• The 10% sales tax on low-value goods (LVG) costing RM500 and below sold online has been implemented from 1 January 2024

• The objective is to promote equitable and fairer treatment between LVG purchased from overseas and locally

• Tax on imported LVG could boost consumer demand for local products

• LVG tax would benefit the government in revenue collection

• The implementation of the LVG tax as an interim measure

The Sales Tax on low-value goods (LVG), which had been deferred previously, has been implemented from 1 January 2024. The Royal Malaysian Customs Department (RMCD) announced the implementation of this tax, which was first mentioned during the tabling of Budget 2022.

To recap, the Sales Tax on LVG legislations were gazetted in December 2022 and came into operation on 1 January 2023. The date for charging and levying the Sales Tax on LVG was originally scheduled to be on 1 April 2023, but was deferred.

What is Low Value Goods Tax?

The LVG tax is a sales tax imposed on low-value goods (LVG) sold online and brought into Malaysia by land, sea, or air. The tax rate for LVG in Malaysia is 10%. LVG refers to all goods (excluding cigarettes; tobacco products; intoxicating liquors; smoking pipes (including pipe bowls); electronic cigarettes and similar personal electric vaporizing devices; and preparation of a kind used for smoking through electronic cigarette and electric vaporizing device, in forms of liquid of gel, (whether or not containing nicotine) which are sold at a price not exceeding RM500 and are brought into Malaysia by land, sea or air.

The LVG tax legislation came into force on January 1, 2023, but the actual implementation was postponed several times before being confirmed to start on January 1, 2024.

How is the sale value for LVG determined? The sales tax is charged on the sale value of LVG not including any tax, duty, fee or other charges such as transportation, insurance or other costs.

The LVG tax applies to both sellers and online marketplace platforms that meet certain eligibility criteria. Online marketplace platforms refer to any local or overseas online platform that facilitates the sale of LVG to Malaysian consumers and is required to register as an “Registered Sellers” (RS) regardless of their own geographical location or the location of their sellers. This includes platforms like marketplaces, shopping websites, and social media platforms with dedicated ecommerce functionalities.

In general, sales tax is applied on goods sold in Malaysia and are paid for by the relevant importer, wholesaler or retailer prior to sale to the consumer in Malaysia. However, there was a loophole in the sales tax. Globally, there is a common practice not to impose sales tax and import duty on imports below a De Minimis (minimal) value, which was set at RM500 for Malaysia, to facilitate ease of customs clearance for postal and courier shipments. With the proliferation in online retail, this created an unfair advantage for online businesses selling directly to Malaysian consumers compared to retail businesses in Malaysia.

Rationale to Implement Sales Tax on LVG

The objective is to create a level playing field between online sellers both inside and outside Malaysia, and would empower local markets and businessmen. The implementation of the LVG tax is expected to mitigate the “uneven competition” between brick-and-mortar stores and online marketplaces. Local retailers have to pay taxes, rent and overheads, while online sellers often avoid their tax responsibility and tend to pay lower rent and overheads, if any.

It is believed that the spending pattern of Malaysians will change after the enforcement of the sales tax for online sales of imported LVG since the sales tax would push consumers to opt for local substitutes, which would benefit the local industry.

Online sales have shot up since the pandemic, where people are shopping from across the globe, but only local sellers are subjected to the Sales and Services Tax (SST). Hence, LVG tax will level the playing field for traders, as consumers will now have better options for local products with an expected increase in tax on imported LVG. The LVG tax would allow local sellers, including SMEs, to compete on the basis of superior service, proximity, and better local consumer protection. For many years, local retailers and online sellers had fought an unfair competition against foreign sellers which sold products that might not have undergone the same stringent quality and safety tests to which Malaysian manufacturers and importers are subject.

Tax on imported LVG could boost consumer demand for local products

The tax would allow for the stabilisation of price between imported and local goods as imported LVG are currently not subjected to any tax whilst a 6% SST is imposed on locally produced items, resulting to it being sidelined by consumers. If there are identical goods in terms of function and utility produced by local and foreign manufacturers, the production costs will undoubtedly be more or less the same, resulting in the same selling price but the 6% SST will make local goods more expensive. The 10% LVG tax would make local goods appear more affordable and attract demand. This tax is only imposed on goods valued at less than RM500, so even though the tax rate is 10%, it is not burdensome as it applies only to low-value items.

