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axa Ion an
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STATEMENT OF THE FEDERAL
GOVERNMENT ON THE REPORT
OF THE MUDIE MISSION AND
ON CERTAIN PROPOSALS MADE
BY THE RUBBER PRODUCERS'
COUNCIL
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•
L.<P
3 '3> %
I
-:n:..
" H::>( f \--€! S
I
PERPUSTAKAAN
NEGARAMALAYSI
A
P·5---lB
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() 0 s<g,
':)z11 bO
KUALA LU MPUR
PRINTED AT TH E GOVERN MENT P R£SS BY G. A.
GOVERN MEh,. P RI NTER
1955
-
1995
erpusra ka 01 n Nega r'.
Malav~ia
S MIT H ,
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TAXATION AND REPLANTING IN THE
RUBBER INDUSTRY
PART ONE
GENERAL
Rubber and Tin are the two mainstays of the economy of
the Federation of Malaya. Without them a nd the income which
they have brought to the country the Federation as a whole
might well have remained in a comparatively undeveloped state.
Of the two industries, Rubber has been the more important
economically and this paper is solely concerned with its problems:
for this industry faces a crisis without precedent in its own
chequered history although of a type by no means unknown
to that of other industries: that is the em ergence and rapid
develo pment o f synthetic substitutes for an established natural
product.
2. Before considering the problems with which the industry
is faced it may be well to set its present position in perspective
in relation to the country's economy as a whole. 1 This is
a ttempted in the following table:
,
FEDERATION OF MALAYA
TABLE
•
I
THE IMPORTANCE OF RUBBE R TO THE ECONOMY OF T H E F EDE RATION
All figures relate to the fi ve years 1950-1954
$
Federation
Tota.l
million
Rubber a.s %
of Total
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Rubber
Exports
• •
•
•
•
•
11 ,34'*
7,341
64.7 %
Export Duty
• •
• •
•
•
1
522
5 9. 2%
3,0 2
868
28 .2 %
I ncome
I ncome ·
Tax
•
•
Assessable
• •
• •
3. The above table indicates clearly the importance to the
country of the industry whose future is now challenged by the
ra pid and continuing development of the synthetic product, which
has now reached the stage of having actually achieved technical
superiority and established consumer preference over natural
N o te o n Employm ent in the Ru b ber Industry . There are no
a ccurate figur es of total employ me nt in th e Rubber Industry. The number
o( per o ns employed on e ta les of o ver 25 acres a t 30th June, 1954, a s
reco rded b y the L a bour Depa rtme nt was 267,981 . The number of persons
e ngaged in Rubber C ult ivatio n acco rd ing to the 1947 C en sus R ep o rt was
505.108 .
• 1949 to 1953.
1
•
2
rubber in certain fields. Some comparative statistics are given in
Table" II below:
TABLE II
•
COMPARATIVE
NATURAL
•
PRODUCTION & CONSUMPTION OF
SYNTHETIC RUBBER: WORLD 2
STATISTICS:
&
'000 long tons
,
P eriod
Total
1950
]951
1952
1953
1954
Total
•
•
•
•
•
•
•
•
•
2, 394.6
2, 793.4
2,667.8
2,660.6
2,511.2
• •
] 3,027.6
• •
Production
,
,
.Natural Synthetic
1,860
1,885
1 ,790
725
1
9 ,063
534.6
90S.-l
877.
935.6
708.2"
% Bro·
tJletic
22.3
32.5
3,964.6
32.9
35.2
28 .2
,
Total
2,2 5.0
2,312.5
2,335.0
2,48 7. 5
2,460.0
30.4
Rubber Study
-
Consumption
,
,
Xa tural Sn lthetic % Synthet ic
1,705
1,500
1,450
1,61 5
1.725
5 0.0
812 .5
5.0
8 72 .5
735.0
25.4
35.1
37.9
35.1
30.0
7,995
3.88 5.0
32.7
Source: International
Group Bulletin of
Statistics.
There is one important feature of the above table to which
attention must be drawn. This is that there is as yet no evidence
that the encroachment of synthetic rubber into the market of the
natural product represents any simple and irresistible trend.
