There is a lot of curiosity around the upcoming Budget 2019 that will be tabled in parliament on Nov 2. The people, investors, businesses and other stakeholders are looking forward to hearing what the government’s tax policy and plans will be, this being the maiden budget proposal for the Pakatan Harapan government.
The recent mid-term review of the 11th Malaysia Plan provides context. Overall, it appears to paint a realistic outlook, with reduced growth targets of between 4.5% and 5.5% until 2020 and a wider fiscal deficit of 3% of GDP in 2020.
It states that “policy priorities will balance the objectives of fiscal consolidation … ensuring more inclusive economic growth. Immediate fiscal and governance reforms are imperative to further strengthen the fiscal position… Swift implementation of these difficult and crucial reforms is likely to have a short-term impact on growth but the trade-off is necessary to maintain the economy on a sustainable growth path”. Other statements include proposed cuts to development expenditure and public expenditure, together with an expectation of a slowdown in private investment. However, private consumption is expected to be a major source of growth.
These statements are consistent with what we have been hearing in the market — that it is a tough situation, with slower growth expected, and there is a need to minimise the revenue gap and improve fiscal performance. Against such a backdrop, what should the priority and direction of Malaysia’s tax policy be?
Should the focus be on laying down policies to support and promote growth, for example, encourage private investment? Or is the urgency to bridge the revenue gap far greater? One of the mandates of the newly established Tax Review Committee — “reducing the existing tax gap, addressing tax leakage as well as exploring new sources of revenue” — would suggest that revenue-raising is very much a priority.
Any new tax will not be popular, but the paramount consideration has to be the longer-term effect of new taxes on business investment sentiment and the competitiveness of Malaysia as a place for doing business. In a global economy, where capital is mobile and moves quickly, a change in tax policy needs to be considered with care and clarity, well beyond just being a tool for raising revenues. The hope therefore is that there will be sufficient thought and resources allocated towards coming up with policies (including non-tax ones) that are positive for the promotion of investment and growth. Increased tax revenues would then be a natural consequence of economic growth.
A number of revenue-raising ideas have been floated, including new or higher taxes in the form of digital tax on online transactions, wealth/capital gains tax, inheritance tax, higher personal income tax and carbon tax. There has also been talk of a reduction or realignment of tax incentives.
A digital tax on online transactions has been discussed in some detail over the last couple of years, at both the international and local levels. Some countries have chosen to move ahead with such a tax, so it would not be surprising to see a proposal to introduce such a tax in the upcoming budget.
Currently, online services provided by foreign players are unlikely to fall into the Malaysian tax net. The current sales tax regime would also not catch goods ordered from outside Malaysia if the goods are below RM500. Having these gaps closed would not only level the playing field for local businesses, but it would also be a revenue-raising opportunity as the tax base is widened. Malaysia Digital Economy Corp (MDEC) has projected that the digital economy would contribute to 20% of the country’s GDP by 2020, where contribution from e-commerce to GDP is expected to exceed RM110 billion by 2020, making up nearly 40% of the digital economy.
One of the more controversial ideas is the introduction of capital gains tax in Malaysia, which presently only taxes capital gains on real property via the Real Property Gains Tax. Some considerations to be taken into account include the impact of such a tax on:
• The competitiveness of Malaysia as an investment destination, as this tax will increase the cost of doing business and negatively impact the returns on investment. This could discourage capital formation and savings, and existing assets may be moved away from Malaysia.
• The attractiveness of Bursa Malaysia shares, considering a number of countries in this region, for example Thailand, Indonesia, Singapore and Hong Kong, do not impose tax on gains from listed shares.
There have been vocal opinions on the potential adverse impact of such a move, and it is hoped a thorough study will be conducted before any decision is made.
Personal income taxes have seen some changes over the last few years, with the top marginal tax rate increasing from YA2016 to land at the current 28% top tax rate. There has also been a reduction in personal income tax rates for those with chargeable incomes of between RM20,001 and RM70,000 from YA2018, to reduce the income tax burden on the middle-income group.
The trend internationally has been to target taxes on high-income individuals, hence it would not be surprising to see the personal tax rates being pushed up again in Budget 2019. With only 2.27 million individual taxpayers, the other consideration would be expanding the income tax net across a broader base of workers. Having said that, if private consumption is expected to be the engine of growth, then there needs to be a delicate balancing act as a tax increase may counter consumption.
Finally, any changes to limit our tax incentives, which have been an important aspect of Malaysia’s attractiveness for investment, should proceed with equal care. While it is important to manage revenue gaps, it is just as important to ensure we have the right investment climate for the longer term growth and sustainability of the country.
Yeo Eng Ping is a tax partner with Ernst & Young Tax Consultants Sdn Bhd and the EY Asean Tax Leader. The views reflected above are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.