Malaysia's consumption tax collectors seek to dethrone cash

Reuters

By Yantoultra Ngui

KUALA LUMPUR, Oct 31 (Reuters) - Malaysia's new consumptiontax is a boon to IT companies that stand to win infrastructurecontracts and fees - provided they can convince people to switchto electronic payments in a country where 91 percent oftransactions are in cash.

The 6 percent goods and services tax (GST) that PrimeMinister Najib Razak announced in his annual budget speech onFriday is aimed at narrowing a budget gap that is expected tohit 4 percent of gross domestic product this year.

Cash payments are harder for tax collectors to track, so thegovernment is encouraging e-payments as a way to reduce costsand improve efficiency.

For companies such as Censof Holdings Bhd and GHLSystems Bhd that specialise in creating electronicpayment and software systems, the initial benefit will likelycome well before the tax is implemented in April 2015.

These companies, along with privately held BrillianceInformation Sdn Bhd and Revenue Harvest Sdn Bhd, are seen asfront-runners for government contracts to build the necessaryinfrastructure because Malaysia has a procurement policy thatfavours local companies. The government has not disclosed howmuch it will spend, but a similar project in Australia in 2000cost A$4.5 billion ($4.31 billion).

That potential has caught investors' attention. Censof'sshares are up 64 percent in the year to date while GHL's havejumped more than 160 percent, both handily outstripping thebroader market's 7.7 percent gain.

"To impose GST, you need to capture sales accurately and itneeds to be done electronically. You need payment infrastructurein place," said Raj Lorenz, group CEO at GHL, Malaysia's largeste-payment firm by market share.

"The business is very bright but there are a lot of peopleusing cash, so they (the government) have to make them all usee-payments. In the end, the only guys who can get away with itare those in the night markets," he said in an interview withReuters.

Ameer Shaik Mydin, executive director with Censof, concurs,adding that all of his company's systems are GST-ready andwaiting to be implemented on clients' sites.

"We've done it in Singapore and Australia," he told Reutersin an interview on Monday, referring to clients overseas. "Itdefinitely has to be electronic. If not, I have to say it'll notwork."

Malaysia's central bank has offered incentives to encourageelectronic payments, which it thinks can generate annualeconomic savings equivalent to 1 percent of GDP. In May, itreduced the cost of interbank fees on e-payments to about 3 U.S.cents from 63 U.S. cents and increased cheque processingcharges. It wants cash transactions to make up 63 percent of thetotal by 2020, down from 91 percent now.

E FOR EVERYTHING

Accounting for GST is especially tricky in a cash economy.Businesses might understate sales to lower the tax bill. But forcash-only companies, making the switch will be costly.

"Big boys can afford it but what about eateries, sundryshops? Do you expect them to pay for such machine and issuereceipts (on GST)?" John Yong, a business consultant based inKuala Lumpur, said.

"If they don't buy and issue receipts then the 6 percent GSTis not going to be remitted to the government. Some industry isjust not ready for GST," he added.

The finance ministry has recommended that only companieswith annual sales above 500,000 ringgit ($158,200) be subjectedto GST, according to local media. That means 78 percent of totalbusinesses - or 433,558 small and medium enterprises - would beexempted.

E-payment companies such as GHL and Censof currently get afraction of the 50 sen per electronic transaction fee. Thecentral bank expects the number of e-transactions to surge10-fold to 12 billion by 2020. That would work out to about 6billion ringgit a year in fees.

The e-payment industry is consolidating just as businessappears to be picking up. GHL, which counts banks and smallbusinesses as clients, announced earlier this month it is takingover Australian listed peer e-pay Asia Ltd. Censofbought a controlling stake in rival Time Engineering Bhd last month.

The next step for Malaysia is getting companies to filetheir taxes electronically. Yeo Eng Ping, who leads the Malaysiatax practice at accounting firm Ernst & Young, said thegovernment was considering an e-filing system that would becompulsory for exporters and for businesses with annual turnoverexceeding 5 million ringgit.

"E-filing allows for a much more efficient process ofreporting, recording and ultimately collecting tax, not justindirect tax. This is especially so when teamed with e-payment,"Yeo said. ($1=1.0431 Australian dollar, 3.1568 Malaysian ringgit) (Editing by Niluksi Koswanage and Emily Kaiser)

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