Think tank warns against digital tax

The Institute for Democracy and Economic Affairs (IDEAS) today cautioned Putrajaya against introducing a new digital tax, saying it could increase prices for consumers and businesses.

“This could slow the development of the digital economy in Malaysia, particularly for new start-ups and small medium enterprises (SMEs),” the think tank said in a statement.

It acknowledged however that the introduction of such a tax would increase short-term revenue.

The Pakatan Harapan government is said to be mulling a new tax for online businesses ahead of Budget 2019 to be tabled in November.

IDEAS said the proposed taxes could be either “direct taxes” that target the profits of foreign digital companies doing business in Malaysia, or “indirect taxes” that apply consumption taxes like the sales and services tax or SST to foreign companies selling digital goods and services in Malaysia, paid by the users.

But if Malaysia introduces a “direct digital tax”, it said, this could encourage other countries to do the same which would be damaging for Malaysian firms looking to export to those markets.

“As an open trading nation, Malaysia stands to benefit more from a pro-trade, pro-innovation approach to the digital economy.”

It said an indirect tax would be less controversial, adding that many countries had adopted such an approach.

Implementing this, it said, would also put Malaysia on a level playing field with foreign companies as local digital firms are already subject to the SST.

“It would, however, still increase the cost of digital goods and services in Malaysia and drive up prices. Also, with the recent switch from the goods and services tax to SST, implementation would have to be handled with care.”