As the new year unfolds, Malaysia has ushered in a paradigm shift with the imposition of the sales tax on imported low-value goods, following the introduction of a new tax regime to regulate the importation and sale of low-value goods last year. Following a series of deferrals from 1st January 2023 to 1st April 2023, which aims to allow the MADANI Government to engage and facilitate consultation with industry players and key stakeholders, the Royal Malaysian Customs Department ("RMCD") announced that the imposition of the Low Value Goods Tax ("LVGT") will be effective 1st January 2024. This change has been met with both anticipation and apprehension, as consumers, businesses, sellers, navigate through the impacts of this new sales tax on the e-commerce landscape.

In line with this, the RMCD has released a Guideline for the Implementation of Sales Tax on Low Value Goods ("Guide") dated 3rd November 20231, along with a set of Frequently Asked Questions ("FAQs") on the Implementation of Sales Tax on LVG dated 6th November 20232, which irons out the key points on the mechanism of the LVGT as set out in the subsequent section below.

Scope and Applicability of LVGT

This section sets out the salient points on the types of goods covered under the LVGT, the applicable threshold for low-value goods, and the criteria that determine the scope of this sales tax, as extracted from the Guide:-

  • Low value goods ("LVG") refer to all goods which are sold at a price not exceeding RM500.00 and brought into Malaysia by land, sea or air excluding liquors, tobacco, smoking and vape products.
  • The implementation of the sales tax on LVG covers all consumers, both businesses and individuals.
  • The LVG that come within the ambit of the new sales tax are goods from outside Malaysia that are sold on an online platform and brought into Malaysia. Online platforms include marketplace operated via website, internet portal or gateway.
  • Online sellers bringing in imported goods into Malaysia, with a total LVG sale value exceeding RM500,000.00 over a 12-month period, are required to register with the RMCD, regardless of whether they are based in Malaysia or overseas ("Registered Seller").
  • The sales tax on LVG shall be charged and levied at the rate of 10% by the Registered Seller. A seller includes a person whether inside or outside Malaysia, who:
    • sells LVG on an online platform; or
    • operates an online marketplace for the sale and purchase of LVG.
  • The sales tax is charged on the sale value of LVG not including any tax, duty, fee or other charges such as transportation, insurance or other costs.

LVG Sales Tax Obligations

This section sets out a summary of the key obligations of the Registered Seller in respect of the LVGT:-

  • Local and foreign sellers, with a total LVG sale value of RM 500,000 over a 12-month period, is liable to be registered, charged, collect and remit the sales tax on LVG to the RMCD.
  • It is the Registered Sellers' responsibility to collect the sales tax and remit it to the RMCD online on a quarterly basis, by way of a sales tax return filing and corresponding payments.
  • The Registered Seller shall collect the sales tax applicable on the LVG at the point of sale.
  • Once registered, a Registered Seller will be assigned with a LVG registration number. During import, every Registered Seller is required to furnish a consignment note that contains its LVG registration number to the RMCD. This acts as proof that sales tax on LVG was imposed and collected when the product was sold to the buyer, thereby, no Sales Tax on Imports would be imposed.

Overview of Sales Tax in Malaysia

Prior to the introduction of LVGT in Malaysia, all taxable goods manufactured locally or goods imported into Malaysia from abroad are subject to sales tax which are paid for by the relevant importer, wholesaler or retailer prior to sale to the consumer in Malaysia. However, there is a loophole in the sales tax system as sales tax and import duties are exempted on goods imported by air courier service below a De Minimis value, which was set at RM500.00 per consignment in Malaysia, to facilitate ease of customs clearance for air courier shipments.

With the proliferation in online retail, this also created an unfair advantage for online businesses compared to local retailers. This is because locally produced goods are currently subject to 6% sales and service tax. Additionally, local retailers have to pay tax at various points of the supply chain such as for importing raw materials or finished goods into Malaysia. In contrast, online businesses selling low-value goods enjoyed the exemption of sales tax and import duties under the De Minimis facility, allowing online businesses to offer products at potentially lower prices, which has been seen as unfair treatment of locally produced goods.

The LVGT, implemented by the RMCD is a specific addition to the country's import tax system, which seeks to redefine the taxation landscape by implementing 10% sales tax for low-value goods (valued at RM500 or less) sold online and imported into Malaysia by land, sea or air. The objective of the implementation of the LVGT is to address the tax treatment disparity between goods sold by local retail businesses and online businesses. The Malaysian government aims to level the playing field for local businesses through the introduction of this new tax.

