This article first appeared in The Edge Malaysia Weekly on January 22, 2024 - January 28, 2024

DESPITE their concerns that the upcoming luxury goods tax will disrupt players’ sales and operations, jewellers’ collective outlook on the gold industry continues to be strong this year. Goldsmiths are expecting to see continued encouraging sales volumes from customary and investment buys this year despite the high gold prices that have resulted from elevated tensions in the Middle East and renewed bets on an early interest rate cut by the US Federal Reserve.

Climbing from a low of US$1,821 (RM8,524) an ounce last October, the precious metal peaked at US$2,077 an ounce on Dec 27. Its performance brought the average closing price in 2023 to US$1,943, 7.83% higher than US$1,802 the year before. It was trading at around US$2,022 as at 5pm last Wednesday.

Goldsmiths have reported encouraging results, underpinned by the rise in gold prices.

“Improvements in the economy will give retailers an even better year than 2023,” Poh Kong Sdn Bhd executive director Ermin Siow Der Ming tells The Edge.

Poh Kong Holdings Bhd’s net profit for the first quarter ended Oct 31, 2023, climbed 21.29% to RM19 million from RM15.67 million in the previous corresponding quarter, mainly driven by the uptrend in gold prices. This was despite quarterly revenue dipping 3.88% to RM355.98 million from RM370.36 million previously, thanks to lower demand for gold jewellery products amid the weaker market sentiment.

Tomei Consolidated Bhd’s net profit for the third quarter ended Sept 30, 2023 was RM10.2 million, falling 28.9% from RM14.3 million the year before, on revenues of RM203.5 million and RM217.4 million respectively.

Meanwhile, company data shows that Habib Jewels Sdn Bhd’s bottom line doubled to RM60.97 million for the financial year ended Dec 31, 2022 from RM30.24 million a year ago.

Commodity experts forecast that the price of gold will continue to trend higher due to the Fed’s indication of three interest rate cuts this year.

Gold players whom The Edge spoke to say they will continue with marketing and promotional activities to ride on the sales momentum this year by capitalising on the Year of the Dragon, which will see more births and marriages, which will boost sales of gold jewellery. While it may be broadly estimated that jewellers enjoyed better revenue and net profit margins in 2023, having bought inventory when prices were lower and selling products on high gold prices, Siow points out that players tend to sell less in terms of weightage due to the higher retail prices.

“If the gold price trends high, we do enjoy better margins for products bought at lower prices. But our business depends on high turnover. We replenish stocks almost every day rather than stocking up and hoping that the gold price keeps increasing,” says Siow, who is an advisor to the Federation of Goldsmiths and Jewellers Association of Malaysia (FGJAM). He was its president from 2014 to 2018. He is also the vice-president of the Asean Gems and Jewellery Association.

Latest quarterly results show that Tomei had a better profit margin of 5.3% compared with Poh Kong and Habib’s 4.65%.

Since the second half of 2023, Tomei’s share price has risen 21.6% to close at RM1.24 last Thursday, valuing the group at RM171.86 million.

Poh Kong’s share price, however, remained stagnant during the same period, even when the price of gold peaked in December. The stock closed at 84 sen last Thursday for a market value of RM346.75 million.

A key concern faced by the industry is the implementation of High Value Goods Tax within the range of 5% to 10% on jewellery on May 1. Foreigners will not be subject to the tax.

Putrajaya has yet to reveal more details on the threshold of goods to be taxed, the items that will come under it as well as the mechanism for tax collection. Industry players expect that items costing RM10,000 and above will be taxed.

Habib group executive chairman Datuk Seri Meer Habib expects that in the months leading up to May 1, customers will take the opportunity to buy high-value items before the tax is implemented.

Jewellers have been lobbying for the government’s removal of the luxury goods tax, with the Malaysian Indian Goldsmith and Jewellers Association cautioning that its implementation will lead to a 10% to 30% loss in revenue for gold retailers, which in turn will cause lower production volume, in 2024.

Taxation experts have said that imposing a 5% to 10% tax on luxury goods, notwithstanding the government’s intentions to broaden its revenue base, may actually do more harm than good. For example, it could fuel an illicit market if the threshold is set too low. Moreover, affluent citizens may choose to acquire luxury goods overseas. Another argument is that the majority of gold acquisitions are made by the lower and middle-class groups for customary and investment purposes.

“Savings should not be taxed,” Meer Habib emphasises.

Poh Kong’s Siow notes: “Gold jewellery is quite different from other [luxury] products. In our business, the raw material makes up 90% of the cost of the product, with the balance coming from the value-add of workmanship. The profit margin from that is single digit, and it will be badly affected by the new tax.”

