KUALA LUMPUR – Malaysia’s new sales tax on items bought online from overseas merchants has drawn mixed reactions, with local sellers saying they welcomed the fairer competition while others raised concerns that the higher prices would burden poorer Malaysians.

In a move aimed at encouraging demand for local products, Malaysia began imposing a new 10 per cent low-value goods (LVG) tax from Jan 1, 2024, on items priced below RM500 (S$140) that are bought online and delivered from abroad.

The government said the new sales tax would help level the playing field for local and overseas sellers by addressing the disparity in their tax treatment.

There is a 6 per cent sales and service tax on locally produced items.

Local business associations have lauded the move, but some shoppers told The Straits Times they may cut their spending.

The Small and Medium Enterprises Association of Malaysia, which has more than 3,500 members, said the tax would allow local sellers to compete, while driving additional revenue to Malaysia that, in turn, would bolster the faltering ringgit.

“We will be monitoring closely the sales trend for local sellers and retailers post-implementation of the LVG tax to see if it translates into an uptick in sales,” association president William Ng told ST.

In a statement in December, Datuk Ng said that local retailers had been fighting unfair competition from foreign sellers for many years.

“While local retailers have to pay tax at various points of the supply chain, including when bringing components or raw materials as well as finished goods into Malaysia, we are being undercut by foreign sellers and local drop-shippers who have largely escaped from paying tax to Malaysia on their products. This artificially distorts pricing in favour of these foreign sellers,” he said.

The tax was originally scheduled to start in 2023, but was delayed to allow the government to engage with industry players and key stakeholders about its implementation, said the Ministry of Finance. The government hopes to collect up to RM200 million a year from the tax.

Items like cigarettes, other tobacco products, liquor and smoking pipes, all of which are already subject to import or excise duty and sales tax, are exempt.

A random check found that online shopping platforms like Shein and Shopee have begun charging the LVG tax on purchases.

Malaysians who frequently shop online for overseas products said they may now think twice about their buying, with the new tax.

Digital manager Emily Teo, 44, who spends about RM1,000 a month on home appliances and fast fashion, said: “I think this will definitely control my spending a bit.

“I will buy from local retail shops more now due to the tax.”

Manager Kaitlyn Lee, 35, who buys supplements from US-based health and wellness website iHerb, said she may also cut down on her spending.

“I get most of my vitamins from iHerb as it has more options than the shops in Malaysia, and is considerably cheaper even with the tax,” she told ST.

She spends around RM1,500 a year on supplements such as vitamins and probiotics for her extended family of five adults and two children.

“But with our weakening ringgit, prices have been going up since last year. I will still need to buy, but perhaps less of those chewable vitamins that my kids take.”

Malaysia’s e-commerce income rose 5.4 per cent year on year to RM289.5 billion in the third quarter of 2023, according to data from the Statistics Department.

Many Malaysian shoppers choose to buy from overseas online stores, with cross-border e-commerce accounting for approximately 40 per cent of Malaysian e-commerce transactions in 2021, according to the SME Association of Malaysia.

It is estimated that more than 31 million parcels were sent from overseas to Malaysia in 2021, according to data from the Malaysian Communications and Multimedia Commission.

Malaysia is not the only country facing lower tax revenues and stiff competition amid a digital boom.

Indonesia banned e-commerce transactions on social media platforms in 2023 in a bid to protect its small businesses.

Politicians and analysts, however, are concerned about the tax’s impact on consumers in the low- and middle-income groups, amid rising costs of living.

Barisan Nasional lawmaker Wee Ka Siong said the tax would burden the poor.

“It is not the time for the LVG tax as the economy hasn’t fully recovered,” said the MP for Ayer Hitam in a video posted to his TikTok and Facebook accounts.

Mr Mohd Noor Musa, a research analyst at think-tank Institut Masa Depan Malaysia, said the tax would exacerbate income inequality, and further affect consumers who are already beleaguered by rising costs as a result of inflation and the weakening of the ringgit.

Ironically, costs will now rise as well for micro, small and medium-sized enterprises (MSMEs) that import or manufacture goods for overseas sales.

“This vicious circle will affect just everyone – higher prices for consumers and negatively impact MSMEs’ sales and profitability,” the analyst wrote in a letter to the Malaysiakini news site on Dec 19.