Although, as mentioned already, there are uses for which the
synthetic production is technically preferable and these have
recently been estimated as high as 38 per cent. of the total market
for rubber in the United States there is still at the other end
of the scale, a rather smaller sector (estimated at 27 per cent.) of
the market in which natural enjoys a similar advantage; and in
between is the critical area, or say 35 per cent. of the total
American market, in which the relative price of the two products
seems to be the principal factor in deciding which will be used."
It is therefore no exaggeration to say that the future of the natural
rubber industry and hence that of the economy of the Federation
of Malaya as a whole may well be summed up in the answer to
the question: H ow much. rubber can the country produce at a price
which will compete with the synthetic product? For despite the
existence of important technical considerations price still seems to
be of the essence of the problem. For a considerable period now
the most widely used form of synthetic rubber, commonly known
as GR-S, has been sold in the United States at US 23 cents per lb .
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• All figures excluding U.S.S.R.
3 Source:
A paper by Dr. Street at Annual Meeting of Rubber
Manufacturers A ssociation of New York (quoted in Natural Rubber N ews
of January, 1955) wh ich estimates that new Rubber consumption in U.S.A.
in 1955 (excl ud ing speciality rubbers and liquid latex) would be divided
as fo llows:
Natural Preferred: 27 % : (271,000 long tons).
Typical products: Larger size truck t yres, airplane tyrest, certain
mechanical goods, drug sundries.
t Added by Editor of Natural Rub ber Ncws.
Synthetic Preferred: 38 % : (382,000 long tons).
T ypical products: Passenger tyre treads, camelback, certain type of
mechanical goods and wire insulation.
Intermediate Z one: 35 %: (352,000 long tons).
Choice depends almost entirely on relative price.
"Provisional: 11
mOD ths
actua.l.
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Allowing for freight, insurance, etc., this is probably roughly
equivalent to 65 cents a lb. f.o.b. Malaya. In addition, a cheaper
variety of synthetic, made by the admixture of oil during the
manufacturing process, and known as oil-extended synthetic
rubber, is sold at 4 or 5 cents a lb. below the price of GR-S.
Since natural rubber is sold in a wide variety of grades, it is
difficult to say precisely which of the normal f.o.b. Malaya
quotations should be taken for the purposes of comparison with
synthetic: possibly it should be No. 2 or No. 3 RSS. What
is significant is the response of the American rubber consuming
industry to changes in the relative price of natural and synthetic.
Thus, the higher prices recently prevailing in the rubber market
. now appear to be encouraging greater use of synthetic by
American consumers: the percentage figures for the consumption
of natural have been falling steadily for the past few months viz.,
October 49.4 per cent.; November 48.6 per cent.; December 46.4
per cent.; January 45.5 per cent.; February 43.2 per cent. 4
4. There is at present no indication that the recent disposal
of the United States Government's synthetic plants to private
enterprise will result in an increase in the price of synthetic.
Meanwhile, although it is possible and indeed appears to have
been the case recently that an increase in the total demand for
new rubber either in the United States, or in Western Europe and
other countries, could possibly hold the price of natural rubber
above the corresponding cost of the synthetic article (owing either
to a timelag between the change in relative prices and the switch
in consumption from one type of rubber to another or to the
supply of synthetic being at present rather inelastic above a
certain ceiling), this could only occur at the risk of
provoking serious long term consequences for the natural rubber
industry; for such a situation would not merely ensure that all
existing synthetic plants were kept at maximum production, but
would also give an enormous fillip to further research into synthetic
and finally would undoubtedly stimulate more interest in the
expansion of existing synthetic plants and the construction of
new ones. As it is, the construction of new synthetic plants is already.
being considered in countries other than the United States. There
is indeed every reason to anticipate that the peace time consumption of rubber will continue to rise, but this is no ground for
ignoring the persistent challenge of synthetic competition; rather
should it be a stimulus to natural rubber producers to conduct
their affairs so that the growing world requirements of rubber
can be met from the output of their trees and plantations and not
from new factories yet to be built.
