A boon for SMEs

Go digital: There are more grants available to help companies digitise their operations. — Bloomberg

FOR once, it did not seem like just a “people’s budget”. The business community is happy to be given the limelight under Budget 2020 this time around.

“After so many years, this is, so far, the Budget we are looking for. It provides a very clear direction (for SMEs). And it is very business- and SME-driven, ” said SME Association of Malaysia president Datuk Michael Kang.

He noted that Budget 2020 addresses a lot of the concerns businesses had raised prior, including uncertainty over the transition from foreign labour and automation.

He lauded the government’s proposal to incentivise employers to employ more local labour. This will not only create more job opportunities for locals, it is also aimed at reducing our dependence on foreign labour.

Finance Minister Lim Guan Eng in his Budget 2020 speech said Malaysia has become overly dependent on low-skilled labour, especially foreign workers, which disincentivises companies from investing in more productive capital and technology. As at end-2018, there were officially 2.2 million foreign workers in the country, making up 15% of the national labour force of 15 million people.

“We must reverse the addiction to low-skilled foreign labour, while recognising the many challenges industries face in securing adequate workforce for their industry, ” Lim said.

In response, the government will be launching the Malaysians@Work initiative to create better employment opportunities for youth and women, while reducing our over-dependence on low-skilled foreign workers.

One of the programmes under this initiative is Locals@Work, which is a hiring cost equalisation programme aimed at incentivising the shift away from low-skilled foreign workers. Under the programme, Malaysians who are hired to replace foreign workers will get a wage incentive at either RM350 or RM500 per month, depending on the sector, for a duration of two years. Correspondingly, employers will receive a hiring incentive of up to RM250 per month for two years.

But will this be enough to lure the industry to make the switch to hiring local labour?

Kang opined that the programme is well complemented with other initiatives.

“That is why you can see that the government is trying to encourage more companies to digitise. This is geared towards getting younger labour in and getting companies to look at automation. And the government has provided sufficient grants, matching grants and so on (for this). Not only is this helpful to digitise SMEs, it will also help SMEs by giving them a direction to head towards, ” he added.

Meanwhile, workforce solutions provider Kelly Services noted that this will help stimulate the participation of local workers in the Malaysian labour force.

“It is good to see the government incentivise the employment of local labour, which is a far better solution to the growing disparity in terms of numbers between local and foreign labour in Malaysia.

“The only concern here is with regards to whether employers would be willing to make the transition happen, as foreign labour has been valued for the high turn up and retention rate, whilst local labour has had a relatively high attrition rate by comparison.

“Indeed, worker retention is an important consideration for any successful business. There is a mindset change required among local workers and this change can be brought forth with some effort from employers, who can leverage the incentives to provide a more rewarding working environment for their employees, ” said Kelly Services Malaysia managing director and country head Brian Sim in a statement.

Digital push

In continuing its efforts to push companies to go digital, the government has also announced several grants to help SMEs adopt new technologies. This includes providing the impetus for them to take up the simplest of digital technologies.

“To build a Digital Malaysia, the private sector must come onboard. More Malaysian SMEs need to adopt digitalisation measures for their business operations, including electronic Point Of Sale systems (e-POS), Enterprise Resource Planning (ERP) and electronic payroll system, ” said Lim.

The government will provide a 50% matching grant of up to RM5,000 per company for the subscription of the above services. This matching grant will be worth RM500mil over five years and is limited to the first 100,000 SMEs applying to upgrade their systems.

The government will also allocate RM550mil in Smart Automation matching grants to 1,000 manufacturing and 1,000 services companies to automate their business processes. This grant will be given on a matching basis of up to RM2mil per company.

In addition, the Accelerated Capital Allowance and automation equipment capital allowance have been extended for the manufacturing and services sectors.

The Federation of Malaysian Manufacturers (FMM) was also happy to note the government’s proposal to set up 14 one-stop Digital Enhancement Centres to assist SMEs in their digital transformation. A budget of RM70mil will be allocated to MDEC to set up these centres as an extension of the ‘100 Go Digital’ programme.

