PUTRAJAYA’S departure levy, due to come into force on June 1 next year, has been panned by the Institute for Democracy and Economic Affairs (IDEAS), which warned that it could lead to tourist numbers plunging by 500,000 and the loss of RM1.8 billion in tourism receipts.

The research outfit, in a paper titled “Potential Dead-Weight Loss of Departure Levy”, said the government should rethink the tax, which it proposed when tabling Budget 2019.

The levy, at a rate of RM20 per passenger departing to Asean countries and RM40 (other countries), is aimed at encouraging domestic tourism.

IDEAS warned of a knock-on impact and greater damage to the economy than what the government could raise from the tax.

The assessment is based on research on similar taxes in other countries, and studies on the link between air travel competitiveness and foreign direct investment (FDI) and trade.

Assessing air travel competitiveness in the country, IDEAS noted that Malaysians already pay 1% to 3% more on full-service airfare to nearby destinations, compared with passengers from other Asean states.

The departure levy will further raise ticket prices for short-haul intra-Asean return journeys by 3%.

This, said the think-tank, will reduce the number of short-haul passengers by 2.51% and translate into the loss of 565,503 Asean tourists to Malaysia by 2020.

“As a result, there will be a substantial loss of income from tourism, as tourists on average spend RM3,1693 per person in Malaysia. This means an absence of RM1.79 billion in tourism receipts due to the departure levy, not only affecting tourism-related industries, but also increasing the missed tax income, as tourists would have paid tax on their expenses.”

The RM1.8 billion loss in tourism receipts will not be covered by the RM400 million that the tax is expected to raise in 2020, it said.

IDEAS cited previous studies that found good air transport connectivity and a “flourishing aviation industry” lead to higher FDI and trade in the long run.

“With new air routes being established, firms will be able to reduce transport costs, thus, increasing the probability of FDI exchange between connected regions… (while) lower air transport costs increase trade volume.”

Overall, the levy will widen the competitiveness gap between Malaysia and other regional destinations.

IDEAS said the tax is higher by 7% to 9% than similar ones imposed by neighbouring nations.

It warned that Putrajaya has already predicted slower tourism growth, noting that there was a 3% drop in tourist arrivals for the 2016-2017 period.

“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 dead-weight loss.”

The departure levy will also hurt full-service airlines as passengers will likely start favouring low-cost carriers, in turn, affecting Malaysia’s position as a global airline hub.

IDEAS cited a similar tax in the UK, namely the air passenger duty (APD), one of the world’s highest.

Abolishing APD would raise demand for flights by 10%, and create 65 potential new connections and up to 61,000 jobs, it said, adding that the move would “pay for itself” through these increments by raising gross domestic product in the long run.

IDEAS also cited the Netherlands, which had introduced a distance-related aviation tax on flight tickets only to abolish it a year later after the tax caused an 18% drop in passenger count.

In Sweden, where a departure tax was introduced in April, the negative effects have already shown, such as a decline in numbers for the country’s main airport operator, and Norwegian Air’s move to discontinue two routes between Sweden and the US.

“Given the potential impact, this paper questions whether the introduction of the departure levy is the right move. This paper suggests that a thorough impact assessment be undertaken, and that the government rethink its approach,” said IDEAS. – December 14, 2018.