“We have arranged for the customs department to visit our manufacturing facilities and retail outlets to understand our operations and how the luxury goods tax will create operational issues [for industry players like us],” he adds.

As for the estimated size of the luxury goods industry in Malaysia and how much Putrajaya could derive by levying a 5% to 10% tax on it, Dr Yeah Kim Leng, professor of economics at Sunway University Business School, points to the Department of Statistics Malaysia’s 2019 Household Expenditure Survey, which revealed that Malaysian households spent 0.52% of total expenditure on jewellery and 0.28% on watches, as a baseline for his deductions. “Assuming that luxury items account for between one-fifth and one-third of the goods sold in 2022, total purchases is estimated at between RM1.7 billion and RM2.5 billion in 2022. A 10% luxury tax may therefore yield between RM170 million and RM250 million [a year],” he explains, adding that the concerns expressed by the tax experts and industry players are valid since luxury goods can be among the “difficult items to collect taxes on unless clearly defined and traceable”.

“Since overly high taxes will create incentives for evasion, it is likely that the additional 5% to 10% for luxury goods, similar to the two percentage-point increase in service tax, will likely be palatable for high-end customer segments,” Yeah deduces.

That said, he adds that since luxury goods comprise a relatively small proportion of Malaysia’s total private consumption, its introduction ought to have a relatively insignificant effect on the country’s inflation out-turn for the year.

“The economy is currently at the disinflationary phase with the headline monthly CPI (Consumer Price Index) easing further to 1.5% last November and annual inflation settling at 2.5% for the year. The ongoing tariff and subsidy adjustments and planned tax increases are expected to reverse the declining CPI trend. The uncertain effects of these adjustments are reflected in the Finance Ministry’s CPI forecast range of 2.1% to 3.6% for 2024.

To Monash University Malaysia professor Niaz Asadullah, Putrajaya’s broadening of its revenue base via the luxury goods tax simply reflects its current priorities and the prevailing societal attitudes.

“Given the perception of high and widening wealth inequality, the move to hike tax on luxury goods will enjoy mass support as it’s perceived to be progressive. Yes, it’s true that for a segment of middle-class Malaysians, gold jewellery has an investment value.

“But the government does not view this as a productive choice. At a time when cost of living remains high and household debt is growing, the new tax may have the added objective of discouraging unnecessary conspicuous consumption among the B40 and M40 groups, some of whom are struggling to make ends meet,” he says.

Niaz surmises that with the launch of the New Industrial Master Plan 2030 last September, the priority has now also shifted from a wealth tax targeting luxury goods consumption and capital gains to supporting the development of industries producing sophisticated and complex products or those that adopt higher production technology.

“An added focus is on industries that are more likely to create higher wage jobs. On both counts, our jewellery industry is no longer a top priority. So, despite its export orientation, Anwar [Ibrahim, the prime minister] may at best agree to a staggered increase [on the quantum of tax] so that the jewellery and gold processing industry can adjust to the new normal of higher tax. Another alternative concession could be to exempt purchases by foreign tourists through the Tourist Refund Scheme (TRS),” he suggests.

It is worth noting that some other countries such as the US and Denmark have tried implementing the luxury goods tax. However, they were repealed due to their adverse impact on certain industries. Yeah cautions that the tax’s potential disruptive effects on industry players need to be closely monitored, given the repeal experience in other countries.

However, some countries appear to have imposed the tax successfully. In Indonesia, purchases such as motor vehicles, luxury residences and yachts are subject to a luxury goods sales tax of 10%. Meanwhile, in Singapore, a goods and service tax charged on the supply of goods and services of 8%  was increased to 9% on Jan 1.

For Malaysia, economists concede that there are several potential challenges such as defining indulgences in a rapidly growing economy with a large aspiring middle class, or discovering that some luxury goods have an elastic demand and therefore a tax hike will add little in terms of revenue.

Niaz stresses that revenue collection is not the sole motivation of the tax hike. “The effectiveness varies across countries, depending on the level of development. Well-defined luxury goods can help achieve the desired tax revenue collection target in countries with a large upper-middle-income consumer group.

”Equally, countries with well-established export-oriented industries with businesses beyond the national border or those with a mature luxury goods market will be also more supportive of a luxury goods tax. At the same time, tax authorities [must] have the necessary capacity to correctly implement and enforce a luxury tax with a complex structure,” he says.

The economists expect the government to carry on with the implementation of the tax. It remains to be seen whether the government will increase the rumoured RM10,000 threshold or stagger the tax, perhaps by starting at 6% instead of going straight to 10%.

Lee Heng Guie, executive director of The Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre, suggests that a threshold of “RM30,000, perhaps, would be more feasible”. 
 

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