicity of tax collected.

Industry watchers say arbitrary tax increases almost always result in a loss of confidence, and could impede industry growth or worse, may lead to an exodus of oil and gas players from the State.

According to media reports in January this year, Chief Minister Datuk Patinggi Abang Johari Openg was quoted as saying that “under the constitution, there’s no capping (on the sales tax rate). We can even impose 10% but we considered the economic environment and (decided to) just impose 5%.”

What this means is that the proportion of sales tax in the State can be reviewed at any time and may even rise above the current 5%, resulting in greater negative impact to the industry.

Observers also note that if the sales tax is unpalatable to industry players, they can choose to produce much less from the State and focus on producing more from the other states, resulting in less revenue for the State.

Tax increases, they say, particularly during a depressed period for the global oil and gas sector, is not a good idea. “The one thing that is going to cause investors to think twice about coming here is a tax rise. Sarawak needs to find other sources of revenue or other ways of boosting its tax collection,” says an industry watcher.

Political observers say it is premature to impose a sales tax on petroleum in Sarawak when Putrajaya is still reviewing the Malaysia Agreement 1963 (MA63). Discussions are ongoing, and the thorny issue of dealing with oil and gas ownership has yet to be resolved.

With long-term national interest and investor concerns at stake, would it be wise to sacrifice the future for quick gains?