A taxing quandary


Sunday November 1, 2009




The service tax on credit cards has upset card holders and many have questions that banks have been unable to answer.


CREDIT card issuers have yet to finalise the mechanism of implementing the RM50 service tax on each principal credit and charge card and RM25 for each supplementary card, which will be imposed starting next year.


Calls made to banks for details received non-committal and standard responses. One says it is still in discussion with Bank Negara whether the RM50 service tax would be absorbed. The call centre says that if it is not, the tax would be imposed on the anniversary of the issue date. Thus, if the card was issued in September, then the service tax would only be imposed in September 2010.


“Customers will be informed via post when the RM50 will be imposed,” says a staff at a call centre.


Another call centre says the service tax would definitely be implemented, but the process has yet to be finalised and it is awaiting a Bank Negara decision before making an announcement.


The Association of Banks in Malaysia (ABM) executive director Chuah Mei Lin says: “Admittedly, the imposition of the service tax will in all likelihood cause customers to review the number of credit cards they hold from the perspective of affordability.”


Regardless of the issuers’ indecision, cardholders have been quick to react to the Government’s decision.


A group of 40 credit card sales agencies, in a report on Saturday, claim that effects of the decision are already being felt – applications for new credit cards have dropped by 80%.


Francis Teow, who runs a credit card sales agency in Penang, says banks would not want to maintain a large sales force if they are not confident of achieving desired sales targets, thus affecting about 5,000 credit card agents.


The purpose of the RM50 service tax is to encourage prudent spending and reduce the use of credit cards. This is by no means a novel strategy; a similar ruling came into effect in 1997. The tax persisted for four years, and was abolished in April 2001.


Bank Negara statistics indicate that there are currently 9.8 million principal and 1.3 million supplementary credit cards in circulation, which will earn the Government a revenue of RM555mil a year.


S.M. Mohamed Idris, president of the Consumers Association of Penang (CAP), does not believe the RM50 service tax will achieve the Government’s aim of encouraging prudent use of credit cards.


“Those who are used to the lifestyle provided by their credit cards are not going to change just because they have to pay an extra RM50 per card.


“Consumers who use their cards wisely will probably hang on to one or two cards and return the rest before the deadline. Those who cannot live without their credit cards will keep all of them. If they give up any, it is because they can increase the credit limit on other cards,” he says.


However, Bank Negara’s Credit Counsel­ling and Debt Management Agency (AKPK) believes that if the credit card issuers absorb the government service tax, the impact on this measure to the consumers would be minimal.


Going by Bank Negara statistics, there was an initial knee-jerk reaction from consumers when the service tax was implemented in 1997 (see chart next page). There had been a steady increase in the number of cards in circulation, reaching 2.14 million cards in 1997. However, the number dropped for the first time in 1998 by 90,000 cards to 2.05 million.


However, service tax as a deterrent gradually lost its effect and card numbers jumped by 296,000 in 1999 to 2.35 million.


“The credit card is needed because it has become a significant electronic paying instrument – the issue is how many one has. It is a safer paying option compared to carrying lots of cash,” says an industry insider.


“There will be a drop initially, but it will find an equilibrium because many have an excess number of cards. If you look at the cards in circulation, it is not at saturation point. For example, as younger people enter the job market, they will apply for credit cards, so things will pick up again eventually.”


The service tax is unlikely to have an impact on overall spending, says Anandakumar Jegarasa­singam, Malaysian Rating Corpora­tion Berhad (MARC), financial institution ratings head.


“The more likely consequence would be a reduction in the number of issued cards.


“Most cardholders will limit their spending to one or two cards and hence the overall transaction value generated by cardholders will remain largely intact,” he says.


Bank Negara Malaysia statistics as of August 2009 show that the current outstanding balance on all cards is RM25.6bil, and only RM2.5bil comprises overdue balance. This indicates that the majority (about 90%) of credit card holders settle their debt promptly.


There are currently 21 banks and three non-bank financial institutions issuing credit cards, and he says larger and more established issuers will retain their market share, or may even increase it.


Unknown strategies

As it is still early days for the service tax, most local banks officially contacted by Sunday Star did not want to comment on the Government’s decision – and the ones that responded did not reveal much.


Citibank Malaysia claims to have over one million credit card customers and a market share of about 20% based on usage. With the Government’s decision, Citi­bank expects its customers to rationalise their portfolio of credit cards and consolidate spending to one or two cards.


“They will choose the credit cards that offer them the best value and relevance,” says a spokesperson of the bank.


RHB Banking Group head of retail banking Renzo Viegas, however, says that if tax is to be levied, then the maximum tax should be applied at the customer level per bank.


If a bank issues two to three cards per customer – for example, a Master, a Visa and a co-brand card with Tesco – the customer could be taxed RM50 instead of RM150.


“We hope the mechanics would be applied on the customer level per bank and not card level per bank,” he says.


Public Bank chief operating officer Wong Jee Seng says the objective of the measure is a noble one. He believes consumers would become more prudent in selecting credit card products that fit their needs.


“They will become more savvy and exercise greater caution on new applications. Redundant cards will be viewed as a financial burden instead of another “nice-to-have”,” he says.


When asked what strategies the bank had in place to reduce cancellations, Wong only replies that the bank would continue to introduce benefits and value-added services to retain its card members.


He adds that in the long run, the credit card portfolio might actually become healthier with card members keeping only the cards they truly need.


“With reduced wastage, revenue per card is expected to rise,” says Wong.


Alternative measures

Anandakumar says the Govern­ment’s objective would be better achieved if the tax is linked to the total transaction value or usage volume instead of a flat annual tax.


In both instances, the tax would be proportional in nature and have more influence on credit card-based spending.


“The introduction of this tax runs counter to payment system sophistication that the Govern­ment should seek to promote. In Australia and the European Union, where credit cards have firmly been established as a mode of payment, the Govern­ment’s focus has been on lowering the cost of transactions by capping merchant fees in order to lower the burden on consumers, and to protect retailers’ profit margins,” he says.


He adds that the direct targeting of credit availability would have been a better policy option. The introduction of a maximum credit limit – such as two times the monthly salary limit as stipulated in Singapore – or a higher minimum income requirement would generate better long-term results.


Idris says that if the Govern­ment is serious about curbing credit card spending, it should increase the minimum annual income required to apply for a card. The minimum required income should be increased from RM18,000 to at least RM36,000 per annum.


“This will allow those new to the job market (like fresh graduates) time to learn how to live within their means before they are given access to easy credit,” he says.