It’s been more than two years since the introduction of the goods and services tax (GST), which brought about a wave of change in the way companies do business in the country.
At the time, it was a struggle for SMEs to put in sufficient resources to upgrade their accounting systems and train staff to understand the new compliance requirements.
SMEs reported a 20% drop in income following GST implementation. They were also impacted by the foreign labour freeze and ringgit depreciation.
The majority of SMEs have struggled to stay afloat over the past few years as they face rising costs and thinning profit margins.
The new tourism tax, which was implemented on Sept 1, came as a slap in the face for SMEs in the hotel industry as they are the ones collecting the tax.
After much commotion over the tax rates, which initially ranged from RM2.50 to RM20 per room per night depending on the hotel’s classification, it was decided that only foreigners would be charged a flat rate of RM10 per room per night.
The government expects to collect some RM210 mil from the tourism tax annually and RM20-30 mil this year.
Cloud-based hotel reservation system Softinn founder Jason Lee Jee Shen shares that feedback from the industry has been negative in recent years.
Online home-sharing marketplace Airbnb and the influx of foreign-owned hotel brands have been driving down occupancies in smaller hotels.
“Occupancy rates in the two- to three-star range (of hotels) are dropping. Two years ago, it was about 60% but it’s now lower. Not to mention it’s not just a drop in occupancy but in ticket size as well.
“In the past, people stayed longer but stays have become shorter, leading to smaller ticket sizes,” Lee explains, adding the majority of hotels on Softinn’s platform are SMEs that operate fewer than 100 rooms.
Malaysia Budget Hotel Association (MyBHA) president PK Leong says: “Generally, the market has been slow for the past few years. The occupancy has fallen by 40% from the peak years in 2008 and 2009, and gone downhill since then.”
Sun Inns Hotel group director Ng Hong Keat, also MyBHA Selangor chapter chairman, agrees that business has been generally slow for SME budget hotels this year.
He notes that while the industry has become more competitive in recent years due to the entry of new players, the intense competition has resulted in more comfortable rooms with better conceptual designs and services.
Sun Inns Hotel was the first to open a budget hotel in Bandar Sunway. Today, competition is fierce with 20 to 30 such hotels in the area
For example, facilities in Sun Inns properties are comparable to that in three-star hotels when it comes to beds, linens, towels and such. The major difference, he says, is the smaller space due to the lower room rates charged.
“There are a lot of additional costs and reduced market share, so business is very difficult. When it comes to profitability, some are profitable and some are losing money. It’s about 50:50.
“Newer budget hotel operators in particular are calling for help, as they’ve gone through the process of buying commercial property and getting a licence, but the revenue and occupancy rates are not covering their costs,” Ng reveals.
Sun Inns Hotel first opened its doors in 1997 in Bandar Sunway, which has seen a mushrooming of 20 to 30 budget hotels since then.
More clarification needed
The tourism tax comes on the back of higher rental and renovation costs, rising utilities costs, a weak ringgit and slower economy, all of which are impacting the industry, Ng says.
While the tax must be collected from Sept 1, there are still many issues surrounding its implementation.
To adapt to the new tax, hotels would have to put in additional resources to adjust their front-end and back-end systems, in a race against time to ensure compliance. According to some reported estimates released by hotel associations, this would cost at least RM5,000, apart from the costs to bring in additional manpower to ensure compliance to all taxes.
In addition, the tax collection mechanism has yet to be finalised by the Customs Department, leading to further difficulties in implementation.
MyBHA’s Leong says: “It’s a big issue, especially for bigger hotels where there are not many suppliers of such software to implement this line for the tourism tax below GST. Until today, the problem has not been solved.”
Issuing a miscellaneous receipt for the tourism tax, for example, would require an additional GST charge.
Moreover, it would lead to unnecessary and unhealthy situations at front desks where tourists and foreign guests who lack understanding of the tax may be upset and this will lengthen the processing time for each guest.
The lack of dedicated talent in the industry is also a major challenge for hoteliers, especially the smaller players.
It is a fact that most of the staff who man the front desks of smaller hotels are not from the hospitality industry.
