The strategic significance of the LVGT

The LVGT is a component of the government’s macro-economic strategy and not merely an attempt to increase tax revenue.

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Published by AstroAwani, image by AstroAwani.

The low value goods tax (LVGT) which came into effect on January 1, 2024 has been subjected to trenchant criticism from many quarters. 

Critics have raised concerns about its impact on the purchasing power of consumers amidst the rising prices of goods and services – notwithstanding the drop in the Consumer Price Index (CPI) or headline inflation rate. They also questioned whether the envisaged revenue estimates of RM200 million (or at most, RM300 million) is sufficient enough to justify the imposition of the LVGT. To be fair, the figure which comes from projections by the Ministry of Finance (MOF) itself pertains only to the first year of collection.

However, the main point of concern would be that buyers or consumers who use online platforms will be affected should the seller/merchants decide to pass the tax burden as a form of added costs to the former. If so, this will only add pressure on the disposable income of Malaysian buyers/consumers, i.e., in reference to the middle class – M40 and T1 of the T20 – on top of a weakened ringgit.

In fact, it could be argued that the LVGT is a form of additional downward pressure on the ringgit for Malaysian buyers or consumers who like to buy or rely on imported items.

Notwithstanding, critics have overlooked the strategic and critical significance of the LVGT in striking the appropriate balance between unduly widening the revenue base with an emphasis on indirect taxation (as in the case of the Goods and Services Tax/GST) which effect will be disproportionate on the B40 and M40 groups, on the one hand, and narrowing the revenue base with an over-emphasis on the higher earners, on the other hand.

Firstly, the implementation of the LVGT is a strategic move by the government to widen the tax base but without aiming to impact the lower income groups.

Unlike the GST, the LVGT is limited in its impact as it involves the direct purchase of imported items online from foreign sellers or merchants.

Any hike in the overall prices of the imported items is self-limited and wouldn’t spill-over into the rest of the economy, i.e., have an inflationary knock-on impact. Both the seller – if the seller chooses to absorb the LVGT – or the purchaser which would typically be from the M40 and T20 socio-economic groups only bear the tax burden.

Secondly, the LVGT represents the extension of the pre-existing sales tax imposed on high value goods under the Sales Tax Act (2018) but vertically – towards low value goods. As a strategic move, it’s also a form of “protectionism” via the imposition of a levy for the same goods or products that’re sold domestically or available in the domestic market. This will help to promote the substitution effect of shifting consumer preference from imported items towards domestically available items that’re of the same kind of category and/or quality, for example (substitution effect).

Thirdly, in turn, this will help to enhance the cashflow of local businesses, i.e., of the small and medium-sized enterprises (SMEs) which are in view here and simultaneously contribute towards stemming the outflow of the RM – by curbing the appeal of online platforms (such as Amazon, Lazada, Shopee, etc.)  with origins (founded, headquartered and originally registered and established) in foreign countries in the retail supply chain.

Fourthly, by extension, it’ll play a strategic role in indirectly helping to (partly or mildly) mitigate the impact of base erosion and profit-shifting (BEPS) by these foreign players (e.g., in the declaration of source of revenue for tax purposes) which affect the extent of the profits and the repatriation thereof.

Of course, if the average or (stereo)typical Malaysian consumer, at the risk of over-generalisation, persists with the attitude that the “quality” of domestically produced/available goods are deemed not to be as good as the imported ones, then item for item, this factor can still blunt the intended impact of the LVGT.  

The LVGT is to ensure a level-playing field in the market for our local or domestic players (with impact on the rest of the supply chain).

Fifthly, this is why we should encourage and promote an importsubstitution strategy that’ll ensure we produce goods of a similar or on par quality or even higher than the imported goods. The government in partnership with the private sector, therefore, needs to identify the types and categories of goods to focus on (including value-added production, use of inputs from the circular economy, technologically-determined costs driven by renewable and green energy) and provide the necessary incentives.

This will complement and supplement the strategic role of the LVGT.

In the absence of such an import-substitution strategy, there’s the concern that the LVGT might only have a limited impact.

Otherwise, our small-and-medium sized enterprises (SMEs) – both seller and producer – should see some increase in sales volumes. This will boost their cashflow and earnings and, by extension, profit margins in the aggregate (and help to mitigate the impact from the imposition of the capital gains tax/CGT).

The LVGT, therefore, can also help to play a part in driving consumer spending that’ll contribute towards boosting our gross domestic product (GDP).

Sixthly, if the LVGT’s elasticity, i.e., the correlation between consumer behaviour and taxation, is high enough, the increase in the revenue or earnings of the SMEs can push their taxable income to a higher bracket which means more tax intake for the government.

This is because imposition of the LVGT at 10% represents an additional RM1 to the purchase price of the imported good of RM10 – which can be up to 4.7%++ in terms of the real purchase value when taking into account the dynamics of the conversion costs.

Conversion costs would be higher than the real exchange rate of the day due to markups by sellers/merchants who in turn collect the cross-border settlement fees imposed by the banks.

To reiterate, it’s highly expected that the 10% sales tax from the LVGT coupled with the associated conversion costs as further eroding the purchasing power and expenditure capacity of the buyers/consumers would encourage a substantial number to opt to switch. Such a scenario is sufficient to represent a (near) captive market (in its own right).

Hence, the implementation of the LVGT means stronger competition between the foreign and domestic/local sellers or merchants and, by extension, domestic/local manufacturers.

Lastly but not least, the imposition of the LVGT will also counter-balance the discontinuation of the national load centre shipping policy in place since the 1990s which centralised cargo loading at Port Klang. This policy move by the Minister of Transport YB Anthony Loke is in itself of another strategic significance that’ll boost the shipping and port sectors in the country and merely aligns policy with existing real-world developments.

As pointed out by logistics expert and consultant Rosli Khan, the emergence of Port of Tanjung Pelepas (PTP) in Johor, and the expansion of the Bintulu and Sepanggar Bay ports in Sarawak and Sabah, respectively, has rendered the old policy irrelevant and moot (see, “Govt correct to discontinue national load centre shipping policy”, Free Malaysia Today, March 4, 2024).

This aspect in the wider liberalisation of the cabotage policy (except for Sarawak which has opted for the reintroduction) would contribute to lower freight and delivery charges for imported consumer goods which in turn could spur local demand.

The LVGT could, then, play a role in “neutralising” the spillovers from the discontinuation or liberalisation of the national load centre and cabotage policy exemption vis-à-vis consumer goods worth RM500 and below.

In the final analysis, the LVGT represents a critical and integral feature/component of the government’s fiscal and macro-economic strategy and, thus, shouldn’t be simply/exclusively seen as an attempt to increase the tax revenue (as part of the broader policy move towards reducing the fiscal deficit/fiscal consolidation).

Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.

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