Here’s How The Digital Tax Will Impact Online Shoppers In Malaysia

Here’s How The Digital Tax Will Impact Online Shoppers In Malaysia

Malaysians have a deep love for online shopping, so when news hit that the government is looking into implementing a digital tax on foreign digital service providers, many were concerned.

Some of the concern involved whether or not this could lead to double taxation, creating a heavier strain on an already higher cost of living.

While a full explanation on digital tax will happen sometime next year, it’s likely that the tax will be announced in some way during the upcoming Budget 2018.


As this may affect online shopping within Malaysia, here’s what you need to know about the digital tax.

An untapped segment

The dawn of e-commerce has made it easy for any creative entrepreneur to sell their wares or service across the globe. Whether you’re in Mexico or Spain, China or Russia, you will be able to sell or buy products and services from and to anyone and anywhere, including Malaysia. When it comes to the taxing aspect though, they are mostly subjected to the tax of the country they’re in rather than the country they’re selling to.

The Malaysian government is now aware of this missed opportunity, and that this segment is actually worth “billions of ringgit“.

They are now looking into amending tax laws, especially with regard to collecting taxes from foreign companies that offer digital services in Malaysia. These not only range from games and movies that are being sold online worldwide, including Malaysia, but it also includes companies such as AirBNB and Uber, who are based overseas, and are not subjected to GST in Malaysia.

Customs Department director-general Datuk Seri Subromaniam Tholasy has pointed out that taxing the digital economy can easily translate into several billion ringgit in revenue, which is currently being untapped.

Under the current tax regime, business-to-business (B2B) is not an issue as there is no loss of revenue. But the biggest loss in the digital economy appears when it is business-to-consumer (B2C).


How does digital tax work?

Digital tax isn’t new, as it has been adopted in many other countries as well, each with their own way of getting sellers outside of their country to pay the tax. Some countries, such as Bangladesh and South Korea, require sellers to register for an account with their online system. Other countries such as Taiwan and Japan require you to register and hire a tax agent from their country to be able to file taxes.

For the EU countries, the VAT is their form of digital tax and is paid by the consumer at the time of purchase of a product or service. This means when you sell a product in an EU country, you charge them VAT according to their country of residence, and to the onus is on the seller to collect it, report on it and file VAT returns using the mini one-stop-shop (MOSS) scheme available online.

In most countries, the digital tax is often pushed on to consumers. For example, if you sell a product worth 1,000 yen in Japan, the customer will actually have to pay 1,080 yen, and that 80 yen is meant to be filed through the tax agent.

As a seller, you can always absorb the cost of the tax, but this may not be worth it if the fees you have to pay for the platform you’re using is high as well. The fee often ranges, and it really depends on the platform. Here is an example of how much it would cost when one person sells their products or service online and decides to absorb the cost.

Price of one product
Assuming platform fee of 3.5%
Digital tax of 10%
Net worth of one product

That’s not the only challenge, they will then need to figure out how to collect and file these taxes. Each selling platform have their own requirements when it comes to tax, with some, like Amazon Marketplace, calculating the tax for you.

There are also platforms like Etsy where sellers will need to calculate and file taxes themselves depending on the customer. So depending on the platform, sellers may have a hard time dealing with taxes and would likely not sell their product or services to the countries with a strict or a high digital tax.

This is a factor that the Malaysian government also needs to consider as well when they’re coming up with ways to collect digital tax from overseas sellers.

What’s the difference between GST and digital tax?

The announcement of the digital tax creates a similar echo to when the Goods and Services Tax (GST) was first introduced and announced. Currently on track to rake in at least RM42 billion for the country, GST has become increasingly important to the country’s economy. Collection has shown improvement parallel with the country’s Gross Domestic Product (GDP) growth.

Currently GST only applies to businesses that are established or based within the country, while those operating outside of Malaysia were not subject to the tax. But with the implementation of the digital tax, this will mean that foreign-service providers serving Malaysian consumers may be charged with tax.

The problem is figuring out how to charge GST to these foreign-digital service providers.

In Malaysia, any company or person doing business, regardless if you’re selling homemade cakes on Facebook or doing online tutoring, is required to register at SSM and will be charged a yearly fee. And if you’re selling items that are not exempted from GST, you have to be registered under GST if your annual sales turnover has exceeded the prescribed threshold of RM500,000. But even if it doesn’t, you can still register voluntarily as long as your product or service is not GST exempted.

Crowe Horwath KL Tax Sdn Bhd managing director SM Thanneermalai told The Edge Malaysia that, “When it comes to GST, there may be a supply of goods and services, but when you have hundreds of thousands of consumers [purchasing goods or services] through digital platforms, [it becomes difficult to track].”

In the same report, Deloitte Malaysia tax partner Tan Hooi Beng said it is important that the foreign-service providers be subjected to GST, as an absence of the charge will create a disparity between them and local service providers, who must pay GST.

“Furthermore, as other countries globally implement these rules, local Malaysian digital service providers who provide services to customers outside of Malaysia will need to register in these foreign GST regimes.”

So whether or not the digital tax will be an improvement of GST, or a different tax altogether, will be revealed at a much later date.

Digital tax vs GST (digital economy)

The Customs Department recently announced that streaming services such as viu and iflix are expected to be taxed under the proposed amendments to the Goods and Services Tax (GST) Act. This is the first amendment for the GST to cover the digital economy, where businesses are mainly done digitally. In this way, GST is either added to the price of the product or absorbed by the seller.

This differs from the digital tax being proposed as it aims to tax foreign online sellers. For example, sellers from China using Lazada to sell their product will be charged a digital tax. As of now, it remains to be seen whether the digital tax in Malaysia will converge under the GST, or if other digital services such as AirBNB and Uber, will be labeled under GST as well.

How the digital tax will affect you, as a buyer?

At the moment, the digital tax seems to only affect sellers and service providers overseas. This means that it should affect only those selling their products or service, even on websites such as Lazada and with sellers that operate in many different countries.

Sadly, this does not mean that sellers and service providers will not push some of the tax cost to the consumers by adding it to the existing price. This is a possibility as this would be a commercial decision for sellers, and will be based on several factors that vary from business to business. Also, if the tax process is too tedious or foreign sellers do not see business in Malaysia as profitable, it’s possible that the product’s listings will be removed from Malaysia, making it unavailable to us.

As for how it will be implemented, there are discussions being done with credit card companies, which will collect the digital tax when consumers swipe their cards, which will in turn remit it to the Customs. At this time of publication, no information has been given on other modes of payment.

Despite all this, the fact remains that a country is entitled to its fair share of tax revenue when an online service entity sells a product or service to a consumer in it. As such, we will have to wait and see if Budget 2018 will reveal further information regarding digital tax.

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