Intensify support for SMEs in Budget 2021

Tax reliefs to encourage people to ‘stay home, stay safe’

WITH many small and medium enterprises (SMEs) still struggling with cash flow and business once again slowing down following the third wave of Covid-19 infections, the Finance Ministry has provided his commitment that there would be more for SMEs in the Budget 2021 proposals.

The government has already rolled out five economic stimulus packages to date amounting to RM305bil to help businesses, especially SMEs, weather the impact of Covid-19. So what else can the government do to support SMEs?

Reduction in tax rate

We are hoping to see a reduction in income tax rates for SMEs, either by way of a direct rate cut or a tax rebate. Although there was a rebate of up to RM20,000 for SMEs in Penjana, this was only limited to newly established SMEs.

It will certainly be more helpful if the reduction in tax rate can be extended to all SMEs as existing businesses, even those that have been in business for a long time, are experiencing significant disruptions.

For context, SMEs are currently taxed at 17% on the first RM600,000 of chargeable income and 24% on remaining chargeable income. Perhaps there can be a reduction to 20% on remaining chargeable income?

Loss reliefs

Given the scale of the economic damage inflicted by Covid-19, most businesses may make losses this year and it will take some time before they can return to profitability.

It may, therefore, be timely for the government to reintroduce the previous group relief regime which allows 70% of adjusted losses to be shared among companies in the same group, without limiting it to surrendering companies that are in their first three consecutive years of assessment.

A loss carryback provision could also be introduced to allow taxpayers to carry back current year losses for a limited period to recover income taxes paid previously.

Cashflow support

For many SMEs, disrupted cashflows remain a threat to their existence. A survey carried out bythe SME Association in August this year indicated that 22% of the respondents have sufficient cash flow for a month, while 27% can sustain until November and 31% until December.

To ease cashflow constraints for SMEs that have experienced a significant reduction in revenue, a temporary moratorium from paying tax instalments for taxpayers with good tax records could be considered.

Such a move may also encourage more self-compliance in the long-term.

Larger businesses, government linked entities, private equity funds and high-net worth individuals can also jointly play a part in supporting SMEs.

The government could establish a fund to match the investment provided by these investors to provide funding to struggling SMEs.

Wage subsidy and employee share schemes will be able to sustain employment and reduce wage cuts.

According to the Statistics Department, Malaysia’s unemployment rate was at 4.7% in August 2020. With certain hotspots once again being subjected to stricter restrictions under the conditional movement control order, more needs to be done to safeguardemployment and deter wage cuts.

A further extension of the wage subsidy program, particularly for sectors that are impacted by the movement restrictions, should be considered.

For other businesses, a special tax deduction may be provided to encourage companies to implement employee share schemes so that higher income employees may be remunerated in the form of shares to participate in the long-term growth of the company, with direct monetary compensation being channeled to lower income employees.

As shares received by employees will be taxed as a perquisite from employment, tax exemption should also be provided to employees to incentivise them to take shares rather than cash.

Tax reliefs to encourage people to ‘stay home, stay safe’

Several incentives were already proposed in the previous stimulus packages to encourage flexible work arrangements.

To further accelerate the adoption of work-from-home initiatives to contain the spread of Covid-19, companies could be accorded an outright tax deduction for the implementation of digital and productivity tools to allow employees to work from home while employees could be given a tax rebate for expenses that are incurred in the production of employment income.

This may cover the purchase of equipment or consumables which are used for work and additional utility or telecommunication charges that are incurred as a result of working from home.

Additional tax relief for mental healthcare support and awareness would also be helpful given the psychological impact of Covid-19.

Creativity required to survive the pandemic

Our Finance Minister faces an extremely difficult and challenging task in framing Budget 2021 against a backdrop of unprecedented economic damage caused by the prolonged Covid-19 pandemic, depressed oil prices and political unpredictability.

With depleting finances and reserves after five rounds of stimulus, it will take an enormous amount of creativity to come up with impactful tax policies that can continue to help SMEs along their recovery path. But there’s an urgent need to focus on this sector.

Representing 98.5% of Malaysian businesses, the survival of SMEs is critical to the overall growth of the Malaysian economy.

Lim Wai Yin is executive director (corporate tax) of KPMG Tax Services Sdn Bhd. The views expressed here are the writer’s own.

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