Leong says there is not enough local talent to operate a typical budget hotel with minimal staff size, which is why the industry has had to turn to foreign workers despite the higher expenses of levies, permits and work visas.
“Foreign workers are actually more expensive than locals. We don’t want to hire foreign workers if at all possible, but we can’t find people willing to put heart and soul into their work. The hotel sector can’t grow because we can’t find appropriate people to do the job,” he explains.
Language is also a barrier, as it is becoming increasingly difficult to find those who can converse in English. To make matters worse, turnover rates are especially high at smaller hotels, even at the managerial level.
Sun Inns’ Ng says: “This scenario is happening even at management and senior management levels. We spend a lot of time training them and pay them RM4,000 to RM5,000 but they’re still changing jobs, so we (have to) conduct recruitment 365 days a year.”
Business as usual for hotels
Despite the challenges and mixed reaction to the tourism tax, SME hoteliers seem to be taking it in their stride.
“It’s been a mixed bag of reactions from hotels (when it comes to the tourism tax). Some are trying to consolidate their units, some will invest in productivity tools to increase profit margin, some consider lowering the cost of customer acquisition by increasing the margin of bookings coming through the internet,” shares Softinn’s Lee.
For most hoteliers, a major transformation in the industry has come in the form of sales and marketing.
Some 60-80% of bookings now come from online platforms as the industry shifts towards automation of pre-booking and pre-payment, largely from online travel agencies (OTAs) or marketplaces such as Booking.com or Agoda.
For Sun Inns Hotel, which runs a chain of one- to two-star hotels, some 10,000 room nights are sold through OTAs and e-commerce sites per month, as compared to 500 room nights a decade ago.
Ng says the group is considering partially automating check-ins and check-outs to address rising costs and the difficulty in getting manpower
Ng says it is considering check-ins/check-outs with minimal assistance by leveraging on technology. This is to address rising costs and the difficulty in sourcing manpower.
“In the coming five years or so, there will be another improvement happening at the front desk where there’ll be self-service machines to check in and collect the keys as well as check out. We’re looking into that now.
“So far there are very few providers of such technology, but on the other hand, hospitality is ultimately about communication and customer service – the human touch,” he explains.
Apart from investing in technology, it has been necessary to provide better customer service to ensure satisfaction for guests, such as providing welcome drinks, free breakfast, airport transfers or discounts for tourism packages.
Hotels shoulder burden of tax collection
It is not the amount of tax charged but consumer sentiment that will affect occupancy rates, says Malaysia Budget Hotel Association president PK Leong.
Ultimately, the tourism tax results in negative perception of the country among tourists and deters them from staying longer.
While Leong lauds the government’s move to exempt Malaysians from paying the tourism tax, he says it is not fair for hotels as they have to collect it on behalf of the government. For this, they have to upgrade their accounting systems at their own expense and be penalised for any errors.
“Hotels have to shoulder the burden of collecting the tax for the government and it’s not equitable since it’s RM10 across the board, regardless of hotel classification. Tourists stay at budget hotels because they have limited budget,” he says.
Leong points to the goods and services tax (GST), which he says is equitable as it is based on percentage where consumers pay more to consume more. But charging a flat RM10 tax for budget hotels where the room rate is RM80 per night is much higher than the GST rate.
“Those that have four rooms and below are exempt from collecting this tax. So it may drive budget tourists to (opt for) Airbnb. This means they’ll be collecting less.
“In addition, a lot of hotels, time-sharing (premises) and apartments are not registered and you can’t collect that tax when they’re not registered,” Leong says.
Instead, he suggests the tourism tax be collected at exit points where tourists pay a lump sum before leaving the country. This way, there could be higher collections from the tax and with less hassle.
In addition, there is talk that the government is looking at implementing a music royalty rate of RM15.90 per room for budget hotels. Authorities are also mulling collecting a RM1 regulatory service charge for travellers departing from Malaysian airports.
“We have to absorb the charge (for music royalty) as operation costs or increase room charges, but we’re stuck between a rock and a hard place. The market (demand) doesn’t increase, but there are a lot of charges imposed on hotel operators, and we can’t raise the room rates,” Leong laments.