Malaysia. Quick revenue boost from lifting of Labuan tax-free status

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THE lifting of Labuan’s tax-free haven status starting with alcoholic beverages, should it happen, is a quick way to boost Government coffers, although the overall impact may not be too significant.

By rough estimates, Yeah Kim Leng, economist and dean at the school of business at Malaysia University of Science and Technology says the Government could potentially reap “a couple of hundred million ringgit” a year by taxing alcohol sold in Labuan.

“In the bigger picture, the impact is not that great but it will help in enhancing overall revenue,” he says.

Additionally, the move to tax Labuan alcohol will also help plug leakages and minimise contraband issues, he points out.

“What is more important, however, is that the Government must strike a balance between revenue enhancement and reining in its spending,” Yeah tells StarBizWeek.

According to industry sources, the amount of alcohol that is shipped into Labuan, located off the coast of Sabah, is more than what is sold in the entire Southern and Central Peninsular Malaysia.

This has led to many instances where smuggled alcohol as well as cigarettes from Labuan had found their way into Peninsular Malaysia.

Based on government data provided, the 2015 estimated figures for excise duty (before taking into account tax changes) imposed are RM122.2mil (for manufactured liquor), RM1.2bil (for beer from malt) and RM1.1mil (for wine).

These compare to the total estimated revenue gained from all excise duties for 2015, which stands at some RM9.4bil.

In terms of sales tax that the Government is estimated to have gained last year, it is RM4.03mil (for liquors) and RM20.6mil (for beer from malt).

Meanwhile, Nomura South-East Asia economist Euben Paracuellesm concurs with Yeah in saying that measures to increase government revenue must be accompanied by steps that “improve tax administration efficiency”.

“There’s little room for raising taxes at this point.

“Measures (such as lifting Labuan’s tax-free status for alcohol) will help raise revenue marginally but these should also be accompanied by steps that improve tax administration efficiency,” he stresses.

Paracuellesm believes that although Malaysia’s growth is slowing, it remains resilient and hence does not need rate cuts to boost growth.

“We see Bank Negara holding the policy rate steady this year.”

The Government had assumed crude price to be at US$48 per barrel when it mapped out the Budget 2016.

Sharp drop

Oil prices have since dropped to below US$30 per barrel and could dip further, hurting government revenue which is derived substantially from oil.

The Government will announce the revised budget, which will incorporate measures to boost revenue next week and hopefully also address its issue of a ballooning operating expenditure and persistent budget deficit.

Labuan alongside Langkawi and Tioman are currently designated as tax-free zones.

Back in 2011, it was reported that Finance Ministry officials had brought up to the Cabinet the issue of widespread smuggling of cigarettes and liqour that had caused the Gov­ernment to suffer massive losses.

This in turn had prompted the Finance Ministry to examine the viability of Labuan’s duty-free status. However, no action was taken.

Away from these tax-free zones, beer and stout sold in Malaysia continue to have the highest excise tax rates, according to information on the Confederation of Malaysia Brewers Bhd website.

The confederation which is made up of the two key industry players who contribute over 90% of the total beer and stout volume in the market, namely Carlsberg Brewery Malaysia Bhd and Guinness Anchor Bhd, notes that following three consecutive tariff hikes (2004 to 2006), Malaysia has the second highest duty on beer in the world after Norway.

The excise duty for beer is RM7.40 per litre with an additional 15% ad varolem tax.