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• The actual figures were:
Sy nthe ti c
1954 October
November
December
1955 Januar y
* February
•
•
• •
•
••
•
••
•
• •
• • •
•
• •
•
••
• • •
•
• •
• • •
58.309
57,287
63,509
68,367
66,444
* Preliminary.
•
T otal
Natural
•
••
•
• •
• • •
• •
•
•
• •
55,970
53,326
55,191
57,299
50,600
•
114,279
• • •
110,613
•
•
•
•
•
•
•
•
• • •
118,700
125,666
117,044
•
4
5. This situation has received the attention of the Government and the industry over a considerable period. The principal and
n?w .generally accepted c~nclu~ion. is that replanting of old lowYleldmg rubber by new hlgh YleldlOg strains is outstandingly the
most important single measure which must be taken if costs are
to be reduced and output increased. The magnitude of this task
can best be gauged by the realisation that approximately 80 per
cent. of the total acreage under natural rubber in Malaya is under
old low-yielding rubber. The situation is complicated by the
division of the industry into two sections, viz., estates and smallholders, whose methods of production, processing and distribution
differ widely. The experience of those estates which have been
able to follow active replanting programmes during recent years,
and whose high yielding material is now in bearing, suggests that
replanting can reduce estate costs to levels at which they can
undoubtedly compete with synthetic at or even below the present
elling price for that product. The smallholders' position is more
perilous by reason of the almost complete absence of replanting,
and more complicated by reason of the larger number of small
and diverse units engaged in this section of the industry. Since
1952, however, the Govemment, with the full agreement of the
Rubber Producers Council, has recognised the need for direct
measures to encourage smallholders replanting by instituting a
cess of 4t cents per lb. on all rubber exported, the proceeds of
which (after the deduction of the estates' share, which is refunded
to them) is paid into a Smallholders Replanting Fund from which
grants are made to individual smallholders. On the estate side,
although considerable replanting has been undertaken, its distribution has been extremely uneven; in fact roughly speaking twothirds of the high yielding rubber is concentrated on one-third of
the estates (by acreage). The general contention of the estate
section of the industry, however, has been that its burden of
taxation has been excessive and must be reduced if it is to find
the funds necessary to undertake replanting on an adequate scale.
The industry has also pointed out with some force that none
of its competitors in the synthetic field has to carry tax charges
corresponding to the heavy burden of export duty levied in this
country.
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6. The Federation Government has not felt able to accept
such representations without a detailed and impartial enquiry.
Export duties are an essential element in the country's revenues
whi~h largely. owing to t~e Emergency, unfortunately fall short
of lts expendlture commItments. In the absence of a reliable
economic survey of the industry, therefore, the Federation Government has felt obliged to reserve its position both as to the measure
of assistance necessary to enable the industry to re-equip itself
in the face of synthetic competition, and as to whether a simple
and straightforward reduction in export duty would be the best
solution.
7. It was in these circumstances that the Government and
the Rubber Producers' Council. as the organisation representative
of all sections of the rubber industry in the Federation of Malaya,
5
agreed in May 1953 to the appointment of a Fact Finding Mission
for the rubber industry with the following terms of reference:
"To examine:
(i) the taxation of the rubber industry in relation to costs
of production,
(ii) the methods of maintaining existing capital in the
industry and attracting fresh capital for development,
(iii) replanting,
(iv) the marketing and processing of smallholders' rubber,
(v) unemployment
in
the
industry
in
the
event
of
a
recession
•
In pnces:
and to make recommendations."
The members of the Mission were:
Chairman: Sir Francis Mudie, K.C.S.I., K.C.I.E., O.B.E.
Formerly Home Member of the Viceroy's
Executive Council in India and latterly
Head of the British Economic Mission to
Yugoslavia.
M embers: Dr. John R. Raeburn.
Reader in Agricultural Economics, London
School of Economics and a member of the
Colonial Economic Research. Committee.
Bernard Marsh, Esq., F.e.A.
A senior partner in Messrs. Cooper Brothers,
Chartered Accountants.
