Key tax aspects of Budget 2023

The government expects to widen Malaysia’s tax base with the introduction of e-invoicing to shore up revenues by capturing “missing income” from the shadow economy.

BUDGET 2023, with an allocation of RM388.1bil, is an expansionary one by a mile, being 17% higher than the previous one, but with a lower deficit at 5% compared to 5.6% in 2022.

Therefore, the curiosity heightens when you note that the reduced deficit comes on the back of lower expected revenue for 2023 of RM291.5bil compared to RM294.4bil in 2022.

The government, though, feels that further revenue growth can be achieved. Taxation, being the main contributor to the government’s coffers, takes centre stage again.

The government expects to widen Malaysia’s tax base with the introduction of e-invoicing to shore up revenues by capturing “missing income” from the shadow economy.

Taxpayer identification numbers (TIN) have already been issued, with youth that turn 18 automatically being issued with a TIN, increasing the taxpayer database.

The Voluntary Disclosure Programme (VDP) has been reintroduced, where taxpayers can disclose unreported income from June 1, 2023 to May 31, 2024, without being subject to penalties. The VDP is expected to contribute to higher tax collections.

Taxpayers would expect certainty that once such disclosures have been made, the tax authorities will not revisit the years of assessment involved.

As such, there should be clear explanations of the situations under which (if at all) the cases may be revisited.

As expected, no major new taxes were introduced in Budget 2023. There is a plan, though, to study whether the capital gains tax (CGT) should apply to the disposal of shares in unlisted companies.

The advantages and disadvantages of CGT need to be evaluated, as currently real property gains tax (a type of CGT) contributes merely about 1% to tax collections.

Based on this, CGT is not expected to contribute significantly to government revenue, but its introduction might cause capital flight and affect much-needed investment in local companies.

The government made it clear even before the announcement of the budget that the goods and services tax (GST) would not be reintroduced, ostensibly as it is not an opportune time to do so with the rising costs of living.

Similarly, as expected, a carbon tax has not been introduced at this juncture. A carbon tax is typically imposed on fuel suppliers, who in turn will pass on the tax in the form of higher prices for electricity, fuel, services and products.

We do need to look at alternative taxes to raise revenues, and a consumption-based tax like GST or a carbon tax could perhaps be looked at in the future once the economic climate is more viable.

The intent behind the introduction of a carbon tax would be to force consumers and producers to move away from fossil and carbon-based fuels to renewable energy sources in light of global warming, pollution, environmental and health concerns.

The introduction of a carbon tax would also provide an avenue for the reduction of direct taxes in the future.

Clearly, the focus of Budget 2023 is to help alleviate the high costs of living, especially for the lower and middle-income groups.

As such, the tax rate for individuals that have taxable income in the range of RM35,000 to RM100,000 has been reduced by 2% so that they have more disposable income.

To partly compensate for the loss of tax revenue, individuals with chargeable income of between RM100,001 and RM1,000,000 will be imposed with a higher tax of between 0.5% and 2%.

It is expected that this increase will not affect a large number of individuals.

Statistically, the T20, or high-income group, earns about 47% of the household income in the country and holds approximately 80% of the savings in the Employees Provident Fund.

The net expected loss in revenue from the amended personal tax rates is RM900mil.

The budget proposes that a tax on luxury goods will be imposed.

The luxury goods market is estimated to be worth about RM8.4bil.

As a result, imposing a 10% tax would generate RM840mil, which would cover the majority of the shortfall caused by the reduction in personal income taxes for the B40 and M40 groups.

It remains to be seen if the imposition of sales tax on low-value goods (LVG), which is supposed to commence on April 1, 2023, will be deferred.

LVG applies to all goods with a sales value of RM500 or less brought from outside Malaysia via land, sea or air.

With the current approach by the government to managing the rising cost of goods, coupled with the introduction of taxes on luxury goods, it would not be a surprise if the imposition of sales tax on LVG is deferred.

Small and medium-sized enterprises (SMEs), which make up about 95% of the total business community and employ 70% of labour are integral to the Malaysian economy.

The budget has provided several avenues to create job opportunities and provide incentives to boost the SME sector. From a taxation standpoint, SMEs are granted a reduction of the corporate tax rate by 2% for chargeable income amounting to RM150,000, which translates to a tax savings of RM3,000.

Harvindar Singh is a council member of the Chartered Tax Institute of Malaysia and a partner at Harvey and Associates. The views expressed here are the writer’s own.

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