- 9 months ago
SST expands July 1 — but what does it really mean for your wallet, your business, and Malaysia’s digital future?
Dr Chris Daniel Wong, Emeritus Chair of MDCC, breaks it down: from rising fintech fees, SME compliance pressure & digital divide risks… to how e-invoicing might quietly reshape the game.
Dr Chris Daniel Wong, Emeritus Chair of MDCC, breaks it down: from rising fintech fees, SME compliance pressure & digital divide risks… to how e-invoicing might quietly reshape the game.
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00:00Hello and welcome to Nyaga Spotlight with me Tamina Kaosji. Nyaga Spotlight takes us through
00:12the week in economic analysis and future affairs. Now this week on analysis we spotlight the upcoming
00:18SST expansion and Malaysia's digital future. So of course Malaysia's July 1st SST expansion,
00:25it requires unpacking, going beyond tax headlines to explore its real impact on the digital economy,
00:32SMEs as well as middle-income consumers. Now while the revenue goal of 5 billion ringgit per year
00:38via SST 2.0 to support fiscal reform under economy madani is a tantalizing imperative, it requires
00:46inclusive and forward-looking participation from the digital economy in particular. Now this is to
00:53ensure that current challenges including e-wallets, streaming, fintech raising fees, SMEs facing
00:59compliance burdens which risk slowing digitization and potential price hikes across tech services
01:05due to tax cascading in B2B chains are all managed adequately. It is also equally important to
01:13understand how e-invoicing could quietly fast-track digitalization, why fintech and digital platforms
01:19might see user drop-off and whether the SST expansion risks widening the digital divide for
01:25underserved B40 Malaysians. Now this is timely analysis on how tax reform intersects with Malaysia's
01:31digital ambitions under economy madani. I have the absolute pleasure of welcoming to the studios with me
01:38today live Chris Daniel Wong who is Emeritus Chair. Dr. Chris is with the Malaysia Digital Chamber of Commerce or the MDCC.
01:45Chris, very good morning. Thank you so much for making time. How are you today?
01:50Good, very well. Thank you for inviting.
01:52Exactly. So I think it's a really timely proposition that you're coming in to help us voice out what some of the concerns as well as
01:59the exciting things which the digital economy players are looking forward to. Chris, let's start off with looking at the fact that Malaysia's digital economy is growing at a really healthy rate, right?
02:10We are seeing figures and facts of about 23.5% of GDP coming in to about in excess of close to 430 billion ringgit and this was in 2023.
02:21It's projected to hit closer to 26% of GDP and this is by 2025 this year. So tell us a little bit about how the SST expansion will be impacting this momentum and things to watch out for.
02:36Well, if you look at the expansion of the entire digital economy, it touches on many sectors. I think first we look at e-commerce which is a major driver of the retail economy.
02:50Then we have cloud services which not only the retail market uses but also the enterprise market.
02:58The enterprise market has two segments, three segments in fact. You have the government who uses cloud services and then you have the MNC or mid-tier company and also the SME.
03:09And then you have a lot of retail that uses digital content. Digital content probably in various social media platforms and people who advertise on social media.
03:20So these are the main contributors of revenue to what we call the digital market.
03:28But when the government of the day implement SST at 8% across the board, what will happen then is that you will see that prices will be driven up.
03:39So when prices are driven up, you are given an amount of budget and you cannot exceed that budget and that budget needs to include government SST as well.
03:49Right.
03:50Which will mean the consumption of the services will then be lesser. It's the same amount of money.
03:55Right. But however, the consumption will be lesser because part of the money will then be provided provision allocated towards paying SST.
04:07So therefore, when the consumption becomes little smaller, right, it will affect the quality and the productivity of the company. That's where I see that.
04:17Absolutely. And I think you've made a great point over there because generally digital SMEs, they quite often rely on outsourced B2B services for IT and etc.
04:25And that's how the cascading costs can actually be hitting them. So tell me about how critical MDCC views the maintenance of this investment momentum.
04:35We have close to one hundred and sixty three billion ringgit approved as of last year.
04:40And how is this also going to help to buffer some of the anticipated impacts, at least during the adjustment period, Chris?
04:48Well, if you look at that, if you see year to year, definitely investment will come in. It's just a matter of how much and how little will come in.
