Introducing new taxes such as CGT and LGT requires careful evaluation to ensure Malaysia remains competitive in the region.
AS Malaysia eagerly awaits the release of Budget 2024 on October 13, 2023, a strong sense of anticipation and expectation permeates the nation, particularly among businesses and individuals.
Building upon the commitment to fiscal discipline established in the Malaysia Madani Budget 2023 earlier this year, Budget 2024 is expected to provide further clarity on fiscal reforms and the nation’s financial landscape.
With a record expenditure allocation of RM388.1bil in Budget 2023, some concerns have arisen regarding Malaysia’s fiscal deficit exceeding 5% and the national debt surpassing RM1.5 trillion.
The declining reliance on oil revenue raises pertinent questions about alternative revenue sources.
Budget 2024 is poised to address income disparities, particularly among the B40 and M40 income groups.
Concurrently, bolstering public and investor confidence and enhancing the ease of doing business in Malaysia is needed to promote domestic and foreign direct investments.
Budget 2024 is the opportune time for the unity government to articulate its comprehensive tax policies and long-term fiscal strategies for Malaysia.
> Stimulating foreign direct investment
Malaysia possesses a competitive advantage among its regional counterparts with skilled manpower across industries such as information technology, software development, engineering, finance/accounting, education and other outsourcing services.
Encouraging high value-added services to relocate to Malaysia would accelerate the much-needed influx of foreign direct investment.
Furthermore, the rising prevalence of remote work has created a favourable environment for this endeavour.
Consequently, Malaysia could revive the expired Principal Hub status incentive to encourage multinational corporations to locate in Malaysia for the provision of export services.
The former Principal Hub incentive was primarily directed at encouraging services tailored to related companies within a corporate group.
Malaysia’s attractiveness extends beyond this as multinational corporations are looking to expand their services to customers globally, and not just for services to affiliated entities.
To incentivise eligible enterprises engaged in export services, Malaysia could extend a 15% corporate tax coupled with an exemption from service tax.
This proposal strategically positions Malaysia as an attractive option for businesses seeking to deliver top-tier services on a global stage which aligns with Prime Minister Datuk Seri Anwar Ibrahim’s endeavour to enhance investment facilitation and to raise the country’s profile.
> Advancing toward a progressive tax regime
In a notable departure from the expected goods and services tax (GST), the government proposed the implementation of a more progressive tax regime in Budget 2023, with the introduction of the capital gains tax (CGT) and luxury goods tax (LGT) to address wealth inequality.
However, the revenue generating capacity of these new taxes remain uncertain.
The impact of the new taxes on investment and businesses must also be carefully studied to preserve Malaysia’s attractiveness and competitiveness in the region.
After over seven months of extensive consultations with stakeholders, it has become evident that there are numerous technical and administrative complexities that require thorough consideration.
For instance, if CGT is confined to the disposal of unlisted shares by entities other than individuals, deliberations must extend to its potential applicability to entities beyond Malaysia and multi-tier corporate structures.
Moreover, given that the Income Tax Act 1967 currently excludes capital gains from the meaning of income, a decision must be made on whether to introduce a new capital gains tax legislation rather than amend the existing income tax legislation.
Furthermore, if the LGT is to be implemented as an extension of the existing sales tax system, concerns regarding potential adverse effects on tourist spending necessitate the development of an efficient refund mechanism.
Such issues require careful balancing as they significantly affect the revenue generation potential of the taxes.
> Broadening the tax base for Malaysia’s transition to a high-income nation
As Malaysia’s economy continues to grow and its dependence on oil revenue decreases, the need for establishing a comprehensive tax framework becomes increasingly apparent.
Considering the current demographic landscape, relying on a small group of affluent individuals to bear the entire fiscal burden is clearly unsustainable.
Malaysia’s path toward fiscal sustainability presents two viable options, which is to either expand the scope of the existing sales and service tax (SST) or re-implementing GST.
While these taxation models have distinct features, SST suffers from embedded tax cascading and GST stands out for its efficiency and transparency due to its input credit mechanism.
Under the GST, tax cascading is eliminated as businesses can recover the GST paid, ultimately reducing the embedded tax to consumers.
The progressive or regressive nature of GST or SST depends on the various factors like taxable goods, the scope of services and tax rates, all of which can be tuned to strike a balance between fiscal requirements and income segments of B40 or M40.
Notably, introducing new taxes requires adequate lead time for implementation.
Even if the introduction of GST is postponed to a future date, such as 2026 or later, announcing this potential implementation in Budget 2024 demonstrates transparency and clarity to potential investors while providing businesses and individuals ample preparation time.
> Balancing fiscal resilience
A primary concern for Malaysia is achieving fiscal sustainability amid increasing expenditure and growing national debt.
To promote economic growth, it is crucial to encourage investments in activities that add value to the economy.
Malaysia has distinct advantages, particularly in skilled workforce, which can be leveraged through targeted tax incentives. It is also crucial for Malaysia to effectively promote this as its key commitment to investors.
Introducing new taxes such as CGT and LGT requires careful evaluation to ensure Malaysia remains competitive in the region.
While aiming for a more progressive tax system to adjust for income inequality is commendable, its success in ensuring fiscal sustainability ultimately depends on how much revenue it generates.
Decisions regarding expanding the SST or reintroducing GST should consider factors like scope and tax rates, which goes beyond the choice of the tax system itself.
Promoting greater confidence in the government’s long-term fiscal plan with clear communication in Budget 2024, such as mentioning the potential GST implementation with ample lead time, should be a key consideration.
In conclusion, as Malaysia embarks on the path toward fiscal sustainability, the strategies outlined in Budget 2024 should hold the promise of addressing economic disparities, encouraging investments and ensuring a fair and balanced tax framework, all essential elements in the nation’s journey toward a high-income future.
David Lai is executive director/head of tax advisory, BDO Tax Services Sdn Bhd and a member of The Malaysian Institute of Certified Public Accountants. The views expressed here are the writer’s own.
