New Departure Levy at Malaysia Airports Could Severely Affect Inbound Tourism

Malaysia, news, taxes, airports

Malaysia is like any countries in the world when looking at new income sources: taxing the tourism and travel industry. A new departure tax has just been mulled out by the government but a think tank warns about its negative impact over tourism.

A think tank has warned that the implementation of a departure levy on all passengers leaving from Malaysian airports may impact tourism with a knock-on effect on the wider economy as well.

The Institute for Democracy and Economic Affairs (IDEAS) said the new levy of RM20 (US$4.80) for those flying to Asean countries and RM40 (US$9.60)for travel to all other international destinations would affect Malaysia’s “competitive advantage”.

The new tax would actually be detrimental to Malaysia as a destination as the fee to be paid would be 7 % to 9% higher than other countries in ASEAN such as Indonesia, Singapore or Thailand. The total levy on passengers would then fluctuate between RM56 (US$13.40) and RM76 (US$18.20) on flights. It would have to be added to the existing passengers charge of RM73 (US$17.50) on international flights and RM35 (US$8.40) on intra-ASEAN flights.

“This pressures the Malaysian aviation market and possibly limits the growth of tourism, as other nearby countries are relatively cheaper to visit,” IDEAS said in its report which was released this week.

“When visiting non-Asean destinations, the part of the tax paid for a full-service flight ticket after the implementation of the departure levy will increase by approximately 3%,” IDEAS economists Adli Amirullah and Irene van Eldik said to Malaysian media.

In the presentation of Malaysia Budget 2019, the Mahathir government had proposed a departure levy on all air travellers leaving the country from June 1, 2019, to encourage the development of domestic tourism.

Experts have since cautioned that the departure levy will however affect inbound tourism as it could lead to a drop in passengers. And at the same time, it is unlikely to deter Malaysian outbound travellers to venture abroad.

IDEAS said the new levy would also reduce demand for tourism based on the price sensitivity calculation by the International Air Transport Association, which would see tourists to Malaysia reduced by over 500,000 by 2020.

“With arrival growth numbers currently turning negative and future expected arrival numbers being adjusted downward, the loss of tourism in Malaysia might be further magnified by this levy, as passengers choose to travel to other holiday destinations with more competitive pricing.

“While the government aims to increase revenue, it might be contradicting its own policy in the long run, as it loses out on reduced tax income from the expenses of tourists now travelling elsewhere, creating a deadweight loss.”

Based on the average expenditure by tourists, this will result in close to RM1.8 billion less being spent in the tourism industry. This would then a larger loss than the expected amount of RM400 million to be raised through the levy by 2020, according to IDEAS.

IDEAS report comes to the following conclusion: “With the prospect of tourism in Malaysia to reach 30 million arrivals by 2020 and Tourism Malaysia estimating that the share of Asean tourism is 75%, a total of 565,503 Asean tourists will be missed out on when implementing the levy.

“As a result, there will additionally be a substantial loss of income from tourism, as tourists on average spend RM3,169 per person in Malaysia.

“This will mean an absence of RM1,792,079,007 in tourism spending due to the departure levy, not only affecting tourist-related industries but additionally increasing the missed tax income as tourists would have paid tax over their expenses.”

Transport Minister Loke Siew Fook highlighted that the government is studying the best mechanism to collect the departure levy before it is implemented on all outbound air travellers. The tax could be added to the price of the ticket which included already the PSC. However, if collected by customs over departure, it could give the psychological impression to passengers of paying less…