04:58But there will be impact. Just give an example. And all this is about sustainable policy, forward looking policy and very important policy that is constant.
05:09When I say constant policy, you don't change it very often. You probably look at it two years or three years once. Right.
05:18You revamp policy as when time changes. But when tax has been, you know, reform year after year, it will affect the sustainable of the policy.
05:29So one of one very good example. I think in Niagara one year I was asked the same question as well. Right.
05:36When we look at data center, there are influx of data center right now in what we call that in Johor.
05:45All right. When you rent out the server, when you rent out the space, definitely there will be SST.
05:51All right. And especially if you're what we call that, your half a million income threshold has really, you have really crosses the mark.
06:00That is one part of it. And then we are talking about manpower.
06:04When people rent your data server farm, there will be manpower involved as well.
06:09Naturally. And that is SST billable. All right.
06:12So there's many components of SST and you will see the cascading effect with the cost of doing business.
06:18Just by data farm center, would that increase us? So that's what worries us as a chamber.
06:23All right. Because we will no longer be sexy. All right.
06:27As compared to Singapore, obviously, you look at exchange rate, we still may be compatible cheaper.
06:32But we must also understand that Singapore has better provided infrastructure at the present moment versus us.
06:40Right. Whether in KL or in Johor, well, we are still building that infrastructure.
06:44So that's what worries us in the chamber.
06:47So what I'm also hearing is the fact that the investment momentum, which has been achieved by 2024, that's actually going to be able to form a little bit of a buffer for us right now.
06:56Right. Moving on into the next few years.
06:58So perhaps maybe even digital infrastructure or even SME grants could be used from the already made investments to perhaps offset a few of these expenses.
07:09But moving on from there, Chris, let's talk about fintech platforms.
07:14E-wallets, for example, which are hugely popular amongst everyday Malaysians and users, they are also definitely going to be passing on SST costs to users.
07:23So are we now then looking at the potential of a digital divide when it comes to lower income Malaysians and will they then be delaying their own fintech adoption?
07:35That is a very straightforward answer. Yes. You will see digital divide between the urban, semi-urban and the less urban.
07:44Right. Three segments then.
07:46Three segments.
07:47You see Kuala Lumpur is a world, first world city. But however, if you go to Seremban, that will be a semi-urban area.
07:55Right. And then obviously you go to Kampung is lesser than that.
07:58But we are blessed because across the board, we have good coverage.
08:03Certain places that you don't have 5G, you still have 4G. But across the board, we have 5G.
08:08But that is only on data coverage. So what you mentioned just now is very apt.
08:15Fintech right now, at the chamber level, we work very closely with Pemuda and the Malaysian Productivity Corporations.
08:22We have come up with the first, what we call that alternative dispute resolution for B2B online businesses.
08:29Right. So recently, there are complaints came in that platform provider, I can't name them, but there are e-commerce platform providers that start to charge 8% on commission.
08:40Right. So they are taking commission. There's nothing wrong. They are taking commission from the sellers, online sellers.
08:47All right. But the commission that they charge is now 8%.
08:51Right.
08:52Government mandated that you have to charge 8% on the commission that you charge on the seller.
08:57So again, like what I mentioned earlier on, the margin becomes thinner.
09:01Sure.
09:02And when the margin becomes thinner, people need to survive.
09:04And what they do, they have no choice but to increase the selling prices, the prices of goods.
09:09And it would then be passed on to that consumer.
09:12Naturally.
09:13Naturally.
09:14So that is only the final tax that we see.
09:17But in between the middle tax, for example, the reseller would have imported their goods from overseas.
09:24Or the resellers would have gotten the goods, bought or purchased the goods from a local manufacturer.
09:29Right.
09:30There are raw materials that have been taxed as well.
09:32And there will be logistic tax as well.
09:34So you see raw materials have been taxed.
09:36Logistics have been taxed.
09:38So it's a cascading tax, which then, and consumer, I'm just briefly sharing that there are three taxes here.
09:45Yes.
09:46Three cascading tax.
09:47So three times times eight, three times times eight, three multiple times, multiple times eight, that will be 24%.
09:55That's right.
09:56So across the board, you will see that prices will definitely increase between the range of 15 to 21%.
10:02So that's what worries us.
10:04So what will happen then is people will then buy lesser.
