Budget 2019 tackles the unenviable task of addressing Malaysia’s burgeoning debt while delivering on the new government’s promises to implement institutional reform and continuing the nation’s development.
Finance Minister Lim Guan Eng had warned that there would be no “goodies” in this budget. What was delivered, however, strives to channel funding to key sectors such as health and education while balancing the need to be practical in terms of fiscal policy without deterring business growth.
It is not easy to remain expansionary in an environment with no significant tax revenue increases on the horizon. The approach of using a one-off solution in the form of a large dividend from Petroliam Nasional Bhd to fund a hopefully one-off issue or cost of refunding RM37 billion in Goods and Services Tax and corporate tax credits is rather clever.
Tightening measures on corporates and moving with the times
Despite pre-budget expectations of new broad-based taxes such as capital gains tax and inheritance tax, Budget 2019 takes the sensible route by introducing some tightening measures on existing taxes.
The move to restrict carry-forward of losses, unutilised capital allowances and incentive claims to seven years is long overdue and ties in nicely with the period needed to maintain records. Our neighbours such as Thailand and Indonesia have long had similar restrictions in place, and these were effective measures to simplify tax administration and match carry-forward losses to the statute of limitations in these jurisdictions.
The same applies to the tightened criteria for claiming of losses under group relief. Companies may now only surrender losses for three consecutive years of assessment. In addition, companies with unutilised investment tax allowance (ITA) and pioneer losses are barred from claiming group relief after the incentive expires.
The introduction of the digital service tax is seen as a good first step in taxing the digital economy. This is timely as more and more businesses transact digitally, which places them outside the traditional scope of tax. This service tax is expected to be expanded in the coming years to be a more holistic tax, on par with how bricks-and-mortar businesses are taxed.
Broadening the tax base and incentivising good behaviour
Currently, Malaysia does not tax capital gains other than gains on real property. The current downward-tiered rates based on holding period have been primarily structured to deal with property speculation, with the rate coming down to zero for resident individuals after five years.
As such, bringing in a tax of 5% for resident individuals and increasing the rate to 10% for corporates signals that the government wants some share or a greater share of what the owner has gained. This is a moderate move, if you consider the potentially adverse impact on investor interest if a capital gains tax regime were to be introduced. It is important to remember that the tax is on gains, not transaction value.
We are also not the first country to introduce a soda tax. Close to 40 countries have something similar in place and the recent implementation of a soda tax in the UK was considered a success in reducing the consumption of sugary drinks. To me, this is a typical case of using fiscal policy to drive behaviour, although the impact of 40 sen per litre, or slightly more than 10 sen per can, of sweetened beverage may not be an adequate deterrent to the consumer, or a push for a change in recipe. Nevertheless, it remains a good start.
Targeting specific sectors
Budget 2019 also takes a focused approach to taxation instead of introducing new taxes or increasing tax rates across the board. For instance, certain sin industries are specifically targeted, particularly the gaming industry. Again, the impact of this in terms of additional revenue to the government will have to be watched closely, given the increased mobility of gaming dollars.
On the property front, there is a slew of measures such as peer-to-peer funding and stamp duty waivers directed at making home ownership easier and more affordable, while benefiting property developers. Given the slow market, I hope these measures will help tide the industry players over.
The one area that I feel still has gaps is the education and broader training and retraining agenda. Although the budget proposes constructive measures, such as the RM30 million allocation for the Technical and Vocational Education and Training (TVET) Prestige Fund, we need bolder measures to catch up with more competitive economies in terms of quality of education. It is a given that the fast-changing job landscape due to technological advancements is putting pressure on today’s talents to be suitably equipped to do the jobs of the future. I would like to see stronger public-private partnerships, where industries are incentivised to participate in designing the curriculum in higher education institutions and producing more industry-ready graduates.
Special voluntary disclosure programme
In addition to tightening measures and raising taxes on targeted sectors, Budget 2019 also looks towards enhancing compliance levels.
Voluntary disclosure programmes are not new in Malaysia and have been used elsewhere as well, including the much-discussed recent example of Indonesia.
You may recall that there were similar programmes in Malaysia for six months in 2015 and nine months in 2016. What is different this time is the penalty, which is more attractive at 10% and 15% for the two disclosure periods under consideration, compared with the 25% during the previous two programmes. This may increase the success of the latest programme. In the previous ones, there was only a small difference between the discounted and full penalty rates, which ranges from 25% to 45%, depending on the circumstances. So it was not particularly effective as a carrot for taxpayers to come forward.
The hefty penalties of 80% to 300% post-expiry of the programme caught my attention. This is worrying if the implementation does not distinguish between real evasion and under-declaration due to differences in opinion on technical matters. Penalties at these levels will be extremely punitive for those who have no intention to underpay taxes.
The finance minister also made an interesting point that the tax authorities would be watching those with unexplained wealth accumulation or excessive spending. What would be more effective though is to nudge high- risk individuals as well as companies, and ask them to come forward during the programme. This could also be done in ongoing audits, by nudging taxpayers to make a voluntary disclosure to avoid being detected for non-compliance — a lengthy audit process which consumes valuable government resources.
All in all, I consider Budget 2019 to be an eminently practical budget. It’s neither over-ambitious in terms of revenue generation nor fiscal austerity. Instead, it strikes a balance between tightening tax measures where they are due, and channelling these funds to areas that truly deserve them in driving the broader national agenda.
Jagdev Singh is a tax leader at PwC Malaysia