AS with previous budgets, businesses and the public will be hoping for lower taxes and more incentives in their Budget 2021 wishlists.
While our budget anticipations this year generally fall under the same theme, the Covid-19 pandemic has certainly thrown a wrench into any assumptions we had at the beginning of the year.
Realistically, requests now need to be more targeted.
Why? Because the pandemic doesn’t only severely impact businesses and individuals, it also hits the country’s economy, hard. Governments across the globe are brainstorming to find a cure for their economy as the race for a vaccine intensifies. Our government has made multiple efforts to help tame the situation in the form of the Economic Stimulus Package, Prihatin PKS+ to Penjana and KitaPrihatin.
Initial measures for indirect tax focused on industries that first felt the brunt of the pandemic, such as service tax exemption for the tourism sector, and sales tax exemption on passenger cars.
Incentives such as import duty and sales tax exemptions on face masks, personal protective equipment and hand sanitisers were also implemented in a timely manner in accordance with the rising importance of healthcare.
Although these measures were introduced immediately to help relevant sectors directly hit by Covid-19, as the situation has yet to subside, the knock-on effect of this health crisis has started to impact the wider economy.
While the pandemic does not discriminate against any sectors of the economy, it is undeniable that small and medium enterprises (SMEs), which are an important backbone to the country’s development, have been hard hit.
Hence, Budget 2021 needs to also have an increased focus on their recovery and sustainability.
Firstly, the importance of technology and digitalisation has been compounded by various forms of movement control orders (MCO), resulting in SMEs needing to accelerate adoption to remain in operation.
Investment in technology can be a costly affair, and with the recent introduction of service tax on digital services, the cumulative taxes could pose an additional financial burden to SMEs.
Although tax on digital services is the new kid-on-the-block, there are hopes that some form of exemptions on import duties and sales tax for information technology equipment and service tax exemption on digital services can be accorded to SMEs in the interim to equip themselves.
When the pandemic emerged, one of the harder hit sectors was the manufacturing sector where not only activities had to be contained, but demand for exported goods also contracted due to cross-border trade restrictions. However, manufacturing companies still needed to manage their supply chain and service their financial obligations.
The measure introduced by the government to give import duty and sales tax exemption on specific goods and equipment for healthcare should be extended to other manufactured goods, to stimulate demand. In this challenging time when cashflow is vital, providing exemptions to local manufacturers from charging sales tax (or even a reduced rate) would be a welcome relief.
As more companies start to explore the use of special facilities with tax incentives to reduce their cost of doing business, the government should look into relaxing the conditions required to operate in these special facilities such as free zones, bonded areas and licensed manufacturing warehouses.
At present, some of the conditions (example permitted activities) and cost of compliance makes it uneconomical for SMEs, who are struggling to stay afloat, to enjoy such facilities.
Unlike multinational companies who have different divisions to handle accounting, finance, taxes and regulatory, for SMEs who have limited resources, the different submissions and deadlines, and various exemption conditions with a short time frame, can be burdensome. The remission of late payment penalty for sales tax and service tax returns/ declarations introduced during the Penjana initiative is much needed.
A further suggestion would be for a longer time frame to submit and pay the indirect taxes due, or comply with exemption conditions.
The food and beverage (F&B) industry is also reeling from lower demand as consumers become more cautious about eating out. Although the growth of food delivery services is a blessing to F&B operators, reduction of dine-in customers impacts the sustainability of brick and mortar establishments. Malaysia is well known for its melting pot of diverse cuisine and it would be a shame if our F&B establishments fall victim to this pandemic.
To revive this important sector, the government could also consider a temporary service tax exemption for local F&B businesses to stimulate growth, similar to that given to hotels and comparable establishments.
The government has an unenviable task of balancing a reduction in tax collections to spur the economy versus generating enough revenue to prevent the country’s deficit rate from increasing. Perhaps the focus should be shifted more towards taxing the black economy, which has always been on the agenda of governments worldwide.
Although the size of the black economy is unknown, it would certainly help alleviate the country’s financial position without burdening the rakyat if authorities can plug tax leakages from this. The biggest task then is for the authorities to figure out how and how fast they can do so.
Ng Sue Lynn is head of indirect tax, KPMG Tax Services Sdn Bhd. View expressed here are the writer’s own.
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