10:07So perhaps could we look at maybe SST relief or subsidies kind of forming the bridge for this anticipated inevitability as we're describing it?
10:17Well, if you look at businesses subsidies, it comes in many various forms.
10:21It comes in tax relief.
10:23It comes in a form of grant.
10:25But what we believe is that if you look at the mathematics, you do the math, right?
10:30The subsidies or the grant would not be able to offset the market purchases.
10:36Right.
10:37If you look at digital economy, it's about 25%, right?
10:40Total GDP, yes.
10:41Total GDP.
10:42And what's our GDP right now?
10:43Almost a trillion, right?
10:44So we are talking about 250 million at least.
10:47So do we have that kind of money or does the government have that kind of money, 250 million, to offset, to give it in the form of subsidies or grant to offset the inflation that's coming up?
11:02So we got to look at the math.
11:04So for me, professionally, if you look at a point of as an economist, there must be certain items that is not taxable because it has really been a cascading effect.
11:15That's right.
11:16For example, the same way in which certain exceptions have already been announced for food items, the same actually most likely needs to be done for digital products too.
11:25I think, I believe, in my opinion, basic digital product that should not be taxed is probably earphones, right?
11:34Handphones, those are basic needs.
11:36It's just like apple and orange become a staple food, handphones become a basic needs of us.
11:41So what we would like to implore the government is that to look at the basic digital needs of the consumer.
11:48For example, data.
11:49Your house probably have Unify or internet and it shouldn't be taxed because it's basic needs.
11:56So not only staple food, but staple digital consumption shouldn't be taxed as well.
12:02Yeah, I think that makes a lot of sense when it comes to how it might be rolling out.
12:07Would you have some perhaps quick advice from MDCC's perspective for companies and how they can then navigate the double taxation on their own digital service chains?
12:17That's a very tough question to answer, in fact.
12:20If you look at companies, a lot of process involved in delivering the end product, right?
12:27If you look at, for example, you walk into a restaurant, they use tablet to do ordering nowadays.
12:32Yes, yes.
12:33No matter where you go.
12:34That is part of the digital process as well.
12:37But the raw materials has already been taxed and then the end product has also been taxed.
12:42Now sugar has been taxed as well because it's a processed product, right?
12:46So I think what SMEs especially can do is to make their process leaner.
12:53And when you make the process leaner, you can actually reduce costs.
12:56But again, it's easy said to be done.
12:59And many of the companies, you know, Malaysia is a very unique country because of our three main races.
13:04And our three main races here is what I always say with my circle of friends.
13:09We are short resilience people.
13:12We are really short resilience people, primarily because we are export driven market.
13:16So when there are, let's say, tariff increases from any other countries, we will be able to absorb that in a very unique manner.
13:24Unique and short time free manner.
13:26So sometimes they will come and tell us and say, how much can we be leaner?
13:32Because there's only so much you can do.
13:34Right.
13:35Of course, the answer is to go lean.
13:37Right.
13:38To manage the costs.
13:39Look at a product that is focused on products that is sellable.
13:44Remove products that are from the shelf that is not sellable.
13:48All right.
13:49That doesn't have that demand.
13:50All right.
13:51But end of the day, again, very important is that these businesses try not to raise prices as much as it should be, actually, because you still need the consumer to come back.
14:05Exactly.
14:06Thank you very much, Chris, for the discussion so far.
14:08Don't go anywhere.
14:09We'll come right back after the short break discussing SST expansion and impacts on the digital economy.
14:32Welcome back to Niagara Spotlight.
14:33Still with me, Tamina Kausji.
14:34And today, of course, we are covering and getting back into the conversation on SST expansion and impacts on Malaysia's digital futures and economy with Dr. Chris Daniel Wong.
14:44So, Chris, moving back into the conversation, another big area of discussion is the fact that e-invoicing is also becoming mandatory by mid this year, which is right about now.
14:55So, is this then perhaps a hidden catalyst for digital tax compliance or is it also going to become a compliance hurdle for our numerous small players?
15:08Well, I look at it, the gap is big.
15:12The gap is big.
15:13It will be a compliance hurdle for many SMEs, especially the smaller businesses.
15:19The smaller businesses probably revenue is about 600,000, 700,000.
15:24Definitely they have, what we call that, reached the minimum half a million threshold.
