CONTRACT AND FEE POTENTIAL: Consumption tax implementation requires e-payment infrastructure to make it effective
MALAYSIA'S new consumption tax is a boon to information technology (IT) companies that stand to win infrastructure contracts and fees - provided they can convince people to switch to electronic payments in a country where 91 per cent of transactions are in cash.
The six per cent goods and services tax (GST) announced by Prime Minister Datuk Seri Najib Razak in the 2014 Budget is aimed at narrowing a budget gap that is expected to hit four per cent of gross domestic product (GDP) this year.
Cash payments are harder for tax collectors to track, so the government is encouraging e-payments as a way to reduce costs and improve efficiency.
For companies such as Censof Holdings Bhd and GHL Systems Bhd that specialise in creating electronic payment and software systems, the initial benefit will likely come well before the tax is implemented in April 2015.
These companies, along with privately-held Brilliance Information Sdn Bhd and Revenue Harvest Sdn Bhd, are seen as front-runners for government contracts to build the necessary infrastructure because Malaysia has a procurement policy that favours local companies.
The government has not disclosed how much it will spend, but a similar project in Australia in 2000 cost A$4.5 billion (RM13.5 billion).
That potential has caught investors' attention. Censof's shares are up 64 per cent year-to-date, while GHL's have jumped more than 160 per cent, both handily outstripping the broader market's 7.7 per cent gain.
"To impose GST, you need to capture sales accurately and it needs to be done electronically. You need payment infrastructure in place," said Raj Lorenz, group chief executive officer (CEO) at GHL, Malaysia's largest e-payment firm by market share.
"The business is very bright but there are a lot of people using cash, so they (the government) have to make them all use e-payments. In the end, the only guys who can get away with it are those in the night markets," he said in an interview here.
Ameer Shaik Mydin, executive director with Censof, concurs, adding that all of his company's systems are GST-ready and waiting to be implemented on clients' sites.
"We've done it in Singapore and Australia," he said in an interview on Monday, refering to clients overseas. "It definitely has to be electronic. If not, I have to say it'll not work."
Bank Negara Malaysia has offered incentives to encourage e-payments, which it thinks can generate annual economic savings equivalent to one per cent of GDP.
In May, it reduced the cost of inter-bank fees on e-payments to about US$0.03 from US$0.63, and increased cheque processing charges. It wants cash transactions to make up 63 per cent of the total by 2020, down from 91 per cent now.
Accounting for GST is especially tricky in a cash economy. Businesses might understate sales to lower the tax bill. But for cash-only companies, making the switch will be costly.
"Big boys can afford it, but what about eateries, sundry shops? Do you expect them to pay for such machine and issue receipts (on GST)?" asked John Yong, a business consultant here.
"If they don't buy and issue receipts, then the six per cent GST is not going to be remitted to the government. Some industries are just not ready for GST," he added.
The Finance Ministry has recommended that only companies with annual sales above RM500,000 be subjected to GST, according to local media. That means 78 per cent of total businesses - or 433,558 small and medium enterprises - would be exempted.
E-payment companies such as GHL and Censof currently get a fraction of the 50 sen per electronic transaction fee. The central bank expects the number of e-transactions to surge tenfold to 12 billion by 2020. That would work out to about RM6 billion a year in fees. Reuters