‘Digital tax may boost indirect tax collection by up to 5%’

This article first appeared in The Edge Financial Daily, on November 13, 2017.
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PETALING JAYA: Malaysia’s plan to expand the scope of indirect tax to cover companies in the digital economy, particularly cross-border e-commerce and service firms, could boost tax collection by 3% to 5%, said KPMG Tax Services Sdn Bhd.

KPMG’s executive director for indirect tax, Ng Sue Lynn, said the figure was a preliminary estimate by the firm as the plan is still under study. “The move to tax the services provided by these companies is still being studied by the Royal Malaysian Customs Department,” Ng told The Edge Financial Daily.

She added, however, that if implemented, “it will be a game changer in the tax industry as it will affect consumers and suppliers throughout the entire value chain”.

Customs, as well as the Inland Revenue Board, have said that they were looking at various avenues to expand the tax scope to cover digital service providers. These would include online delivery firms, online streaming providers, and ride-hailers such as Uber and Grab.

Noting that Australia, South Korea, Japan and New Zealand have implemented a digital tax, Ng said the immediate challenges for Malaysia include ensuring that the tax process is simple and that there would be compliance.

“The first step in implementing the digital economy tax is to conduct a proper study to analyse the operational, legal and financial impacts that it could cause,” she said, adding that there is also the need to get foreign service providers to register with the government.

Asia Internet Coalition (AIC), an industry association founded by Google and eBay, said that when implementing new taxation laws, governments should engage with industry to make sure the new laws are simple and do not distort the growth of digital and low-value tangible goods e-commerce trade.

It noted that there are a variety of international e-commerce platforms that are not technically ready to collect goods and services tax (GST) for other countries into which they sell goods.

“Third-party-marketplace platforms such as Alibaba, Etsy and eBay, for example, do not own or sell goods, but merely connect millions of buyers and sellers of goods. Who will tax authorities collect taxes from for goods sold on third party marketplaces?” AIC said in a report released in June.

Meanwhile, Ng agreed with the projection by the government — as stated by Customs director-general Datuk Seri Subromaniam Tholasy recently — that GST collection in 2018 will total more than RM44 billion, on the back of an expected 6% to 7% growth in consumption.

According to the finance ministry’s Economic Report 2017/2018, the government collected RM27 billion in GST in 2015, with the figure rising to RM41.2 billion in 2016. For 2017, the projected figure is RM41.5 billion.

Commenting on the changes relating to the GST proposed in Budget 2018, Ng said the measures are aimed at “improving and streamlining the application of the indirect tax in the country”.

The government has expanded the list of zero-rated goods and services while exemptions have also been given to certain services until 2020. Ng said the move was aimed at helping the people cope with the higher cost of living.

On the possibility of even more taxable items and services becoming zero-rated in the future, Ng said: “There is no indication seen towards that trend for now.”

Ng said Customs has been making significant progress in simplifying the tax process since GST was introduced in April 2015. “Initially, refunds was an issue, but we observed that the pace has improved tremendously,” she added.

On the possible increase of the GST rate from the current 6%, Ng said: “That is subject to the political will of the government.”

“The gradual increase pace seen in some countries is anywhere between three and seven years, and the hike is normally benchmarked against various key economic indicators,” she said, noting that Thailand is the only country seen to have adjusted the GST rate downwards.

Going forward, Ng urged the government to consider granting approval for newly established companies, especially those with long gestation periods before turning to become producers of taxable supplies, to register under the Good and Services Tax 2014.

“Under the existing regime, newly established firms must make a taxable supply before they are allowed to proceed with the GST registration. This could be difficult as newly set-up companies will incur a lot of establishment investment before they can produce supplies, and the input tax on purchases, they cannot claim back,” she said.