THE Budget 2012 is wide-ranging in terms of the sectors and components it touches on, and it is basically seen as a people-friendly budget.
Because of the many spending measures on social programmes, the Government can continue with its commitment to reducing its deficit. This is laudable, particularly when it can be achieved without raising taxes. It reflects the underlying strength of the Malaysian economy.
What is critical is that the various projects come to fruition as planned and achieve the desired impact on the economy. The Government's real challenge lies in the implementation of its policies and the manner in which the budget allocations are spent to ensure that the budget deficit continues to decline without slowing down the overall economic growth.
Notwithstanding this, we know that this is just a one-year plan and the temptation to just think of the short term is extremely strong.
We should also look at the tax initiatives from a broad perspective, in line with the goal of achieving developed nation status by 2020, which is not far away... to some. In fact, it is a short timeframe, given the underlying structural nature of the Malaysian economy and the tremendous efforts needed to achieve a shift towards the target.
The budget's fiscal thrust is tax neutral in many respects no new taxes are introduced and neither were there any substantive increases in tax rates in light of the policy commitment to reduce the fiscal deficit.
However, there is a lack of concrete tax rationalisation framework involving a review of the corporate tax, personal tax, tax concessions and the impending goods and services tax, so as to build a solid tax base for the future. Will this ever happen?
There was no significant clawback of tax incentives or realignment of tax reliefs other than some tinkering with the shipping tax exemption and the reinvestment allowance. Are there any concrete plans on this despite all the labs coordinated by the Government's Performance Management and Delivery Unit?
The increase in total Government revenue in 2012 will be mainly from the economic expansionary effects of the Economic Transformation Programme initiatives. In addition, there will be greater reliance on the tax authorities carrying out more tax audits and compliance-enhancing initiatives.
How do we enhance tax compliance? Why are we not even considering the introduction of a compulsory tax file number for every entity and working individual? Why are we not even considering a withholding tax on all payments to individuals/entities who do not have a tax file number?
The services sector is expected to remain the key driver of growth, and the further liberalisation of the services sector is a positive move. However, we need to do more than relaxing foreign equity ownership. For example, are the locals ready to face liberalisation?
The social aspect of Government spending is another feature of the budget. This includes a slew of measures to benefit the less privileged. This is necessary, but are we really a welfare state? If so, then be prepared for increasing tax rates in the future, as there is no other way to fund the ever-increasing costs of assisting the rakyat.
The spending by Ministries must be managed effectively to minimise wastage and to do more with less. Then we have more to be allocated for the less privileged. Or maybe the super-rich can contribute more to society personally rather than through their businesses. Some are funding various charities but a more inclusive approach is needed and all those who qualify MUST assist the nation. This may even help to partly plug the deficit.
Shipping companies have been enjoying 100% tax exemption on income for a long time. This has been curtailed by a proposal to limit the exemption to 70%. This is seen as a rationalisation of the tax incentive to bring it in line with most other activities and sectors.
A number of amendments have been proposed to tighten the rules for granting the reinvestment allowance on capital expenditure for expansion, modernisation, diversification and automation projects. Is that all? Surely there are many other inefficient tax concessions and double deductions that can be removed. Or maybe we shall see more such announcements when the economic scenario is more stable.
Trying to attract Treasury Management Centres is not new; others have done it. We need to list everything that we need in order to develop Malaysia as a competitive financial centre in the region, and then move cohesively to achieve this. We cannot be seen to be doing things on an ad hoc basis. To many observers, that is how the Malaysian financial services sector is chugging along amid so much liquidity and profits.
A tax holiday for industrial design services will not fuel innovation and creativity. We need more, but do we have an enabling environment for this?
Also, providing double deductions for companies that implement structured internship programmes, award scholarships and participate in overseas career fairs as steps to enhance the human capital needs of the nation, is unlikely to be a sufficient in bringing back local talent or developing and retaining such talent.
Once again, tax breaks alone are not the answer. It is all about the processes and procedures, the quality of life and having an attractive and thriving metropolis.
To further encourage the involvement of the private sector in providing education services and facilities, some fairly generous tax incentives have been proposed for profit-oriented private and international schools. In addition, tax deductions are to be granted to contributors who donate to national schools as well as to religious institutions.
This is an excellent move and must be followed by a clear commitment by such schools to lower their fees. Their financial positions must be audited and monitored.
To aid the ageing population and to benefit the financial services sector, tax reliefs have been proposed for individuals contributing to the private retirement scheme. Again, this is a good move and let others develop retirement schemes, as all of us must protect our future and have enough to live on after retirement.
Compensation for late refund of income tax is finally here subject to certain conditions the time limit for tax audits will be lowered from six years to five years, and pre-filling of tax returns will commence soon. These are great developments in the context of modernising tax administration and respecting taxpayer rights. More please.
The current real property gains tax rate of 5% on gains on disposals of property has been altered by increasing the tax rate for disposals made within two years of acquisition to 10%. Disposals between two and five years of acquisition will be taxed at 5%, and disposals after five years will continue to be free of tax. It is left to be seen whether these measures will have any immediate or lasting impact.
It was expected that the tax rates would revert to the earlier scale rates of 30% to 5% but the Government has chosen a cautious approach. But property developers and speculators may be the only ones who gain from this. Be bold and revert to the old rates!
So, all in, a one-year plan can only take us so far. We need a five-year plan at least to outline the fiscal policy direction for the nation and we need to be bold in our outlook. This includes changing the mindset of the citizens, having consistent application of rules across the nation, as well as enforcing and monitoring effectively. One cannot take a populist approach in everything. At times, we have to bite the bullet and endure some pain so that our resilience and ability to respond is up to the mark.
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