This article first appeared in The Edge Malaysia Weekly on October 10, 2022 - October 16, 2022

IT would be safe to say that there were very few complaints from the man in the street about the measures announced in Budget 2023 last week.

The budget totalling RM372.3 billion – the largest tabled, against RM332.1 billion allocated under Budget 2022 -- was read out by Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz on Friday, Oct 7.

Many have described the budget as “feel-good”, “people’s budget” and “committed to the rakyat”, and one wouldn’t have to wonder why that’s the case with the next general election taking place soon.

Looking at the measures announced in the budget, it does provide many measures that are aimed at protecting the welfare of the man in the street, who has been hit by a higher cost of living due to rising interest rates and inflationary pressures.

Experts and observers note that Budget 2023 includes measures for the middle-income group (M40), who usually had been left out of previous budgets. This time around, those in the tax brackets of RM50,001 to RM100,000 saw a reduction of two percentage points in personal income tax.

Tax consultants view this as a good move as it would be the most direct way to help alleviate the financial burden of this income group. PwC Malaysia tax leader Jagdev Singh says the measure will result in an immediate tax cash savings of up to RM1,000 for individuals in those tax brackets.

Those in the tax bracket of RM250,001 to RM400,000, who are currently taxed at 24.5%, will now join those in the RM400,001 to RM600,000 tax bracket, where the rate is 25%. But, says Jagdev, there remains a net gain of RM250 for taxpayers with annual taxable income of RM600,001 and above.

As for those looking to purchase a property above RM500,000 to RM1 million, they will see a higher exemption on stamp duty for sales and purchase agreements and housing loan agreements, from 50% to 75% next year, which will likely benefit the M40 and above.

Women are also big beneficiaries of this budget — from the RM11 million to subsidise mammograms and cervical cancer tests to the six-year income tax reprieve from 2023 to 2028 for those reentering the workforce after a career break, and a RM235 million fund especially for women entrepreneurs.

The government has also decided to extend the tax relief on childcare and kindergarten fees amounting to RM3,000 for parents until Year of Assessment 2024.

The youth seems to be the focus as well in the measures announced. Given the high unemployment rate among youth, about 11%, it is definitely a move that will be welcomed by the public.

There were measures to boost youth employment. Employers will be given incentives under Perkeso to employ young people who have been unemployed for more than three months. Employers who employ TVET graduates will also be offered this incentive.

To encourage entrepreneurship among the youth, RM305 million worth of loans will be made available to them through SME Bank, Tekun, Mara, BSN and Agrobank.

One debatable measure, though it is likely to generate jobs among the youth in the immediate term, is the one rolled out for the B40 group, specifically the youth, where the government has agreed to incur the cost of obtaining a taxi, bus or e-hailing licence for this group under the MyPSV programme. RM10 million has been allocated for the extension of Skim Tekun Belia Mobilepreneur for youth involved in delivery services using motorcycles.

“Why encourage youth to be taxi drivers, bus drivers or be in the delivery service business? Youth should be encouraged to pursue a skill or take on a course to further improve themselves,” notes an observer.

The government is also offering those who took on PTPTN loans a chance to pay off their loans at a discounted rate between Nov 1, 2022, and April 30, 2023.

The B40 group has definitely not been left out. In fact, the direct cash handouts given to this income group has increased and the category widened, with an allocation of RM7.8 billion for 8.7 million recipients.

There was also an increased allocation for the programme to eradicate hardcore poverty, with the amount increased to RM1 billion for 2023 from RM150 million in 2022. Part of the funding will come from government-linked companies.

There were many measures announced for the rakyat, from initiatives to encourage employment to the extension of social security measures, upskilling and reskilling programmes, an emphasis on the education sector, and an upgraded public transport system. Farmers and fishermen were not left out either.

On the corporate front, perhaps the most significant measure was the tax reduction amounting to two percentage points for SMEs with annual chargeable income of up to RM100,000. SMEs in this tax bracket will be taxed at 15% instead of 17% in YA2023.

“This is effective from YA2023, and it appears that SMEs would be subject to three progressive tax rates depending on the level of annual chargeable income. Annual chargeable income of RM100,001 to RM600,000 would be subject to a corporate income tax rate of 17% while the amount in excess of RM600,000 would be subject to 24%,” notes Deloitte Malaysia tax leader Sim Kwang Gek.

“While the rate cut provides some relief to SMEs, the tax savings of RM2,000 may not be significant in view of current challenges faced by SMEs. A 2% cut on annual chargeable income up to RM600,000 would be more meaningful. Having a two-tier tax rate would also be simpler for SMEs to administer.”

Measures for the business community were more targeted this round, specific to sectors such as tourism, aerospace and pharmaceuticals.

Efforts like the extension of the Penjana relocation incentives to attract electrical and electronics investments through the extension of existing tax incentives and a reduction of the personal tax rate for C-suite expatriates until 2024 has been touted as a good move.

