THERE are many ambiguities surrounding the luxury goods tax or high value goods tax, at a rate of 5% to 10%, that was proposed during the tabling of Budget 2024.
There has been no mention of the implementation date or types of luxury items that will fall under the tax, save for jewellery and watches that were mentioned in the budget announcement. More importantly, particularly for retailers, the prime minister’s speech did not specify the threshold for high value goods that would be subject to the tax.
Like the other new tax proposed during the budget announcement — a capital gains tax on the disposal of shares in unlisted companies — details are scant. What is now known is that the capital gains tax will be effective March 1, 2024, at a rate of 10% on the net gain from the disposal of shares in unlisted companies but will not apply to initial public offerings and internal group restructurings.
There is no question that both taxes will help widen the tax base, but what is on everyone’s mind is whether the tax collection will be significant enough to shore up the nation’s coffers.
“There has to be a balance between additional tax revenue collected and the impact on the retail industry and the cost of compliance on companies,” says EY Malaysia tax managing partner Farah Rosley on the high value goods tax.
Inevitably, with every new tax introduced, companies will have to incur a compliance cost. It is worth noting that there will be a new law enacted for the proposed high value goods tax as it will not form part of the current sales tax, say experts.
Deloitte Malaysia country tax leader Sim Kwang Gek says it remains to be seen whether the high value goods tax will generate significant enough revenue to narrow the fiscal deficit or if it will do more harm than good. “It remains to be seen whether the luxury goods tax will give an immediate boost to the tax revenue as the scope is limited.”
Many tax experts do not think the high value goods tax will bring in significant revenue for the government’s coffers and there have not been any official estimates given by the Ministry of Finance.
Nevertheless, a rough calculation by Chow Chee Yen, senior executive director for tax advisory and compliance at Grant Thornton Malaysia, puts the number at RM900 million to RM1 billion a year.
For perspective, the proposed increase in sales tax to 8% from 6% currently is said to be able to bring in an additional RM3 billion per year, according to Treasury secretary-general Datuk Johan Mahmood Merican.
While it may cost the rich in Malaysia 5% to 10% more to purchase luxury items in the future — foreign tourists are exempt from the tax — it should be noted that a tax on luxury goods is not uncommon around the world.
For instance, Indonesia imposes a sales tax on luxury items on top of the existing value-added tax (VAT). Sales tax on luxury goods is imposed at a rate of 10% to 200% for certain luxury goods that are manufactured in or imported into the country. Examples include luxury cruisers, property exceeding IDR30 billion (RM9.01 million) and vehicles.
Tax experts believe that how “luxury goods” are defined is important. Equally important is the prescribed threshold for the definition of luxury goods that will be liable to tax.
“Setting the right threshold for different goods itself is a challenge as different cultures may have different views on what is considered luxury,” says Chow.
A jewellery retailer shared a similar sentiment, saying that his customers are not necessarily rich, but are mostly working class who use their savings to buy items like gold jewellery as an investment or for celebratory purposes.
“Many can’t buy houses or invest in other forms of assets. So they buy small items of gold as a form of investment. So, the threshold is really important and it would be a shame if it ends up at a level that is too low, resulting in taxing the middle-income gro up,” he says.
Sim also brings up the point that the high-income group is generally highly mobile and resourceful, which means they can choose to acquire luxury goods elsewhere rather than in Malaysia.
“The retail business, especially those in the luxury consumer products segment may be affected. There are alternatives to shop elsewhere outside the country where GST or VAT refunds are available and, hence, the price of luxury items may be cheaper than in Malaysia,” she says.
What would be even more troubling with the high value goods tax is if a substantial number of consumers choose to make their purchases overseas to avoid paying the additional tax. It could lead to not only a small amount collected under the new tax but also a lower amount of corporate income tax collected from the retailers, say experts.
There is also the possibility of breeding an underground market for luxury goods if the threshold is too low. As it is, Malaysia already suffers a significant amount of revenue leakages from the black market on tobacco-related items and alcohol.
In 1991, the US imposed a 10% luxury tax on items such as boats, automobiles, private planes and jewellery. However, after a short two years, the tax was repealed when it was found to have adversely impacted certain industries. News reports also highlighted that the luxury tax did not collect the intended amount set out by the government, but only a “negligible” sum.
Capital gains tax
The other tax that has been hotly debated is the capital gains tax on the disposal of shares in unlisted companies. Set to take effect on March 1 next year, the tax is seen as a precursor to other forms of capital gains tax in the future.
“Yes, it is a precursor to other kinds of capital gains in the future,” says Farah, adding that Singapore currently does not have a capital gains tax regime.
Sim points out that countries like Indonesia, Thailand, Vietnam, the Philippines, Australia and the UK have been imposing capital gains tax on a wide range of items, with the tax rate from as low as 0.1% to as high as 30%, depending on the type of assets disposed of. “For example, in Australia, the scope of the capital gains tax includes real estate, investments, collectibles, cryptocurrency assets and intangible assets,” she says.
“Taking our cue from international practices, the introduction of the capital gains tax in Malaysia may pave the way for future expansion of the scope of taxable items and provide the additional tax revenue that comes along with it. A careful study of the impact on businesses and complexity in administering a capital gains tax regime should be carried out before Malaysia embarks on a full-blown tax regime.”