The visibility gap in Malaysia’s e-commerce tax system

 Developing countries need more than tax laws. They need digital-ready institutions.

From Hal Lai Keong and Ong Tze Chin

The real issue in e-commerce taxation is visibility. A single online purchase is a complex web: an overseas seller, a remote platform, a foreign payment gateway, and a cross-border courier.

By the time the Malaysian customs department finally sees the physical parcel, the sale, payment and delivery are already complete. This makes tracking the transaction nearly impossible.

This is why the UNCTAD Intergovernmental Group of Experts on E-commerce and the Digital Economy meeting in Geneva earlier this month was so critical.

Focused on helping developing countries protect their tax revenues, the session highlights a hard truth: e-commerce taxation is not just about demanding more money. It is about whether developing countries possess the data, tools and institutions needed to police the digital economy fairly.

Malaysia is already fighting back. On Jan 1, 2024, the government introduced a 10% sales tax on imported low-value goods (LVG) under RM500. The framework avoids wasting resources on occasional sellers by establishing an annual sales threshold of RM500,000 for mandatory platform registration.

This design effectively segments the market: the RM500 price cap isolates high-volume parcel trade, while the RM500,000 threshold ensures compliance focus remains on scalable platforms.

However, while capturing low-value imports on paper is a critical milestone, the ultimate measure of success lies in implementation.

Traditional trade channels are highly visible, as goods often move through retailers, importers, distributors or wholesalers.

In contrast, e-commerce transactions are deeply fragmented. An overseas seller might list a product on a remote platform, process payments through a foreign gateway, and ship items via international couriers.

Consequently, border customs only see the physical parcel upon arrival. No single entity possesses visibility over the entire transaction. This data fragmentation paralyses tax collection and creates severe revenue leakage.

Fair taxation requires seamlessly connecting disparate pieces of data. Tax authorities require sales data, customs require product details, platforms hold buyer-seller data, and couriers track delivery locations.

To bridge these gaps, Malaysia must build robust digital institutional capacity. This requires upgrading customs systems, streamlining tax registration, deploying digital filing, and removing communication silos between agencies.

This matters for domestic businesses.

Tax treatment of domestic and foreign sellers should be neutral. A local retailer that pays tax, keeps records and complies with domestic rules should not be placed at a disadvantage against an overseas seller whose transactions are harder to detect or tax, particularly for informal e-commerce across social media platforms, foreign communication apps, foreign e-commerce platforms or video sharing platforms.

The intention is not to protect domestic businesses from foreign competition, but to ensure that competition takes place on comparable tax terms.

If imported goods escape effective tax collection while domestic businesses remain fully visible to the tax system, it creates an uneven playing field.

Digital marketplaces wield immense operational control over product listings, payments and logistics. It is highly practical for tax laws to mandate their assistance in collection and data reporting.

However, regulatory design requires careful calibration. Overly lenient rules perpetuate tax evasion, while excessively harsh rules inflate compliance costs. This burden ultimately hurts consumers and prevents small businesses from participating in digital trade if compliance becomes too complicated.

This is why Malaysia needs balance.

Malaysia does not currently operate a VAT/GST system, but the same policy question arises under the sales tax on low-value goods: how can the country collect consumption tax fairly when the sale is made online, the seller may be overseas, and the parcel enters through customs channels?

VAT/GST may be one of the strongest tools for taxing consumption, but in e-commerce, its success depends on the strength of the institutions behind it.

Malaysia should also make compliance simple. Foreign sellers and online marketplaces should know when they must register, how to charge tax, how to file returns and how to avoid double taxation. A confusing system will not improve compliance. It will only create uncertainty.

The wider lesson from the UNCTAD discussion is that developing countries need more than tax laws. They need digital-ready institutions. E-commerce taxation depends on data, coordination and administrative capacity. A country cannot collect efficiently from digital trade if its institutions still operate in separate silos.

As such, Malaysia’s e-commerce tax debate should be beyond whether e-commerce and digital trade should be taxed and instead discuss whether the institutions are ready for e-commerce and digital trade.

Well-written rules may remain vulnerable in practice without coordination between the tax authority, customs, platforms and other intermediaries within the e-commerce ecosystem to ensure that the tax is collected fairly, protecting neutrality, and ensuring that digital trade grows on a level playing field. - FMT

Hal Lai Keong is a PhD candidate and Ong Tze Chin serves as a senior lecturer at Universiti Malaya’s Faculty of Law.

The views expressed are those of the writers and do not necessarily reflect those of  MMKtT.