Eroding purchasing power and expenditure capacity of consumers would also encourage the switch to domestically available items. The tax would not only help local businesses to step up their sales which in turn could lead to more job opportunities creation and a better sustained domestic economy but also increase the government income as well as strengthen the ringgit via the reduction of overseas cash flow.

LVG tax would benefit the government in revenue collection

The LVG tax will affect both individuals and corporate entities alike. The increase in revenue or earnings of local SMEs could potentially push their taxable income to a higher bracket, which equates to more tax intake for the government and would benefit the government in revenue collection. The Dewan Rakyat was told last year that the government expects to collect RM200-RM300mn a year from the LVG tax, which is a mere 1% increase from the government’s annual SST revenue. In 2022, the government collected RM31.4bn in SST and is expected to generate RM34.2bn in 2023 and RM35.8bn in 2024. When we consider this alongside the increase in service tax rate from 6% to 8% (effective March 1, 2024), the introduction of high-value goods tax (will be imposed starting May 1, 2024), and the capital gains tax on share sales for unlisted companies (the effective commencement date is March 1, 2024), it's evident that the government is expanding the tax base. Coupled with the impending introduction of e-invoicing, the government is clearly making efforts to bolster its coffers.

The implementation of LVG tax is a strategic move to widen the tax base without impacting the lower income groups as it involved the direct purchase of imported items online from foreign sellers. Any hike in the overall prices of the imported items is self-limited and would not spill over into the rest of the economy, have an inflationary knock-on impact.

It is worth noting that the LVG tax is not unique to Malaysia. Other countries had also imposed taxes (in the form of Goods and Services Tax (GST) or value-added tax (VAT)) on LVG.

The implementation of the LVG tax as an interim measure

The LVG tax could help to bolster government revenue and is projected to generate RM200- RM300mn annually. However, adding this figure to the SST collected, it still pales in comparison to the revenue hauled in by the GST. Under the existing SST system, the Malaysian government is expected to collect revenue of RM34.2bn and RM35.8bn in 2023 and 2024 respectively. As compared to 2017 before the GST was abolished, the figure stood at RM44.3bn. Taxes like the LVG face inherent limitations given that their narrow scope hinders their ability to tackle disparities in tax treatment and capturing digital revenues comprehensively, hence an unsuitable strategy to address leaks in the online marketplace. On the other hand, the multi-tiered GST structure boasts numerous advantages. Its layered approach effectively plugs tax leakages and encompasses individuals from all economic backgrounds, promoting greater universality, fairness, and holism. If GST is implemented, the LVG tax can be scrapped to avoid double taxation.

During the tabling of 2024 Budget, Prime Minister announced that the SST rate would be raised to 8.0% from 6.0% currently. The service tax rate hike to 8% and widened coverage of taxable services under this tax would broaden Malaysia’s tax base. The new adjustment on SST is expected to generate an additional RM9-10bn in revenue for the government. However, it is poised to increase costs for service providers, potentially affecting businesses across the nation. As a result, overall inflation could see an uptick, with businesses passing on these additional logistics costs to end consumers, potentially impacting the cost of everyday goods.

In a nutshell, while there may be good intentions as the nation move forward with various economic reforms, implementation of policies such as the imposition of taxes should be more holistic and universal where the government can acquire greater revenue while meeting the objectives of balancing our national account. Thus, Malaysia needs to expand its tax base, plug leakages in the tax system while ensuring burdens on the people are at the minimal where reintroducing GST could be considered. Malaysia needs to introduce a resilient tax regime such as the GST so its economy can bounce back. The Malaysian tax system has to-date seen some progress, though not at the desired speed nor completeness in certain areas of tax reform. Since the Government had increased the SST to 8%, hence, should the GST make a comeback, the government may consider a rate of 6%, which is same as the previous rate when GST was introduced in 2015 but at a slightly lower rate than the revised SST. However, the government has so far resisted the calls, focusing instead on subsidy rationalisation and other ‘smaller’ taxes such as capital gains tax and luxury goods tax but acknowledged that GST remains the most transparent and efficient taxation system.

Source: BIMB Securities Research - 13 Mar 2024