Economists applaud tax cut for SMEs

This article first appeared in The Edge Financial Daily, on March 20, 2019.
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KUALA LUMPUR: Economists are largely positive about the government’s efforts in reducing the tax burden of businesses with a fresh one-percentage-point corporate tax cut — even though the initiative is targeted at small businesses — amid a slower economic growth outlook.

Sunway University Business School Economics Professor Dr Yeah Kim Leng lauded the move, saying it “is the best they can do at this juncture”, as the government needs to balance fiscal prudence with growth while managing its debts to keep to its fiscal deficit target.

The tax cut — from 18% to 17% — was announced by Prime Minister Tun Dr Mahathir Mohamad at the Invest Malaysia 2019 forum yesterday. The reduction is only for small and medium enterprises (SMEs) with a paid-up capital of below RM2.5 million, and businesses with annual taxable income of below RM500,000. The measure was included in Budget 2019 tabled last November.

“Also bear in mind the government had previously replaced the goods and services tax (GST) with the sales and services tax, lowering the tax burden on consumers. With a smaller revenue base now, the government is not in a position to give a major tax cut to all businesses,” Yeah told The Edge Financial Daily.

If the government had maintained the GST, then it could probably afford to extend the tax cut to not just all corporates, but also individuals, he added.

Still, the 1% reduction should be “a welcome relief” to many SMEs, he said, adding it could boost overall business sentiment as this will help strengthen

their cash flow and allow smaller businesses to expand and invest more.

Similarly, AmBank Group chief economist and head of research Dr Anthony Dass said the measure will support smaller businesses’ cash flow amid a slower economic growth outlook, especially those in the export and construction sectors which have been most affected.

Dass projected that Malaysia’s gross domestic product (GDP) growth would slow to 4.5% this year, from 4.7% in 2018, in tandem with a slower global growth. For local SMEs, Dass expects their growth, in average, to moderate to 6.3% from 6.5%.

SME Association of Malaysia president Datuk Michael Kang Hua Keong said small and micro businesses stand to benefit the most from the tax cut. However, a big chunk of SMEs — he estimated many with a paid-up capital of above RM2.5 million — will be left behind.

However, he said he remains heartened that the government is committed to having SMEs contribute 41% of national GDP by 2020, from 37.1% in 2017. He expects SMEs’ contribution to rise to 39.5% of GDP this year.