8. The Mission proceeded to Malaya in June 1954 and
presented its Report in August 1954. This was laid before the
Council on the 6th October as Legislative Council Paper No. 58
of 1954. Since that date the report and recommendations of the
Mission (which are referred to in this Paper as the Mudie Report
and the Mudie Mission respectively) have been the subject of
prolonged discussions between the Rubber Producers' Council and
the Government. The present Paper is concerned with the proposals
which the Government wishes to lay before the Legislative Council
as a result of those discussions.
9. In addition to the various documents published and
statements made in relation to the rubber industry in the past.
the Mudie Mission had the advantage of access to a more comprehensive survey of cost and allied data relating to the rubber
industry than has ever hitherto been gathered together. This had
been collected by a Joint Working Party containing representatives
of the Government and the Rubber Producers' Council. This
Working Party had been supplied in confidence with cost and
other data by the estates. It had also organised a special pilot
survey of rubber smallholdings.
•
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10. The Mission had no difficulty in coming to the conclusion that the two subjects of overriding importance within its terms
of reference were Taxation and Replanting. Of these Replanting
is dealt with in detail in Parts II and III of this Paper; Taxation
in Part IV. In the present Part an attempt will be made to
6
•
anticipate and bring together in summary form the Government's
conclusions on these important matters which are now submitted
to the Legislative Council fQr approval.
On Replanting the Mission were outspoken on the
necessity for immediate measures saying: "If the present state of
affairs is allowed to continue, and nothing is done to secure an
adequate rate of repLanting over the industry as a whoLe, the end
of the rubber industry in Malaya, as we know it, is inevitabLe
within the next fifteen or twen~y years. It will just graduaLLy sicken
and die." · But they were not less outspoken on the subject of
Taxation. They concluded: "The examination convinced us that
the present taxation is excessive at the lower prices and that in
fact there should be no export duty when the Singapore price is
60 cents per lb. or less. We consider, however, that at prices about
80 cents and above the present rate should be raised."6
] 2. The Mudie R eport recommended, in respect of taxation,
the abolitio n of export duty at 60 cents a lb. and below, and the
institution of a more steeply rising rate, passing the present rate
of export duty at prices between 77 and 78 cents a lb. and
continuing more steeply thereafter. Touching replanting it
recommended not merely the continuation of the existing 4!- cents
cess scheme for smallholders, but also its extension to the estate
section of the industry. The report also recommended that estates
should be allowed to "overdraw" on their cess fund accounts,
subject to payment of interest, in anticipation of credits accruing
later. It recommended the abolition of the existing Schedule II
cess 7 for replanting on the grounds that the income derived from
it was insignificant at the prevailing and prospective level of
prices. Taken together these represent the most important
recom mendations in the Mudie Report and it is with them that
this paper is principally concerned. Certain of the other
recommendations made in the Mudie Report notably in re~ard to
taxation are however mentioned in later Parts of this Paper,
together with an ex planation of the Government's attitude t hereto.
Other recommendations made in the Mudie Report but not
mentioned in this Paper will be dealt with separately.
11.
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13. As to taxation the Federation Government accepts the
argument in the Mudie Report that "with a price of 60 cents a lb.
a low yielding estate cannot both pay export duty and set aside
Mudie R eport : para. 26.
• Mudie R eport: page vi.
, The Schedule II cess is not to be confused with the 4t cents per lb.
cess. Both are for rep lanting, but whereas the latter is levied at a flat rate
of 4t cents, regardless of price, and is for the benefit of sma llholders
(the estates' share being refunded to them), the Schedule II cess is
calculated at a progressive rate rising with the price of rubber but levied
only when the pric~ of rubber is ~ver 60 cents a lb. (cf. Appendi x VI).
The proceeds of th ls cess arc dlvlded between smallholders and estates
in accordance with their respective production; the former·s share is
paid into the same Sma llho lders' Fund (otherwise known as FWld B)
as receives the proceeds of the 4t cents cess; the estates' share is
credited to individual estates (through what is known as Fund A) by the ·
Ru bber Industry (R eplanting) Board and can only be drawn out against
proof of corresponding expenditure on replanting.