15:28Yeah.
15:29And the challenges is that most of these companies, because the margin is so thin, they don't really have cloud-based technologies.
15:35Right.
15:36They don't use it.
15:37They don't use it.
15:38And because when they don't have cloud-based, very rarely they use API integration.
15:42They don't have that capability to integrate the payment system into an API or maybe a particular module into API.
15:50When we look at the e-invoicing system, some of it has been incorporated into CRM system as well, into ERP system as well.
15:58Those are quite big SMEs that can actually afford to do it.
16:02Affordability doesn't only mean money, it also means manpower.
16:06Very true.
16:07You need to have compliance officer or maybe operational staff.
16:10Qualified inside your system already.
16:12You have an operational executive who actually really look into that.
16:15So the other factor is actually compliance needs and compliance costs.
16:22So the gap is still there.
16:24The gap is really still there.
16:26If you look at statistics, we got about 1.2 million registered businesses with SSM.
16:31And more than 95% is actually SME.
16:34And of the 95%, about 61% to 70% is actually micro-SME.
16:40So which means the gap is really huge if you look at the statistics.
16:44Exactly.
16:45So I mean the stats as well are coming out from SME core.
16:47They're also showing that not even 20% have actually even begun with the implementation for e-invoicing.
16:55So it's definitely pointing towards quite a few complex issues.
16:59But at the same time, maybe if we were to look at for e-invoicing to do phasing, how would that perhaps aid?
17:07Or is it just something which is going to continue to be an issue regardless of the timeframe given?
17:12Now, one thing that we are very happy with at the Chamber is that the e-invoicing was supposed to be $150,000 below threshold.
17:21That's right.
17:22And then we fought for it.
17:23We fought for the policy.
17:25And then now it became half a million.
17:26We thank the government of the day for it.
17:28Very cognizant, yes.
17:30But next, aptly what you say, next one, it will be we need a phased implementation, especially for the micro-SME so they can ease the transition.
17:41Like what I mentioned just now, 60-70% of the micro-SME, they're not ready.
17:46So what are they going to do?
17:48Either they close shop or they do lesser so that they don't go above the half a million threshold.
17:54So there's many probability that will really happen actually.
17:59And government should actually take the lead and initiative through various agencies, for example SME Corp, to provide solutions, affordable solutions to the micro-SMEs and more training.
18:12And these SMEs, micro-SMEs, they don't have time to come for physical classes.
18:16Naturally.
18:17You probably have to do videos, two-minute videos, three-minute videos.
18:20Video that's not very long.
18:21Standardized explainers.
18:22And explain how to use that system actually.
18:25And then probably at every daerah, at every district level, there will probably need to be an SME champion coach that actually handhold the micro-SMEs.
18:40Have you done this?
18:42Organization by organization.
18:43Yes, what are the challenges?
18:44So there's continuous, not only workshop, but handholding process so that we can see a total, not seamless, but a total buy-in of adopting e-invoicing.
18:57A soft mandate might actually turn out to be a blessing in disguise.
19:01But moving on from there, I'd also like MDCC's expertise looking at a wider area of discussion, Chris.
19:07Now, Malaysia has also secured close to 90 billion ringgit in data center investments in 2024, as we were touching on earlier.
19:15So with SST on leasing and energy costs, what could the slowdown or potential slowdown mean? And how can we move from there anticipating this already?
19:27From the news report that I read yesterday, it seems that there are changes.
19:34There are changes. What happened is that government will not tax on leasing.
19:39There's good news. And also, government will not tax on, well, I can't recall that, but mainly it's on leasing.
19:48So there's good news for data center actually. But again, if the data center is above half a million revenue, definitely the tax will be there.
19:57So what we look at that, to reshape the digital infrastructure landscape, we need to create more jobs from data centers.
20:07What we heard from ground up feedback is that most of the data center leases does not create much jobs.
20:17But it consumes a lot of energy, like what you mentioned just now, and it consumes a lot of water.
20:22So we are only seeing the top of the food chain, the top of the food chain that benefited from these data center businesses.
20:30That's right. The first layer only, so to speak.
20:32Companies that provide electricity, companies that provide what we call data center leases, they benefited.
20:39But the middle part, the middle part, the jobs for the middle part, for example, data scientists.
