Tax free cigarettes

Ernst and Young Tax Consultants Sdn Bhd director, A. Jeyaratnam, said although import duties have actually come down a lot over the years, the current level of 20 per cent is still considered high.

“Only when such a tax is in place, would you see import duties declining to not more than 5.0 per cent,” he told Bernama in an interview recently on expectations of the upcoming Budget to be unveiled by Prime Minister and Finance Minister Datuk Seri Abdullah Ahmad Badawi this Friday.

Set to be implemented fully by January 2007, he said the possible introduction of the long-awaited VAT was also in line with the government’s priority in reducing the budget deficit. He said the idea of having a VAT, or a broad-based consumption tax, has been touted about for more than 10 years.

However, for it to be implemented, the government still has to give a two-year window or advance announcement so that the public would have time to gradually embrace it.

“This will allow for education of taxpayers, businesses and the public, as well as getting the government machinery to go on roadshows to explain what the new taxation system is all about,” he said.

“And in VAT, you have to convince the public it is not going to be a bigger burden than whatever taxes they are paying now,” he said.

In 1992, the government announced the implementation of VAT, known as the sales and services tax (SST) then, to supposedly replace the current sales and service tax.

“But for reasons best known to the government, it has yet to be fully implemented,” he said.

Jeyaratnam said the VAT could be implemented first on the manufacturer or at the wholesaler level, before progressing to the retailers.

Although some of the items like textile and garments are still slapped with a 20 per cent import duty, the real high duty items in Malaysia are actually automobiles, alcohol, cigarettes and tobacco.

Jeyaratnam said as far as automobiles are concerned, Malaysia would include them in the inclusion list under the Common Effective Preferential Tariff (Cept) scheme, which is the implementing mechanism for the Asean free Trade Area (Afta) in 2005.

“Malaysia asked for, and was given, a two year deferment. We believe they also got an approval to start out at 20 per cent and not 5.0 per cent and progressively reduce this rate to 5.0 per cent by 2008,” he said.

Jeyaratnam said in VAT style taxation, it would be preferable to have the exemption list reduced, and introduce what is called a zero rate as a positive rate, where tax free inputs could be enjoyed.

“Those items which are considered essential to the man on the street should be placed on a zero rate, and where you have services, and do not want to be left out of the VAT system, only those will be exempted,” he said.

In that way, there would be no undue burden on the taxpayers, said Jeyaratnam.

He cited cigarettes, where in the previous budget, the government acknowledged there was rampant smuggling and serious loss in government revenue as a result of it.

With that, comes the introduction of security features for both local as well as imported cigarettes. All imported cigarettes come with tax stamps and the local ones have security markings.

He said the tobacco industry has since invested heavily in the requirement to have the security features to distinguish such cigarettes from contraband.

This year alone, the three main players including Phillip Morris, invested about RM90 million on machinery and ink, said Jeyaratnam.

“They also bought all locally manufactured tobacco, to the tune of about RM60 million a year. So there is expense incurred,” he said.