KUALA LUMPUR: The proposed introduction of a capital gains tax on shares and windfall tax for companies which have enjoyed extraordinary profits during the pandemic could pose a negative impact on the overall equities market, say experts.
Given the prevailing economic uncertainties as a result of the Covid-19 pandemic, Sunway University economics professor Dr Yeah Kim Leng said the two tax revenue enhancement measures will have an adverse impact on the capital market, if implemented.
“How sharp or persistent the tax shocks are on market behaviour and investors’ psychology will depend on the magnitude of the tax and its ease of administration,” he told StarBiz.
Yeah added that more details are also needed, as this could spook investors into looking for investment opportunities elsewhere.
“The relative attractiveness of the post-tax gains will be important in determining the severity and durability of averse investors’ reactions.”
Malaysia University of Science and Technology professor Dr Geoffrey Williams said the proposed capital gains and windfall taxes would be a concern to investors, given the fragility of the business and investment environment currently following the global pandemic.
“A capital gains tax would not stop the capital outflows we have seen recently and the prospects of such a tax might make investors, especially foreign investors, wary of the Malaysian market.
“Taxes on real-capital gains or direct investment in businesses are a deterrent to long-term investment.
“Malaysia doesn’t have capital gains taxes at the moment and this is one of the few advantages it has over regional competitors. So, changing now will not help investor sentiment.”
Last November, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said introducing a windfall tax on companies that enjoyed extraordinary profits during the pandemic would send the “wrong signal” to investors.
Williams concurred with this, adding that nothing has changed since then to make a windfall tax more appealing.
He also said the proposed windfall tax will not raise “as much as people think.”
“Apart from glove makers and Covid-19-related activities, there are not many excess-profit targets actually.
“The tax yield would be of no material use in terms of increasing revenue. It is also one-off and far too small to make a difference. It’s more of an envy-tax than anything else.
“Both types of tax are very ineffective and inefficient. They distort investment and business decisions and encourage tax avoidance.
“They’re also quite difficult and costly to administer,” he said.
Williams emphasised that tax reform, whether capital gains tax or the goods and services tax, should be put off until the economy has recovered.
“Tax reform must also go hand-in-hand with cutting leakages and monitoring spending. An independent fiscal body should be set up to look into the whole tax and spending system. There is no argument for new taxes now.”
Given the fiscal deficit that has increased substantially due to the allocations required to tackle the Covid-19 pandemic, Centre for Market Education chief executive officer Carmelo Ferlito said a special-purpose tax of 5% should instead be imposed in Malaysia on taxable profits of corporations above a specified threshold.
“Such a tax should be imposed for a two-year period for the assessment years 2021 and 2022 and then removed after that.”
Ferlito said this framework, if implemented, needs to be clearly defined.
“What is absolutely crucial is that the government needs to state the commencement date, the objective and the end date clearly in its communication narrative.
“Failure to consistently do so will lead to presumptions of a permanent corporate tax rate increase and that will have an effect on foreign investors who may become concerned about further changes being made to the general corporate tax regime.”
CGS-CIMB Research also believes that a capital gains tax on the trading of shares in the local stock exchange will be negative for the Malaysian equities market.
“This is because Malaysia will become less competitive due to the additional taxes, which could lead to further outflow of foreign funds. We gather that Indonesia, Singapore and Thailand currently do not impose capital gains taxes on the trading of shares on their stock exchanges.”
The research house also questioned the potential mechanism that will be used by the government to identify companies or sectors that have achieved extraordinary profits.
“This is because some companies could be achieving high earnings growth in 2021 due to a low earnings base.
“However, if this one-off tax is implemented, investors are likely to identify gloves, petrochemicals and commodity sectors as potential sectors that could be affected by the windfall tax.”
CGS-CIMB estimated that every one percentage point increase in the tax rate for companies on the FBM KLCI could shave around 1% off its earnings estimates for the bourse in 2022; and 15 points from the stock market’s end-2021 target of 1,629 points.
“These concerns could dampen near-term sentiment on the market till Budget 2022 is announced on Oct 29,” it said.
On Wednesday, Deputy Finance Minister II Yamani Hafez Musa said in Parliament that Putrajaya is studying the feasibility of implementing a capital gains tax, which was proposed by several Members of Parliament during the latest parliamentary sitting as part of efforts to replenish government funds spent on tackling the Covid-19 pandemic.
The government is looking at ways to boost its revenue, which include the proposed introduction of a capital gains tax on shares and windfall tax for companies that have enjoyed extraordinary profits during the pandemic.
Yamani Hafez was quoted as saying that the government will consider the views and feedback of affected stakeholders to ascertain the effects of imposing these taxes.
This is so that it does not affect Malaysia’s economic standing and competitiveness, specifically in attracting foreign investments.