S
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an adequate amount for replanting."8 The Government also ~ccepts
the argument in favour of a higher rate of export duty mainly as
an anti-inflationary measure when prices are high. The Gove.rnf!lent
does no t, however, consider that acceptance of these prmclples
necessarily involves acceptance of the precise proposals put
forward by the Mudie Mission without any modification. Specifically the Government cannot contemplate the abolition of export
. duty as a regular source of revenue. If it accepted this portion
of the Mudie Report it would stand to lose some $40 millions
a year from the rubber industry alone at a price of 60 cents a lb.,
which (notwithstanding certain recommendations made by the
Mission) it does not believe can be replaced from alternative
sources of taxation. The Government also believes that it is
reasonable to seek a larger contribution to revenue at higher pr ices
in view of the assistance which it proposes to offer to the industry
by reducing taxation at lower levels of price and making grants in
aid of replanting. The Government also considers that since the
principal justification for relief from taxation is the necessity to
release funds to finance more replanting, that relief should be more
closely linked with replanting than is the case with the Mudie
proposals. In making these comments the Government has in mind
the position of the smallholders as well as that of those estates
where more replanting is needed. For although valuable progress
is being made with smallholders' replanting under the scheme
already mentioned,9 the Federation Government considers that
further measures are needed if this important programme is to go
forward as quickly, and on as wide a front, as is desirable. But
whereas the reductions in export duty proposed by the Mudie
Report are linked, through the extension of the 4t cents cess to
estates, with measures designed to ensure that more funds are set
aside by the latter for replanting, there is no such link in the case
of the smallholders, and there is no reason to think that the
taxation concessions made to them would be reflected in any
increase in replanting activity. Indeed it might even have some
effect in the opposite direction. In the case of estates, even the
extension of the 4t cents cess to them in the manner proposed by
the Mudie Report has the disadvantage that being levied on
~xports it links the amount of money so earmarked for replanting
m t.he case of an individual estate to its current output instead of
t~ Its need for help. It is the estates with higher costs which are
lIk~ly to. need help most; they are also most likely to be the ones
whIch wlll suffer most from loss of output and income as a result
of an energetic replanting programme.
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•
14. The Rubber Producers' Council also indicated the strong
objections of the estate section to the extension to them of the
4-!- cents cess on the grounds that it introduced a principle of compulsion which they held should and could be avoided; that at lower
price levels it would more than offset the remission of export duty
• Mud ie Report: para. 94.
• The figurcs for smallholders' acreages replanted with grants from
the Smallholders Replanting Fund were: 1953: 20,000 acrcs; 1954: 33,000
acres. At thc time of preparation of this Paper applications from smallholders for replanting in 1955 had been rece ived in respect of approx imately 60,000 acres.
•
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8
proposed by the Mudie Mission and would be too heavy a burden
for many estates to bear.
15. The Rubber Producers' Council itself made certain
1o
proposals which in their final revised form were broadly as
follows:
The existing rates of export duty and Schedule II cess should
be maintained but a proportion of the present export duty shoul.d
be paid into the Schedule II cess fund for replanting. T~s
proportion should be at the rate of 1~ cents a lb. when the pnce
of rubber was below 70 cents a lb.; at rubber prices of 70 cents
a lb. and above the Government share of duty should be limit~d
to the equivalent of 5 per cent. ad valorem. The amounts so paId
into the fund would be divided between estates and smallholdmgs,
the estates' share being credited to individual estates in proportion
to their verified production figures and the smallholders' share
going into Fund B. (This conforms to the existing procedure for
the Schedule II cess). Estates would be eligible for refunds in
respect of replanting expenditure incurred since 1st January, 1953,
to the extent of their credits in the fund and would also be eligible
for annual advances not exceeding one-fifth of the balance of their
credits in the fund. Estates which had spent an equal or greater
amount on replanting/new planting since 1st January, 1953, would
be entitled to the refund of the whole of their credit in the fund.