“Despite Malaysia’s commitment to implement the minimum tax under Pillar 2, Budget 2023 does not shy away from using incentives to attract foreign direct investments in strategic areas. We should not miss out on reaping potential changes arising from the global supply chain disruptions and geopolitical uncertainties,” says Jagdev.

Nevertheless, the Federation of Malaysian Manufacturers (FMM) says it is disappointed in the budget as it does not provide any assistance to support trade for industries to expand their market access, given how many have faced severe impact on their existing markets as a result of the Covid-19 pandemic and supply chain disruptions.

“There were also no specific allocations to support SMEs that have invested or are going to invest in ESG initiatives in their operations. In addition, we find that the allocation of RM1 million for the Domestic Investment Strategic Fund (DISF) is insufficient to support business recovery,” notes FMM president Tan Sri Soh Thian Lai.

Sustainability was a key focus in Budget 2023. The government’s intention to introduce a carbon tax to drive the environment, social and governance (ESG) agenda is seen as a good move.

“There has been no specific implementation date announced for a carbon tax, but the government is evaluating the carbon pricing mechanism. The carbon tax will serve as a new source of government revenue and is certainly a step in the right direction to assist our nation in achieving carbon neutrality by 2050,” says Soh Lian Seng, head of tax at KPMG in Malaysia.

“The extension of the Green Investment Tax Allowance (GITA) and Green Income Tax Exemption (GITE) by another two years to Dec 31, 2025, will also continue to incentivise and encourage businesses to accelerate the use of ESG-focused technology and embark on green projects.”

Perhaps what was most disappointing in the budget this round was the lack of major structural reforms. However, there were some reform measures, such as e-invoicing, which is set to take effect in 2023, and the automatic issuance of a Tax Identification Number to help pave the way for a more efficient tax administration.

“Having an e-invoicing management system that integrates with the government’s system can be a powerful tool to tackle tax evasion, reduce tax leakages and promote greater tax transparency. This demonstrates the government’s efforts in driving efficiency and curbing tax evasion through digitalisation of the tax administration and business transactions,” says Sim.

There is also the Fiscal Responsibility Act, which is expected to be tabled in parliament by the end of this year, which will help to provide more fiscal transparency and accountability.

There are small steps in fiscal consolidation, where the deficit will be reduced by RM400 million in 2023. The government is seeking to narrow the budget deficit to 5.5% of GDP in 2023, or a RM99.1 billion deficit, from a deficit of 5.8% of GDP (RM99.5 billion). This is due to the limited room for manoeuvring when it comes to spending, says Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce & Industry of Malaysia’s Socio-Economic Research Centre.

However, the large-scale reforms that were speculated on in recent times were absent, one of which was the reintroduction of the Goods and Services Tax, or even a reform of subsidies.

CIMB Group Holdings Bhd regional head of treasury and market research Michelle Chia says that given the focus on economic recovery and socioeconomic resilience, the runway to implement reforms such as widening the revenue base and rationalising expenditure was extended.

“While it was inevitable that Petronas would continue to provide substantial non-tax revenue, the RM35 billion dividend was lower than we anticipated, given the oil price assumption (with a sum deposited back to Kumpulan Wang Amanah Negara, or KWAN), which suggests the government may have taken a more conservative approach to mitigate fiscal slippages given the potential volatility in oil prices and global demand in 2023,” she adds.

Lee notes that the current narrow tax base is unsustainable. “The budget did not commit to a wholesale tax reform to broaden the tax base as the current narrow tax base is unsustainable. In times of meeting revenue shortfall, the government has implemented a piecemeal approach such as the windfall tax, prosperity tax, or turned to Petronas as its banker of last resort, thanks to soaring crude oil prices. But once the high crude oil prices fizzle out, the challenge of having a sustainable revenue stream to meet high committed obligations and expenditure remains.”

With the proposed reduction in personal income tax, estimated to cost the government about RM800 million, the government has projected an increase in tax collection across the various taxes imposed.

Estimated tax revenue collection in 2023 is expected to increase to RM205.58 billion, higher than the RM198.23 billion in 2022.

“This could be a reflection of the government’s confidence that the economy will continue to recover to pre-pandemic levels, resulting in higher tax collections contributed by individuals returning to the workforce at higher wage levels, profits from recovering businesses and increased audit activities by the tax authorities,” says Jagdev.

While tax revenue collection is expected to increase, the total revenue of the federal government is expected to be lower at RM272.57 billion in 2023 from RM285.22 billion in 2022, as the dividend expected to be received from Petronas in 2023 would be less than the RM50 billion contribution in 2022.

“New measures such as the implementation of e-invoicing and TIN should provide more room for the tax authorities to shore up tax revenue. However, in the longer term, Malaysia needs to consider a broader-based tax system such as the GST to have a more sustainable source of revenue,” says Sim.

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