This article first appeared in The Edge Financial Daily on October 29, 2018

KUALA LUMPUR: With the tabling of Budget 2019 just four days away, the talk has been mostly on potential new taxes to be introduced to bridge the reported RM21 billion revenue gap from the discontinuation of the goods and services tax.

At the same time, the government has made it clear that public-sector spending is to be tightened to deal with the RM1 trillion national debt. This raises the question: Who will be driving the growth moving forward?

Against this backdrop, the private sector would need to step up to drive economic growth.

The question then arises: Are new taxes the way to go to invigorate the private sector’s spending and investment?

EY managing partner for its Asean tax practice Yeo Eng Ping opined that while implementing new taxes may provide a quick reprieve to fill the coffers, it is however not the long-term solution to spur economic growth.

“A favourable tax framework is actually an incentive to attract and retain investors. When deciding on tax policy, you can’t just consider our country only. You have to look at it in relation to others, at how our tax policy compares to neighbouring countries in the region.

“For example, the talk on the capital gains tax being considered. If Malaysia were to introduce it, when other countries such as Singapore and Hong Kong do not, how would that look to investors?

“Relative comparisons are key, not just for foreign investors wanting to invest in Malaysia, but for Malaysian companies operating here as well. We do not want a situation where Malaysian companies also decide to operate their businesses elsewhere due to the higher costs of doing business here,” she told The Edge Financial Daily in an interview.

Ernst & Young Tax Consultants Sdn Bhd partner and Malaysia tax leader Amarjeet Singh, who was also at the interview, said that a good example to look at when it comes to tax reforms is the UK.

“We did a study on the UK’s tax reform that was introduced in 2010 when its new government came on board, whereby it reduced government spending by 25% and introduced a two-year pay freeze for all public-sector employees.

“The private sector in the UK was then expected to pick up the slack, and what the government did to encourage this was not just a headline corporate tax rate cut; they also introduced things like increasing the entrepreneurs’ relief lifetime limit from £2 million (RM10.72 million) to £10 million to encourage entrepreneurs to grow their business and reinvest their gains.

“As a result, from 2009 to 2015, the UK’s tax revenue growth was higher compared with Germany, France and the OECD (Organisation for Economic Co-operation and Development) average, and so was the growth of foreign direct investment (FDI) in the UK,” he said.

Total tax revenue for the UK from 2009 to 2015 grew at a compound annual growth rate (CAGR) of 3.7% compared with the OECD average of 2.4%, while total net FDI inflows grew at a CAGR of 26%, even surpassing Germany.

“Learning from that, our view is if you want the private sector (and when we say the private sector here, it does not just refer to FDI but also our domestic corporate players) to drive economic growth, we need to encourage them — be it in the form of tax allowances, corporate tax cuts or incentives,” said Amarjeet.

It would also be a good time to review the current tax incentives available under the Income Tax Act 1967, to see if they suit the current business models and business environment.

Manufacturers in Malaysia, such as glove makers, have long been lobbying for an extension of the reinvestment allowance (RA), a special incentive that is available for capital-intensive businesses to claim their qualifying expenditure incurred. The RA is no longer granted to companies which have claimed it for 15 years, hence the call for the extension of the allowance.

“Lots of incentives have been introduced over the past 10 to 20 years, but business models have changed, so maybe we need to change the way we approach incentives.

“Rather than coming up with multiple incentives, maybe we should just have tailor-made or customised incentives to suit the needs of the business, with a focus on what kind of return the government is going to get with every dollar of tax that it is going to give away,” said Amarjeet.

Yeo concurred, and opined that with the ongoing trade war between the US and China, it is an opportune time to invigorate the private sector.

“We need to look at some of these US and China companies that are thinking of relocating to the Asean region because of the trade war, and we know that Vietnam is a strong contender as an alternative location for manufacturing operations .

“We should send a message to the business community that we are a very investment-friendly government, and entice them to set up operations here through customised incentives.

“The government should not view tax incentives as a subsidy, rather it should be viewed as an investment,” she said.

But can we afford to do this, with a mounting debt in the books?

“We need to grow our way out of debt, not raising taxes to close the gap. We need to grow the pie so that the gap will naturally close. If we help businesses here grow, there will be jobs created and people will be earning. More people paying taxes, albeit at a lower rate, gives you a higher tax revenue overall, compared with hiking rates or having more types of taxes,” said Amarjeet.

Meanwhile, Yeo pointed out that the current high crude oil prices have provided Malaysia with some breathing space.

“Oil prices are now ranging between US$70 (RM292.38) and US$80 per barrel, and that has bought us a little more time to think about any potential changes to tax policy and their repercussions. What we don’t want to do is rocking the boat with investors, especially given the intense competition for capital from our neighbouring countries,” said Yeo.

It would once again be a tough balancing act for the new government to strike between maintaining fiscal discipline and sustaining economic growth.

However, if we do intend to become an Asian Tiger again, perhaps invigorating and not burdening the private sector could be the roar that the government needs.