20:44For example, even a basic reception jobs, they aren't much actually, because data center is supposed to run by itself.
20:51You just store the data on the cloud and then the server will then pull the data from the cloud and so forth.
20:58So it's a server farm essentially.
21:01Exactly. And to be most modern, you have to adopt that system.
21:05So you don't really need much manpower to do it.
21:08But in the long term, we need to create jobs from these kind of businesses.
21:12So when you create jobs, definitely there will be expansion of tax collection, whether in the form of business tax, whether in the form of SSC tax or whether in the form of income tax.
21:23Exactly. So from there also, let's go into the fact that 70% of SMEs did report healthy growth.
21:30And this was in 2024, but also thanks to AI adoption, which increased from 11% to close to 30%.
21:38So that's super encouraging.
21:40Does MDCC feel that SST on digital services will discourage further AI and cloud investment?
21:47Or do you hope to see those numbers grow again?
21:50Well, definitely in the short term, there will be knee jerk reaction.
21:54With the implementation, people will hold back on investment.
21:58They will actually look at what we call a see and wait look approach.
22:04But during this time, the policy makers need to look at policy support.
22:11And three very important policy support is that they need to look at tax rebates or maybe capital allowances for businesses that invest into AI or digital.
22:23Tax rebates or maybe capital allowances.
22:26And then the second is consider SST exemption for productivity enhancing technology.
22:32Like for example, I mentioned, there are tools that we use every day for our businesses, especially digital.
22:39So consider that for exemption because when you spend more on these gadgets, it will produce better productivity.
22:48And it should be exempted because once productivity improves, revenue improves.
22:53When revenues improve, collection of corporate tax also improves.
22:59And the third one is that we need to promote more local digital tools.
23:04Right now, most of the solution is coming from foreign companies.
23:07So we need to have more, not only startups, but we need to have more mid-tier companies.
23:13Why mid-tier companies? Because they already have that finances.
23:17They have that money.
23:19Probably what they don't have is the know-how.
23:22They can probably partner with certain local startup companies or smaller companies, provide the finances, the capital.
23:29And then these companies being lean company, being a startup, being more innovative, can actually come up with more digital tools locally.
23:38Exactly. We also need to be innovators rather than just consumers.
23:41Chris, before we end off, I want to give you space for a last discussion area.
23:45So, of course, with the anticipated RM5 billion a year coming in from SST revenue,
23:50which has been pledged by economy medani fiscal buffers.
23:53What are MDCC's expectations around how this will directly feed into, hopefully, the digital infrastructure, literacy and also, of course, SME support and growth?
24:05Well, I look at it, three areas. What I mentioned just now was actually digital job creation.
24:11We need more digital job creations.
24:14And the second is actually utilization of funding into much more appropriate area.
24:21The one I mentioned earlier on, have policies and incentive for mid-tier companies to invest their retained profits into innovative startups or smaller companies,
24:34so that you can produce more local digital tools that will create jobs again.
24:39And then the last one is that, obviously, we look at digital divide, huge between non-urban and urban.
24:46That's right.
24:47And we got to do more, actually. We got to do more.
24:49And you need policies and especially tax rebate for the bigger company to actually bring all this, what we call it, technology into rural area.
25:00For example, there will be people who still do rural farming, for example, or maybe rural industries.
25:08And it has to come along with technology, like agriculture technology, plantation technologies.
25:14Digitizing one part of the chain.
25:16Yes, correct. And therefore, you can elevate the status of the local economy in this non-urban area.
25:23Absolutely. Chris, thank you so much for actually setting the tone for what needs to be done for the digital economy.
25:28Pleasure having you on the show.
25:31Well, Malaysia's SST expansion isn't just about tax. It's a pivotal moment for the digital economy.
25:35Now, of course, as MDCC's Dr. Chris Daniel Wong has just shared, the impact on SMEs, fintech and consumers is real.
25:41But so is the opportunity to drive smarter, inclusive digitalization under economy madani.
25:47The key, balance reform with readiness.
25:50Well, that's all we have time for today on Nyaga Spotlight.
25:52We'll see you again next week with more economic analysis and insights.
25:55I'm Tamina Kausji signing off.
25:57Here's to a productive week ahead.
25:59I'm Tamina Kausji signing off.
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