Another RM10mil will also be provided to MDEC to train micro-digital entrepreneurs and technologists to leverage on e-marketplaces and social media platforms to sell their products.

Businesses will also benefit from the government’s plans to upgrade digital and logistics infrastructure for better efficiency. The deployment of new digital infrastructure in high impact areas and better upkeep of roads would help reduce turnaround time for companies.

Another initiative introduced under the Budget that would help the local industry, said Kang, are the tax incentives to promote high-value added activities in the Electrical and Electronics (E&E) industry to transition into 5G digital economy and Industry 4.0. These incentives include income tax exemption up to 10 years to E&E companies investing in selected knowledge-based services and special Investment Tax Allowance for companies in the E&E sector that have exhausted the Reinvestment Allowance.

“In the past, the E&E sector enjoyed good exports. But our E&E sector is more focused on manufacturing and assembly. The majority of the export is by the MNCs. This (incentive) will encourage local companies to develop their own local products and move to smart manufacturing. It will encourage more local players to move towards a high-value local industry, ” said Kang.

Other aids

One favoured initiative that made a comeback this round was the Market Development Grant (MDG).

“The MDG grant was what we were asking for the past few years to help SMEs with export. Now, finally the government is giving extra funds for this. Companies can go for more exhibitions. If they can go for more exhibitions, they can get more sales, ” said Kang.

The new grant will see the ceiling set per company increased to RM300,000 from RM200,000 a year. Additionally, the ceiling for participation in each export fair will also be revised upwards to RM25,000 from RM15,000. This will mean a company would be able to participate in 12 exhibitions, said Kang, thereby increasing their opportunities for export sales.

The government will also allocate RM50mil to encourage SMEs to engage in more export promotion activities, Lim said.

“Another thing that is good is that the government also allocated funds for regional development through all the corridors. This will help develop the rural SMEs, ” Kang noted.

For 2020, RM1.1bil will be allocated to support projects for corridor development activities including the development of Chuping Valley Industrial Area in Perlis, Kuantan Port related projects, the construction of Sungai Segget Centralised Sewerage Treatment Plant in Johor, as well as infrastructure development for Sarawak’s Samalaju Industrial Park and Sabah Agro-Industrial Precinct.

The allocation, coupled with infrastructure spending, will give companies outside the main city centres a boost.

While there were not as many tax relief provided for under the Budget, to further encourage the growth of SMEs in Malaysia, the government has proposed that the preferential corporate income tax rate of 17% be extended to a chargeable income of up to RM600,000 from RM500,000 currently. To be eligible for this rate, companies must have a paid-up capital not exceeding RM2.5 million and annual sales not exceeding RM50mil.

However, FMM president Tan Sri Soh Thian Lai said more clarity was needed on the definition of SMEs.

“The increased threshold from RM500,000 to RM600,000 for the reduced 17% tax rate of SMEs requires further clarity on the eligibility condition of annual sales of not more than RM50mil.

“Currently, the national definition for SMEs set thresholds at annual sales turnover or full-time employment. In this respect, the manufacturing sector was looking forward to a re-alignment of the SME definition under the Income Tax Act 1967 with the national definition for SMEs, ” said Soh.

Nonetheless, Soh welcomed the government’s efforts, which he noted are focused on expanding the economy despite the current economic constraints. He said sufficient initiatives and incentives have been provided towards the development of human capital, SMEs, export promotion, enhancement of innovation activities and the overall ease of doing business which are essential to restructuring the economy to be more progressive, knowledge-based and high-valued.

Are these efforts enough to achieve the targets set for the SME sector by 2030?

This, said Kang, will depend on the government’s execution of the plans under Budget 2020.

Under the National Entrepreneurship Policy 2030, SMEs are expected to contribute 50% to GDP, 30% to exports and 80% to jobs generated.

“The government needs to work with the private sector and with the trade associations to reach out to all smes.”

For now, though, Kang is happy with the direction the government has taken.

“Previously, the government talked about wanting to help SMEs but the support and incentives for SMEs were scattered. Now, the government is taking the lead to move the country’s SMEs forward, ” he said.