This article first appeared in The Edge Financial Daily on August 24, 2018

KUALA LUMPUR: While it was reported that the Malaysian government will keep the current excise duty rates on alcohol and tobacco for 2019, tobacco and alcohol manufacturers will be imposed a higher sales and services tax (SST) when it makes a comeback next month.

According to a guide on proposed sales tax rates for various goods prepared by the Royal Malaysian Customs Department dated Aug 16, 2018, manufactured tobacco and spirits will be subject to a 10% sales tax.

“At the manufacturers’ level, the differential is actually an additional 4%, [compared with the 6% goods and services tax (GST)],” Grant Thornton Malaysia executive director for indirect tax and goods and services tax Alan Chung told The Edge Financial Daily on the phone.

Thus, tobacco manufacturers such as British American Tobacco (Malaysia) Bhd, and breweries such as Heineken Malaysia Bhd and Carlsberg Brewery Malaysia Bhd will be incurring an additional 4% tax, in the form of sales tax.

Under the new SST regime, there will be no more tax on the value added under the supply chain. The GST was imposed on each intermediary of the entire supply chain up to the retailers’ level.

Hence, for consumers, the goods may be more expensive, depending on “the length of the supply chain [intermediaries], and the value added along the supply chain”, said Chung.

“You have to look at the number of intermediaries in the entire supply chain; you have to look at how much value is added by the intermediaries,” he explained.

Thus, products imposed with the GST may be cheaper if there is a shorter supply chain.

“The other factor is businesses don’t go on a fixed margin. They will only price their products based on their costs; they will add a percentage of margin onto their costs,” Chung added.

He also said under the SST regime, on top of the 10% sales tax, a 6% service tax will be charged to consumers purchasing alcohol or tobacco at a food and beverage (F&B) outlet.

“The logic is the F&B outlet is serving you the alcohol, meaning they are charging you the service of serving you the alcohol, and not so much selling the goods,” Chung explained.

Tobacco and alcohol are sectors heavily taxed in Malaysia. Notably, the tobacco industry last saw a hike in excise duty of 36% in November 2015.

The excise duty for locally produced hard liquor, meanwhile, increased from RM24 per litre to RM60 per litre, effective Dec 15, 2016. The excise duty structure for beers changed to RM175 per 100% volume per litre, from the previous RM7.40 per litre and 15% ad valorem tax, effective March 1, 2016

Earlier this month, it was reported that Deputy Finance Minister Datuk Amiruddin Hamzah said the current sin taxes, not revised since 2016, were already at high levels and raising them further would drive the illicit market.

Other items subject to the 10% sales tax under the new SST regime include chocolate malt drinks including the three-in-one variety and oats containing cocoa.

For motorcars, completely knock-downs are exempted from the sales tax, while completely-built-up models are subject to the 10% sales tax.