On 24.2.2023, the Unity Government re-tabled the long-awaited Budget 2023 (“Budget”). Beneficiaries include the EV and agriculture industries, MSMEs,1 and M40s, who stand to receive various tax reductions and incentives. Apart from changes in tax rates for individuals and MSMEs, the newly proposed luxury tax and capital gains tax is also noteworthy.
In this Special Alert, we summarise the key tax measures and share our thoughts on the potential legal implications.
A. New Tax 1- Luxury Tax
The Government plans to tax luxury goods which exceeds a certain value, a concept introduced by the French more than a century ago in 1918. Being widely regarded as the birthplace of luxury, the French adopted a 3-fold classification of “luxury”2 :
- Articles of obvious luxury such as jewellery, antiques, perfumes, sculptures, watches and yachts;
- General articles which are considered luxury only when they exceed a certain price such as $20 for suits, $2 on imitation jewellery, $50 on women's costumes, $100 on horses, $500 on safes and motor-cycles, $8 on pleasure dogs, etc; and
- Spending in luxury establishments such as hotels and restaurants. 3
Naturally, what was considered luxurious a century ago may not necessarily be perceived as such now. However, the test is largely similar: non-essential, luxurious or extravagant items.
Introducing Luxury Tax rather than GST may be seen as politically prudent, a tax on luxury goods consumed only by the wealthy would certainly be more acceptable to the public compared to a broad-based consumption tax like GST. The following are some of the possible methods for the implementation of Luxury Tax:
- Increasing the existing sales tax rates for luxury goods (“Option 1”);
- Imposing excise duty on luxury goods (as seen with the sugar tax implemented in July 2019) (“Option 2”); or
- Enacting new legislation specifically targeting luxury goods (“Option 3”). See Select Luxury Items Tax Act in Canada which imposes luxury tax on aircraft, yachts, and certain motor vehicles that meet specific criteria with effect from 1st September 2022.4
Imposing Luxury Tax on goods through the existing Sales Tax Act 2018 or Excise Act 1976 (Options 1 and 2) present several challenges:
- Importantly, the HS (Harmonised System) Codes used under both Acts do not differentiate between luxury or non-luxury goods. For example, a women's handbag which falls under HS Code 4202 does not differentiate between a RM 500 handbag with a RM 50,000 one. Without a clear criterion to define luxury goods and their value, imposing luxury tax through these existing legislations would be difficult. Establishing clear and specific criteria to determine what qualifies as luxury goods would be imperative.
- Further, the Government should also consider imposing Luxury Tax at the retail level rather than the import / manufacturing level. This would improve transparency for consumers regarding the taxes imposed & prices increase. The latter by contrast may attract criticism for being opaque and resulting in cascading taxes along the supply chain.
Currently, sales tax and excise duty are only applied at the import / manufacturing level, where the costs of these taxes/ duty are embedded in the price of the goods. Modifying the current sales tax structure to levy Luxury Tax at the retail level, similar to the implementation of sales tax on low-value goods (effective from 1st April 2023), could be a viable option.
Alternatively, the creation of a new piece of legislation for the imposition of Luxury Tax (Option 3) would be a better though less likely option. This would establish Luxury Tax as a distinct category of tax and allow for the definition of clear criterion on what qualifies as luxury goods. This would offer greater flexibility for future adjustments and expansion for the Luxury Tax to include luxury services, when required, such as fine dining experiences at Michelin-starred restaurants and exclusive club memberships.
Regardless, any modification to the existing tax structure could have long-term impacts and require further study. Ultimately, the effectiveness of Luxury Tax will depend on the Government's criteria for classifying goods as luxurious, and their implementation.
B. New Tax 2- Capital Gains Tax (“CGT”)
Traditionally, gains on share disposals are non-taxable in Malaysia, unless it involves shares in a real property company (RPC) under the RPGT Act or if the disposer is engaged in the business of trading in shares. However, the Government has proposed to introduce a limited Capital Gains Tax (CGT) in 2024 on the disposal of unlisted shares by companies.
Neighbouring countries have CGT rates ranging from 0% (Singapore) to 22% (Indonesia):
- Singapore - 0%
- Thailand - As Thailand has no separate capital gains tax law, Thailand's corporate tax law treats capital gains income derived by entities as normal assessable income subject to corporate income tax of 20%.
- Vietnam - Capital gains generally are taxed as ordinary income at the corporate income tax rate of 20%.
- Indonesia - Capital gains earned by a resident company generally are taxed as ordinary income at the corporate income tax rate of 22%. Gains on the sale of shares listed on the Indonesia Stock Exchange are subject to 0.1% of the transaction value. An additional final tax of 0.5% applies to founder shares on the share value at the time of an initial public offering (IPO), regardless of whether the shares are held or sold following the IPO.
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1. Micro, Small & Medium Enterprise
2. E.L.Bogart, "Luxury Taxes”, The Bulletin of National Tax Association, June 1919, Vol. 4 No.9 pp.237-239. Also see UK Parliament Hansard on Luxury Tax Vol.105 https://hansard.parliament.uk/Commons/1918-04-22/debates/93d93192-adbf4164-b327-ee71d5a296fc/LuxuryTax
4. Select Luxury Items Tax Act (SC 2022, c 10, s
135)' (Justice Laws Website, 2022)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.