Impact of LVGT

The LVGT, primarily introduced to create a fair playing field for local retailers by ensuring that low-value goods imported online undergo a similar tax treatment as their domestically sourced counterparts. While the LVGT is expected to influence Malaysian consumers, who were previously exempt from sales tax on low value goods purchased online from abroad, the implementation of the 10% tax raises questions about the potential impact on online shopping trends in Malaysia. Will this lead to a decline in online purchases, prompting more consumers to shift towards physical stores?

Despite the new sales tax, it is likely that online shopping is expected to remain a significant and reliable avenue for consumers. While there may be an initial slowdown and an impediment on the online retail sector, the overall impact is likely to be transitional. It is anticipated that consumers will still opt to purchase goods online as it remains a cost-effective and convenient option when compared to those in brick-and-mortar stores. Especially in the aftermath of the Covid-19 pandemic, Malaysian consumers have held onto the habits of relying on e-commerce to make their lives easier.

Further, it is observed that the tax implementation is unlikely to lead to any shifts towards physical stores but that it is likely to only impact highly price-sensitive consumers. The inherent distinctions and broader range of options available online compared to goods found in physical retail stores often also influences consumer preferences and purchasing behaviours, factors that extend beyond the impact of the LVGT.

Moreover, the introduction of LVGT is likely to also cause administrative impact on small-time businesses – particularly those operating in the e-commerce space, for instance may face additional costs and administrative burdens due to the requirements of compliance, documentation, and tax reporting associated with the implementation of the LVGT. The demand for heightened compliance measures and the increased documentation workload may impose a burden on their limited capacities, potentially impacting their day-to-day operations.

In summary, while the introduction of LVGT may bring about certain administrative adjustments, the impact of LVGT on the e-commerce market is projected to be short-term. Consumers are likely to maintain their preference for the affordability and convenience of online shopping in the long run, despite the additional 10% sales tax.

Conclusion

While the RMCD has introduced the Guide for the Implementation of Sales Tax on Low Value Goods, there remains a degree of ambiguity in certain processes. LVGT obligations have extra-territorial application and extend to Sellers within and outside of Malaysia. Some processes under the new LVGT are not very clear at the moment, especially how the RMCD wants to ensure all sellers who falls under the threshold, especially those overseas, register themselves as Registered Sellers with the RMCD for this new tax regime.

It is also worth noting that there are other countries, including Australia, New Zealand, and Singapore which have already adopted similar measures within their Goods and Services Tax ("GST") frameworks. For instance, in Singapore, a 9% GST is currently applied to items valued at S$400 and below, imported via air or post. Meanwhile, in Australia, 10% GST is currently applied to retail sales of imported low-value goods (AU$1,000 or less) when purchased by consumers. While these counties have implemented their own form of tax on low value goods, it is crucial to note that many other countries do not impose such taxes. This could also pave the way for businesses to explore markets without undue government interventions, offering an opportunity to fully leverage the online business model without regulatory constraints.

To conclude, the introduction of the LVGT in Malaysia marks a change in the country's taxation landscape, primarily aiming to address the disparity in tax treatment between local and online retailers. Businesses, policymakers, and consumers alike will have to adapt to these changes, understanding the nuances of LVGT becomes paramount for compliance and strategic decision-making. As such, stakeholders in this sector should continue to monitor of any further developments from the RMCD as well as to bear in mind existing guidelines and requirements.

Footnotes

1. Royal Malaysian Customs Department, Guidelines for The Implementation of Sales Tax On Low Value Goods (LVG), (3 November 2023 < https://mylvg.customs.gov.my/uploads/Guidelines%20for
%20The%20Implementation%20of%20Sales%20Tax%20On%20Low%20Value%20Goods%20(LVG).pdf > accessed 22nd January 2024.

2. Royal Malaysian Customs Department, Frequently Asked Questions (FAQ) Implementation of Sales Tax on Low Value Goods (LVG), (6 November 2023). < https://mysst.customs.gov.my/assets/document/Annoucement/FAQ-Implementation%20of%20Sales%20Tax%20on%20LVG%20as%20of%206.11.2023.pdf > accessed 22nd January 2024.

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.