The government is likely to introduce a subsidy rationalisation framework in Budget 2024, which will take into account the socioeconomic status of households. — Bloomberg
HOT on the heals of the tabling of the Madani Economy framework in late July, the National Energy Transition Roadmap Part 1 and Part 2 in August, and the New Industrial Master Plan 2030 in early September, the government tabled the 12th Malaysia Plan Mid-Term Review (12MP MTR) early this week.
Next on the agenda is the tabling of Budget 2024 and to say the budget this year will be the “same old, same old” will be an understatement.
Bold targets under 12MP MTR
The key elements from the tabling of 12MP MTR this week were the presentation of some lofty targets, which among others include the introduction of 17 big bold measures covering 71 main strategies and initiatives and 11 new transport and logistics projects.
The government is expected to spend some RM270bil or an average of RM90bil per annum on development expenditure over the final three years during the 12MP.
On gross domestic product (GDP) growth, the 12MP MTR is now looking at a GDP growth of between 5% and 6% for the period under review, with the inflation rate set at between 2.8% and 3.8%.
The 12MP MTR left the budget deficit target at between 3% and 3.5% while the unemployment rate is envisaged at 3.3%.
Other bold targets include raising the compensation of employees to GDP ratio to 40% by 2025 and as much as 2.5% research and development expenditure as a percentage of GDP.
New taxes?
Given the targets set, it does seem that the government is coming to the reality that it needs to boost revenue to meet deficit targets set under 12MP MTR.
Based on Budget 2023, Malaysia’s expected tax revenue to GDP ratio of just 11.6% is unsustainable and the government needs to come out with cleverly structured tax reforms to tax the right segment of the society or to remove tax incentives, given that will see taxpayers ending up paying more to the taxman.
As it is, the mere utterance of any new taxes is met by pouring cold water over it, as every taxpayer believes new taxes or higher tax rates are not welcome when corruption and leakages within the government are rampant and large, respectively. This was evident when the Economy Minister was quoted as saying that Malaysia will introduce the capital gains tax (CGT) next year and looking at introducing the goods and services tax (GST).
Social media and WhatsApp messages went viral as investors felt that this was not the right time for the CGT, mainly on the assumption that this would target equity investors on the local bourse.
On the GST, while most Malaysians welcome the move, the middle and lower income group will feel victimised as the GST will just raise prices across the board and result in higher living expenses, resulting in more Malaysians finding it hard to make ends meet.
The question is, while the GST is an efficient tax structure, Malaysia needs to address two things.
One, the GST implementation must be structured with an effective refund mechanism, and two, the rate must be tax-neutral in the sense that consumers will not be overburdened with an increase in consumer prices.
Having said that, at a time when wages are low and inflationary pressure remains, introducing the GST now may not be the best idea to raise government revenue, as its implication on lower-income groups will be significant as the GST is a form of a regressive taxation system.
While the top income earners or even some businesses welcome the implementation of the GST, there are far-reaching consequences to the economy if the GST is introduced at a time when the larger population is not ready for it.
The government might as well widen the scope of the current sales and service tax to boost the government’s coffers as the current SST rate is still limited in scope compared with the GST.
As for the CGT, it is widely believed that it is the same proposal as the one that was retabled in Budget 2023 in February this year, which is a tax on unlisted companies.
The only thing that is left is to fine-tune the definition of what the CGT will entail in terms of scope and rate.
Having said that, the government must ensure that angel investors, venture capital investors and private equity funds are exempted from the CGT, as the nature of business of these investors is to invest in private and unlisted companies in the first place.
Imposing the CGT on them will discourage the growth of the startup industry and the nurturing of young companies in Malaysia, which are always looking for new investors to grow and expand their market reach.
The government is also expected to introduce details of the Luxury Goods Tax in Budget 2024, which lacked details when it was first announced in the retabled Budget 2023.
Other than these few taxes, there are also murmurs that the government may be mulling other forms of taxes to boost its coffers. Among them are the reintroduction of the inheritance tax, the introduction of the carbon tax, wealth tax, or even vacancy tax for unsold properties or unoccupied completed properties kept as inventory.
Subsidy rationalisation
Much has been said about subsidies and the government is likely to introduce a subsidy rationalisation framework in Budget 2024, which will take into account the socioeconomic status of households.
Set to be launched early next year, the subsidy rationalisation will have a significant impact on government finances, especially now that global crude oil prices are on the rise again.
This is a welcome transition as Malaysia needs time to adjust to a full pricing mechanism, especially for the lower-income group due to our current low-wage structure. With a progressive wage model set to be rolled out too, it is hoped that in time to come Malaysia will not only sell fuel based on an acceptable market price, but begin to impose a tax on RON95 as it is only fair for the government to collect taxes on fuel sold just like in most countries in the region.
Rebalancing tax reliefs
This column has talked about tax reliefs in previous columns and the run-up to the presentation of an annual budget. To recap, the government did introduce some measures in last year’s budget, but this was then reversed again due to pressure from various stakeholders.
If the government wants to be bold and brave in addressing deficit issues as well as widening the tax net, it needs to remove some of these reliefs that are given to both individuals as well as corporate taxpayers.
Other than the RM8,000 tax relief granted to individuals for the contribution made to Skim Simpanan Pendidikan Negara up to 2024, other forms of deductions that the government should consider is removing the RM3,000 relief for the Private Retirement Scheme as well as the RM2,500 relief granted for the purchase of personal computers, tablets or smartphones.
At the same time, the government should also increase the amount granted for personal relief to RM10,000 instead of the current RM9,000 and individual relief for contributions made to the Employees Provident Fund to RM7,000 (from RM4,000 currently), while relief for life insurance should be raised to RM5,000 from RM3,000 presently.
Typically, the presentation of the annual budget has been mostly a non-event, but given the various blueprints that have been presented over the past couple of months, as well as the discussion on addressing Malaysia’s structural issues, the upcoming tabling of Budget 2024 will be the most anticipated event of the year.
After all, the theme for this year is “Empowering The People” and hence it has to be a budget that will touch the lives of everyone, that will drive the Madani Economy narrative.
Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.
