Malaysia's internet market 'fragility' may drag down GDP opportunities and prove counterproductive to the newly announced Digital Free Trade Zone initiative (DFTZ), warned the Internet Alliance (IA).
Chan Kee Siak (pic below), the president of IA, also known as 'Persatuan Hubungan Internet Selangor dan Kuala Lumpur,' said that a successful DFTZ implementation will boost digital content connectivity's contribution to Malaysia's GDP.
"Currently, the contribution from the digital connectivity economy is about 16 percent but we believe that a single focused effort such as DFTZ can boost it to as high as 25 percent and beyond as soon as by the end of 2017. IA believes so because the local internet community is a fast adapter and knows how to organically leverage any good initiative quickly," said Chan.
Digital connectivity as an economic activity currently contributes almost 16 percent to the country's annual gross domestic product (GDP) - of which the eCommerce subsector makes up about half of it at 8.8 percent, he said.
The DFTZ is understood to be an extension of the Malaysian Government's allocation of RM162 (US$36.54) million by national ICT agency Malaysian Digital Economy Corporation (MDEC) to implement programmes to boost the national digital economy, said Chan. "The DFTZ is conceptually a microcosm of the current physical free trade zones such as at Pasir Gudang, Bayan Lepas and Port Klang; and DFTZ is meant to offer a conducive and competitive environment for internet companies to digital-based economic activities including trade, provision of services and the development and production of solutions."
Further details of the DFTZ will be announced by the government soon. These initiatives are expected to boost the country's eCommerce industry by reducing tariffs imposed on items being shipped into the country that are priced more than RM500 (US$113) and should also include faster Customs clearance procedures.
Stakeholder dialogue essential
Chan summarised the feedback from IA's 50 ISP (local internet service providers) members that "while this internet initiative is an admirable effort by the Government, they lament the lack of Government dialogue with the local internet market."
DFTZ was currently being watched over by Alibaba founder Jack Ma, who has also been appointed as Malaysia's digital economy adviser, he said. "So far, only Jack Ma of Alibaba seems to have to be consulted. No doubt he is an international success icon for all things internet, but IA believes that the input from local internet players and service providers are much more relevant for DFTZ to truly succeed."
Asked to explain the 'fragility' of the local internet market, Chan said that in the current growth phase of the local eCommerce sector, "a single bad, or ambiguous policy could easily spell success or doom for the eCommerce sector."
One example is "the recent Withholding Tax issue - which is till today ambiguous at best, as the general tech market is inclined to assume that it covers the payment for the use of, or the right to use software," he said. "One of the most significant taxation impacts for the tech sector was when Budget 2017 (unveiled October 2016) that saw the re-imposition of withholding tax on offshore services - which we see is a counter-productive tax rule that has impacted a wide range of businesses from startups, SMEs to multinational companies which are paying for technical assistance and technical services rendered by non-residents."
[See the latest Budget 2017 feature - What Budget 2017 means for Malaysia's IT industry.]
Chan said "in the Cloud computing world, eCommerce and internet service providers rely greatly on the provisioning of software and applications (regardless from where they are hosted within or out of country), this brings about a huge headache as strict adherence to the withholding tax would essentially mean a direct 10 percent loss to the internet service provider."
IA's current DFTZ recommendations to the government include:
a) Hold proactive dialogue sessions with the local 'grassroot' internet service provider community to assess the viability and impact of all DFTZ taxation policies;
b) Ensure the interests of local internet and eCommerce community to benefit from DFTZ instead of just foreign players; and
c) That DFTZ does not unwittingly become a China or Alipay-centric initiative but to be fair for all regional markets.
Established in 2010, the non-profit association Internet Alliance (IA), also known as 'Persatuan Hubungan Internet Selangor dan Kuala Lumpur', currently comprises 50 members, mainly Internet Service Provider corporate members (Internet service and 'middleware' infrastructure providers - spanning web hosting companies, data centres, payment gateway and Cloud providers, web platform enablers, and eCommerce players), who collectively drive about 85 percent of Malaysia's active internet space.
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