It was announced on Friday, November 2, that service tax on foreign digital services in the country will be effective January 1, 2020

Malaysian Finance Ministry (MOF) has announced that it will implement service tax on foreign digital services starting from January 1, 2020. The tax imposed will also include any software, music, video, and digital advertising, as reported by The Star.

“For online services imported by users, foreign service providers will be required to register with customs, apply, and remit the relevant service taxes,” said MOF, represented by Finance Minister Lim Guan Eng.

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The tax application is said to seek a level playing field between physical and online stores, especially online stores owned by foreign companies.

There were key highlights from the 130 minutes speech that stressed on Malaysia’s commitment in supporting digitally and entrepreneurially, driven economy such as the collaborative approach between the 4Ps of Public, Private, Professionals and the People to manage and steer projects. Most of the government-owned venture capital funds will be efficiently distributed to companies in various stages of financing needs.

There were announcements of the allocation of RM2 billion (US$478 million) in matching funds to co-invest with the private equity and venture capital funds, as well as RM50 million (US$12 million) to set up a Co-Investment Fund (CIF) to invest alongside private investors via new alternative financing platforms of Equity Crowdfunding and Peer-to-Peer Financing.

Even with the positive notes. The plans of letting entrepreneurs take advantage of the digital economy policy was met with frowns from the public, especially those who currently are in the newly accelerated digital ecosystem.

Kenneth Ho, CEO of BEAM, a Malaysian networking platform, shared his thoughts.

“I can see where the government comes from, but I personally am not in favour of the idea of introducing such a tax in such short notice, especially when the local digital industry is still relatively new,” said Ho.

“I think it will create a negative sentiment from businesses towards the government, and may result in more companies running their businesses outside Malaysia. The last thing we want is to create more reasons for businesses to leave Malaysian soil. We should be doing everything we can to empower the entrepreneurs, and foster initiatives for more established entrepreneurs to contribute to the younger ecosystem. This doesn’t do that,” said Ho on how it would affect startups in Malaysia.

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Annoyance towards the fact that the digital tax may end up pushing the price increase on to consumers were the general sentiment recorded in social media since Friday, as reported by The Star.

As for Jia En Low, Founder of Amazing Fables and founding member of MaGIC, he noted that the move by the government is consistent with the global trends on governments reducing such tax loopholes.

“The digital taxes are mostly there to ensure large international digital businesses are taxed fairly on income derived from the local economy. However, the crux is on who will be absorbing most of the taxes- whether it would be the platforms, or whether the cost would be passed on to the consumers,” explained Low. But Low agreed that the impact won’t be too significant on consumers as they are using the foreign services on the need basis.

The announcement reportedly included foreign companies logos such as music streaming Spotify, video streaming Netflix, and game distribution platform Steam.

This fiscal policy that brings forward the theme of ‘Credible Malaysia, Dynamic Economy, Prosperous Rakyat’, will be the key test of government run by Malaysian Prime Minister Tun Dr Mahathir Mohamad, that inherited a total of RM1,065 billion debt from the previous government.

As quoted from The Star, here are the details of the Budget 2019 tax policy:

All Imported services, including online ones like software, music, videos and digital advertising, will be levied with a service tax starting Jan 1, 2020.

RM1billion (US$240 million) allocation is to implement National Fibre Connectivity Plan, Mandatory Standard Access Pricing (MSAP) enforced fixed broadband prices down by at least 25 per cent by the end of this year.

RM2billion (US$478 million) in the Knowledge Resource for Science and Technology Excellence (KRSTE.my) to enable greater collaboration between public and private sector based on existing resources.

RM3bilion (US$720 million) Industry Digitalisation Transformation Fund with a subsidised interest rate of 2 per cent under Bank Pembangunan Malaysia Berhad, to accelerate adoption of smart technology consisting of driving automation, robotics, and artificial intelligence in the industry.

Capital Markets and Services (Prescription of Securities) Guidelines gazetted in early 2019 to set up a new regulatory framework to approve and monitor Digital Coin and Token exchanges.

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