This article first appeared in The Edge Malaysia Weekly on October 29, 2018 - November 4, 2018

COME Friday, many will be glued to their TV screens as they watch Finance Minister Lim Guan Eng unveil the Pakatan Harapan government’s maiden budget. Everyone seems to be bracing themselves for the announcement of new taxes in Budget 2019 but at the same time, they are probably hoping they will not be among the affected parties.

With Budget 2019 upon us, we list below six taxes that have been talked about over the last few weeks. 

1.     Digital tax

It seems there is no escaping a digital tax this time around as it was explicitly stated in the midterm review of the 11th Malaysia Plan that the government is looking at taxing online transactions, thanks to the continued growth of e-commerce and sharing economy activities.

If announced, Malaysia will be the second economy in Southeast Asia, after Singapore, to start taxing the digital economy. The city state will impose the Goods and Services Tax (GST) on digital services from Jan 1, 2020.

Digital tax is essentially imposed on businesses with a substantial digital footprint in the country but no physical presence. In the last eight years, governments around the world have been looking at ways to tax this growing segment of the digital economy.

The argument is that apart from bolstering the nation’s coffers, the tax is also necessary to level the playing field for bricks-and-mortar and digital businesses, whose customers will have to pay the same quantum.

At this point, it is not clear how digital tax will be implemented in Malaysia, given that the country only recently abolished GST. Countries that have already imposed the tax, for example Australia, and those that will be doing so in the near future, such as the UK and Singapore, have the GST or value-added tax (VAT) system to implement it.

While the Malaysian government and tax consultants iron out the technicalities, one thing is certain — the digital tax will be borne by consumers at the end of the day.
 

2.     Carbon tax

Some economists have suggested that carbon tax be imposed in the country. This was highlighted during the conference entitled “Malaysia: A New Dawn” that was attended by Prime Minister Tun Dr Mahathir Mohamad early this month.

Carbon tax is imposed on energy sources that emit carbon dioxide with a price levied on each tonne of emissions from fossil fuels. The main purpose of the tax is to reduce the emission of carbon dioxide and in turn slow down global warming.

Proponents of the tax have argued that its imposition, at a high enough price, will incentivise both consumers and companies to turn to green sources with a lower environmental impact for their needs, thus reducing the reliance on fossil fuels. It also goes without saying that it would be a good source of revenue for the government.

Nevertheless, in countries where the tax has been imposed, industries that are energy-intensive have been successful in getting exemptions, significantly reducing its effectiveness.

Furthermore, there is no stopping companies that are highly exposed to the tax to relocate to countries that do not have it, should the companies find that the cost outweighs the total benefit of staying.
 

3.     Inheritance tax

Will the death tax make a comeback? It was once implemented in Malaysia under the Estate Duty Enactment 1941 but was repealed in 1991. Back then, the estate of a deceased that was valued above RM2 million was liable to a tax of 5% while that valued above RM4 million paid a 10% tax.

This tax seems like a novel idea to increase the government’s revenue and, at the same time, reduce the concentration of wealth in a small group of people.

Experts believe if the tax was reintroduced, the threshold before one becomes liable to the tax is key as it is largely meant to tax the ultra-rich. If set too low, it would risk burdening the middle-income group who are already saddled by different kinds of taxes.

But there are also those who believe death tax is ineffective because of the many ways available to protect one’s assets before death. A common way that has been used by the rich in countries that impose the tax is to establish trusts.

Besides that, experts suspect the total revenue collected from inheritance tax may not be significant enough and, in fact, it could cost more to implement it.
 

4.     Capital gains tax

This tax will probably worry investors in the country. A tax on capital gains can affect a wide range of assets, from investments in the stock market to even valuable collectibles.

The tax is imposed on the proceeds from selling the assets.

Around the world, there are two main ways in which such taxes are imposed. For example, capital gains tax in Australia forms part of the income tax regime. While gains are taxed, losses incurred during the disposal of a capital asset can be used to offset current or future capital gains.

In countries like the US, the capital gains tax regime is more complicated, segregating gains into short and long term. Short-term capital gains — from assets held for less than a year — are taxed at the prevailing income tax rate while long-term capital gains are taxed at 0%, 15% or 20%, depending on the taxable income.

This is also another way to tax the rich, given that capital gains are highly concentrated among the higher-income taxpayers. But this could result in a lock-in effect, where investors avoid steep taxes by keeping their assets instead of selling them. This, in turn, could result in reduced economic growth as the tax could prevent the reallocation of capital from low-performing investments to more profitable ones.

Some say this might also reduce foreign investor interest in the local stock market and make the country less competitive compared with Singapore or Hong Kong.
 

5.     Soda tax

As its name suggests, this is tax on soft drinks. Nevertheless, the interpretation of what constitutes a soda tax differs widely. In the US, where a soda tax is imposed, it is technically a “sweetened drink” tax. It is charged at 1% or 2 % per ounce of the sugary beverage and collected at the distributor level and then passed on to the retailers. No surprise then that this eventually trickles down, increasing what the consumer pays for the soda.

Depending on how the tax is drafted, it could also include drinks with artificial sweeteners or juices that contain less than 50% of real fruit and vegetables.

The idea behind the tax is a noble one — to encourage healthier lifestyles as a high sugar intake via beverages can contribute to heart and liver diseases, diabetes and childhood obesity and tooth decay.

Given Malaysia’s record as the fattest nation in Asia, it could be a good tax to consider in order to encourage Malaysians to consume healthier beverages.

Nevertheless, there are those who disagree with the idea of the government imposing on their personal choices. Also, there is concern about the impact on the profits of businesses that manufacture sugary beverages and those that sell them if consumers reduce their sugar intake significantly.
 

6.     Other taxes

Often talked about is the potential rise in the excise duty or sin tax on alcohol and tobacco. In the last seven years, alcohol has not seen any rise in excise duty, but it was simplified in March 2016 based on the product’s alcohol content per litre.

On the other hand, tobacco has been slapped with several excise duty hikes in recent years. It was raised by 14% in 2013, 12% in 2014 and a dramatic 40% in 2015.

It has been well argued that increasing excise duties on tobacco and alcohol is more related to improving the health and well-being of society than tax collection.

Nevertheless, statistics in recent years have shown that higher excise duties merely steer people to alternatives in the illegal market. This can be seen from the high market share of contraband cigarettes at 58.3%.

Many have said that before raising the duty on these items, enforcement should first be stepped up to curb illegal cigarettes and alcohol. Failure to do so would thwart the intention of promoting a healthier lifestyle.

Besides sin tax, some believe it might be a good idea to impose higher Real Property Gains Tax (RPGT) on foreigners.

Currently, foreigners who dispose of real property are subject to a tax of 30% if the sale happens within five years of purchase and at 5% if the property is sold after five years of purchase.

Doing so will curb speculative foreign buying but it is unlikely to have any significant impact on housing affordability for Malaysians.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.