Friday 29 Mar 2024
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Over the last weekend, I had dinner with a former school mate of mine, Eddy, who had left his employment and just started a new printing business venture. He and his wife are the shareholders of the company that was set up for the business. While he is very optimistic about the enormous business opportunities that lie ahead, he also shared his concerns.

He thinks that in the current environment, compounding challenges such as interest rate hike, increased minimum wage, retirement age extension, subsidy roll back, possible rise in energy costs and declining domestic consumption are especially threatening to SMEs.

The chances of SMEs in meeting the target of 41% contribution to the gross domestic product (GDP) by 2020 from 33.1% in 2013, seems slim. To Eddy, more rigorous measures will need to be employed by the government to foster the environment needed for SMEs to prosper and, ultimately, meet the nation’s vision 2020.

Given the above, how do fiscal policies come into play? Have Malaysian fiscal policies been effective thus far? What else could be done?

 

Past budgets

The annual Budget has always been the stage for the government to unveil policies and initiatives to aid SMEs. Tax incentives introduced in the past, such as two-tiered corporate tax rates, waiver of limit in claiming accelerated capital allowances for small value assets for certain SMEs, and the granting of Pioneer status or Income Tax Allowance to small-scale manufacturing companies have contributed to the steady but meagre increase in share to the overall GDP of an average 0.4% a year from 2005 to 2013.

The 2013 Budget introduced the incentive of merging certain SME service providers into larger entities by providing a flat tax rate of 20% for five years, as well as stamp duty exemption on the merger documents to give present SME businesses the scale needed to be competitive in the wider and international markets. It also introduced the angel tax incentive, which grants up to RM500,000 tax exemption on investments by angel investors into certain SMEs to encourage interests and investments in such SMEs at their crucial, early stage.

Despite its appeal, the effectiveness of such well-intentioned incentives remains to be seen.

 

 

More goodies to come?

In Budget 2003, the government introduced a reduced corporate tax rate of 20% on the chargeable income of up to the first RM500,000 for certain SMEs, as opposed to the flat corporate tax rate of 28% for other corporations, which was very attractive at the time.

The standard corporate tax rates have subsequently been reduced over the years of assessment 2007-2009 to 25%, which diminished the advantage these SMEs enjoy over larger businesses as the savings from the two-tiered tax rates enjoyed by them is capped at RM25,000, which was insignificant in most cases.

The potential savings would be further reduced in the year of assessment 2015, as the standard corporate tax rate would be decreased to 24%. The upcoming Goods and Services Tax (GST) regime would likely increase costs and exacerbate the tax woes suffered by SMEs. The government may consider decreasing the tax rate and/or increase the threshold enjoyed by SMEs so that the savings could be used to expand their businesses and, at the same time, attract more SMEs to start a business.

Presently, only non-SMEs enjoy the Group Relief incentive, whereby a large company within a group may claim a certain portion of business losses suffered by another unit in the same group in the current year of assessment. Such incentives can arguably be of more benefit to owners of SMEs who may not have as much capital to continually finance the running of multiple companies, especially when at least one of them are accruing losses. The government could extend the Group Relief Losses incentive to SMEs to encourage entrepreneurs to expand their business ventures and thus further contribute to the increased GDP by SMEs.

 

In the present challenging environment, where the costs of doing business are spiking due to the compounding challenges mentioned above, SMEs with low profit, especially those that are still in its infancy or weathering through a bearish period, would likely struggle to continue operating in the near future. In addition to the reduced corporate tax rates, the burden of tax could be further reduced for such low-profit SMEs by providing tax relief, whereby those with an annual taxable revenue within a certain threshold - say RM30,000 - would be entitled to enjoy a tax cut, possibly 50%, of its total tax payable, which is similar to what is implemented in China.

A more aggressive measure could be to give a full exemption on the tax payable for an annual taxable revenue within the threshold. Such a tax relief could be the lifeline needed for them to survive long enough to see higher returns from business and be able to contribute more to the GDP.

Albert Einstein once said this of income tax: “This is too difficult for a mathematician. It takes a philosopher. The hardest thing in the world to understand is the income tax”. Clearly, tax can be a complex matter. With greater complexity, comes greater compliance cost to the business, including SMEs. Therefore, whilst certain concessions as mentioned above have been granted to SMEs, more could be accorded in time to come. One alternative for SMEs with a certain amount of turnover is to pay corporate tax based on a percentage of the revenue rather than taxable profits. In this regard, the tax return and computations will be simplified. Where a conventional tax return is still a preferred option, perhaps SMEs could be permitted to take the accounting depreciation as tax depreciation, with some modification. After all, it is merely timing differences.

Companies with smaller transactions are allowed to prepare a less robust transfer pricing documentation. Certainly, this will reduce the cost of compliance. In Singapore, tax authorities are prepared to accept the 5% mark-up adopted for certain routine support activities as a reasonable arm’s length charge for such services. Perhaps, Malaysia could follow suit.

The current proposed annual turnover threshold for a person to be required to register under the GST Act is RM500,000. This has left many SME businesses stranded in trying to comprehend the extent needed for their businesses to be in compliance with GST.

Despite training grants and double deduction on training expenses for GST implementation that are granted by the government, many SMEs survive on basic accounting systems with staffs that require minimal training to maintain minimal administrative costs as they continue to face various other rising costs.

As such, even with an annual turnover exceeding RM500,000, businesses may not generate sufficient annual profit to comfortably absorb the overheads arising from the implementation of GST. The government could consider raising the annual turnover threshold to give struggling SMEs the cushion needed to maintain healthy profits while having the option to voluntarily register should the input tax credit claimable be deemed worthwhile by the SMEs.

One of the most crucial elements for most SMEs to grow and stay ahead of the competition is the adoption of new technologies. The use of information technology, e-commerce and automation of processes is key to improving value-adding features, productivity and competitiveness of businesses.

In view of this, the government may aggressively promote the rapid adoption of such new technologies for SMEs with a further capital allowance incentive by granting possibly 200% claim on capital expenditure incurred on ICT equipment, as well as plant and machinery, which could be claimed in one or over a few years.

Such incentives could result in an exponential growth for SMEs and propel a surge in SMEs’ contribution towards the GDP, to be in line with Vision 2020.

One must not overlook the importance and significance of SMEs. This is evident by the fact that there is a clear vision of aiding SMEs to achieve a 41% contribution to GDP by 2020. In light of this, fiscal policies, as always, will remain an important tool to spur the growth of SMEs. I remain hopeful that more tax goodies will be in the pipeline.

 

Tan Hooi Beng is the international tax leader of Deloitte Malaysia.

 

 

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