Though established online giants like Shopee have already begun imposing a 10 per cent Low Value Goods Sales Tax on their platform, new business owners may still lack clarity on the new tax treatment.
In this post, we highlight rules surrounding LVG Tax in Malaysia to help domestic and international SME owners determine whether their business operations will be directly affected, and if so, in what capacity.
Why Low Value Goods Tax was implemented
We won’t dwell on this too much, but in the case of LVG Tax, the primary purpose is to help Malaysian retail businesses compete against online alternatives.
Plugging the De Minimis loophole
The de minimis practice in Malaysia allowed international consignments below RM500 in value to be exempt from sales tax and import duty. In theory, this was to facilitate faster customs clearance for postal and courier shipments.
However, in practice, this gave online businesses an unfair advantage over retail outlets as they could sell imported goods directly to Malaysian consumers at lower price points. If you run an online business selling directly to Malaysians, you probably already know this.
The idea behind the LVG Tax is to reduce the price gap between imported and locally sold goods, making products from local SMEs more competitive.
Well, that and increasing government revenue of course!
Conditions to qualify for LVG Tax
Two categories of conditions must be satisfied for a business to qualify for LVG Tax.
A product must meet three conditions to qualify as a taxable low value good:
- Sold online
- Imported into Malaysia from an overseas source
- Has a total CIF (cost + insurance + freight) charge under RM500
There are two exemptions to these conditions:
- Alcohol, vape, and tobacco-related products receive a specialised tax treatment
- Goods imported by air courier into selected airports are exempt from LVG tax
This one is very straightforward.
A seller qualifies for LVG Tax treatment if the total sale value of low value goods brought into Malaysia exceeds RM500,000 in 12 months, irrespective of where they are based.
If your business does not meet either of the above requirements, then for now, your goods sold will not be subject to LVG Tax.
What to do if you qualify for LVG Tax
Business just got a bit more complicated, but nowhere near as bad as a penalty for sales tax non-compliance!
If you find that you qualify for LVG Tax, here are our recommended next steps.
Step 1: Become a Registered Seller
You will need to register your business with Malaysia’s Customs Department via their MyLVG portal.
You’ll also probably find this official guide to completing your registration useful.
Step 2: Familiarise yourself with how LVG Tax works
The 10% LVG Tax is only imposed on the sale value of the product itself, not accounting for the insurance or freight costs.
For example, if a Malaysian consumer goes online and buys a book for RM50 from overseas and gets charged RM5 for delivery, the LVG Tax only applies to the RM50 sale value of the book.
Here are some other scenarios concerning LVG Tax to consider:
- Discount codes change the sale value of a good and can make it qualify for LVG Tax
- Vouchers don’t affect actual sale value and won’t cause goods to qualify for LVG Tax
We’re afraid this is a rather surface level understanding of how LVG Tax can affect cost of importing goods, so for a deeper understanding of how it interacts with the de minimis rule and regular import duties, check out the Malaysian Royal Custom’s FAQ on LVG Tax.
Step 3: Memorise LVG Tax obligations
As a Registered Seller, you must submit a Sales Tax return on LVG known as LVG-02 every three months according to the taxable period via the MyLVG portal
You must also keep the various invoices related to LVG transactions for seven years from the last date related to those records.
The transactions are to be done in Ringgit Malaysia and overseas sellers may refer to any reputable source for real-time currency exchange rates, though we’d recommend Bank Negara Malaysia’s table of exchange rates.
Reviewing your online business model
If your business, whether already running or just an idea, will be significantly affected by LVG Tax to the point you no longer have faith in its viability, consider the following options to solve the problem.
Option 1: Move to HVG or sell less LVG
A Registered Seller can cancel their registration if they stop selling LVGs or no longer meet the minimum threshold of RM500,000 worth of imports over 12 months.
If a 10 per cent LVG Tax would no longer make you competitive, setting a maximum sales figure where the amount of imported SVG does not exceed RM500,000 mark and adding more High Value Goods (HVG) to compensate can allow your business to continue charging low prices for imported goods.
Option 2: Switch to selling locally produced goods
As the price gap between local and imported goods shrinks, being locally manufactured and assembled becomes a more compelling unique selling point.
Not only could supporting local manufacturers open doors to unique grants and subsidies, it might come at no compromise to quality – don’t underestimate Malaysia’s industrial sector!
Option 3: Explore other markets
While other countries in Asia such as Singapore also implement their own form of tax on low value goods, many other countries do not, and if you’re the laissez-faire sort, it could makes perfect sense to shift your attention to a market where you can take full advantage of an online business model without undue government intervention.
Let MISHU plan your tax strategies
While a 10 per cent Low Value Goods Tax is a significant burden on sellers that qualify, the right tax strategies based on your business’ goals and needs can help minimise its impact and ensure you remain competitive.