Huge impact: Customers checking out merchandise at a batik factory in Penang. The SDG Indicators, Malaysia, 2021, show that meaningful work goes hand-in-hand with growth, which will result in prosperity.
“ECONOMIC recovery” is the buzz phrase in this volatile global environment, which has changed dramatically since 2022 following the Covid-19 pandemic and exacerbated by geopolitical tensions that have caused supply chain issues as well as other lingering effects on the economy.
The prices of food and fuel have escalated, and many countries are facing financial crises.
These circumstances have created dampening effects on the world’s economy.
How can taxation policies be used to support a nation’s economic growth and recovery?
Labour productivity
Labour productivity is key to supporting industries and boosting living standards.
Having a productive workforce is key to supporting economic development.
It is vital to boost living standards and this is a priority in the United Nations’ Sustainable Development Goals (SDG) in the call to end poverty, protect the planet and ensure that all people will enjoy peace and prosperity by 2030.
In many parts of the world where labour productivity is growing, its correlation to poverty reduction is obvious.
Simply put, when workers have access to meaningful jobs and employment, poverty levels will decrease.
The SDG Indicators, Malaysia, 2021, published by the Statistics Department, showed that meaningful work goes hand-in-hand with economic growth, which will result in prosperity for the nation.
The Covid-19 pandemic has impacted employment opportunities around the world, including in Malaysia.
In economies where people lack formal work arrangements or are self-employed, the impact of a downturn will impact these categories of individuals almost immediately.
Further training
In these circumstances, encouraging businesses to continue providing training to employees as well as developing training programmes to foster new skills will lessen the impact and contribute to productivity.
In Malaysia, double tax deductions are available for expenditure incurred by companies on training programmes approved by the relevant authorities.
In the previously announced Budget 2023 in October 2022, tax incentives such as an extension of the income tax exemption on employment income for women returning to work after a career break, which was originally introduced via Budget 2018, would encourage women to return to the workforce and enable them to continue to be trained and improve on their skills.
We will need to wait to see if the extension of this incentive will be maintained in the retabling of Budget 2023 on Feb 24, 2023.
Sector growth is essential
There are various other ways to use taxation policy to achieve the nation’s economic goals.
For certain sectors which are new and require support, a preferential tax rate can help boost investments.
We have seen the preferential tax rates or tax holidays for specific sectors or investments in a designated corridor or location, encouraging growth in that sector or geographical location.
To encourage technology advancement and innovation, tax incentives on research and development (R&D) activities will encourage more spending in this area.
This will also stimulate private sector innovative activity and continued investments in innovation and technology.
According to the Malaysian Science and Technology Information Centre (Mastic), as at 2019, Malaysia R&D spending was 1.44% of the country’s gross domestic product or GDP.
This is compared to 4.55% for South Korea, 3.21% for Japan, 3.02% for Germany and 1.91% for Australia.
Reducing the corporate income tax rate may also be advantageous in spurring the economy, more so than reducing personal income taxes.
This is because a reduction in corporate tax rates would allow businesses to continue to reinvest in the business and focus on growth.
With this, the business will be able to expand and create more employment opportunities, which will in turn create a multiplier effect on the economy.
Higher disposable income
A reduction in personal income taxes, on the other hand, will provide higher disposable income for individuals and a flow of money into the economy through consumption.
However, this may be comparatively less impactful.
Lastly, a tax system that is stable and simple and which is administered in an efficient and transparent manner will result in increased investor confidence and higher investments, which will in turn spur economic growth.
Conclusion
Taxation plays an important function in the economic development of a country.
The right tax policy will enhance productivity and boost industry sector growth, which can be greatly beneficial to the economy.
It is important that the tax policy is up-to-date and relevant to the needs of the nation.
Continuous monitoring and constant updates to the tax policy will help businesses to do well and achieve the desired national outcomes.
Farah Rosley is the Malaysia tax leader at Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writer’s own.