The Rubber Producers' Council claimed that these proposals
had the advantage that all contributions by the Government and
the industry would be available only for current and future
replanting and provided for a continuing annual flow of money
into the fund at all price levels and without limit of time. The
same could indeed be claimed for the Mudie scheme (and,
except for the time limit, for the Government's proposals set out
below): the difference in, and advantage claimed for, the Council's
proposal was that it avoided the 4t cents per lb. flat-rate cess
which would have borne hardly on the industry when prices were
low and that it related contributions to the Replanting Fund to
the price of rubber, i.e., to the industry's capacity to pay. It was
argued that at high prices large surpluses would accumulate for
use when prices were lower while the proposed standard rate of
It cents per lb. for the "Government contribution" at prices of
70 cents and under would also give the industry an assurance that
a substantial income would accrue to the replanting fund even at
lower prices. The provision for advances was considered to provide
a means of enabling replanting to be started which might otherwise be prevented owing to shortage of ready funds. It was also
claimed that administration would be simple since the present
organisation for dealing with the Schedule II cess would be used.
The Federation Government considered that it could not
proceed with the proposals of the Rubber Producers' Council
because their success (measured in terms of acreage which could
be replanted with the funds which would be made available for
that purpose) would depend on the price of rubber remaining at
higher levels, say, around $1 a lb., than could reasonably be counted
PERPUSTAKAAN
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•
These are set out in greater detail in Appendix II and are discussed
more full y in Part II of th is Paper.
10
I
,
,
9
on; whereas if prices fell for a long period to say 70 cents a lb. or
less, the funds available (viz. the Government's contribution of
l! cents a lb.) would only be sufficient (after deducting the smallholders' share) to replant 0.75 per cent. of estate rubber a year.
Anything more would have to come from the estates' own
resources. In short the scheme would provide least assistance when
and where it was most needed and there would be no assurance
that more replanting would be undertaken, particularly by
the backward estates, on the scale necessary to save the industry.
Another objection was that the additional assistance for replanting
(i.e. over and above the sums that would come from the existing
Schedule II cess) was to be given entirely at the taxpayer's expense
regardless of the industry's prosperity (or otherwise).
16. After full consideration of the recommendations of the
Mudie Report and the Rubber Producers' Council, in the course
of which the Government representatives had a number of
discussions with the representatives of the industry, the Government elaborated certain proposals which it believes combine the
essence of the Mudie Report (viz., assistance to the industry and
the reduction of taxation at lower price levels, offset by higher
and largely anti-inflationary taxation at higher price levels), in a
form which avoids the various objections which have been made
either to the Mudie Report or to the proposals put forward by
the Rubber Producers' Council itself.
The Government's proposals are: 1 t
(i) that export duty shouLd be reduced beLow 80 cents a Lb.,
but so that at and beLow 60 cents a Lb. it will be at
the rate of 4 per cent. ad valorem instead of 5 per cenl.
at present;
(ii) that above 80 cents a Lb. export duty shouLd be raised,
but m.uch Less steepLy than was proposed in the Mudie
R eport, and with the additional provision that at price
Levels over $1.00 a Lb. a substantial portion of the
higher rate of duty should be Levied not as Government revenue, but as an anti-inflationary cess which
wouLd be set aside and returned to the rubber industry
at times of Lower prices 12;
(iii) that the existing Schedule 1I cess for repLanting should
be abolished. The reason for abolition is that given
by the Mudie Mission, viz., that its yield is likely to
be too small (cf. at 70 cents only t cent per lb. and
at present prices 14 cents a lb.) to make an adequate
contribution to the replanting problem. From the
smallholders' point of view the effect of its abolition
will be that the current income of the individual
smallholders from rubber will not be noticeably
affected by the increase in export duty mentioned
above until the price is between 87 and 88 cents.
(iv) that in Lieu of the more generous reductions in export
duty recommended by the Mudie Report, particuLarly
PERPUSTAKAAN
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These are set out in greater detail in Appendix III and are
more fully in Part III of this Paper.
.. F o r further details see Part IV and Appendicc V and VI.
II
d'