Beyond broadening the tax base, effective enforcement and compliance measures are pivotal in curbing revenue loss and leakage.
THERE is a heightened sense of curiosity surrounding the government’s budget-setting priorities for 2024.
This annual financial roadmap not only serves as a reflection of the country’s economic and social policies; it is also a strategic blueprint for addressing critical challenges while fortifying the nation’s fiscal capabilities.
Against the current backdrop of a softening global economy riddled with geopolitical risks, three prominent themes come to the fore: addressing escalating costs of living, rejuvenating local businesses, and ensuring fiscal sustainability through existing (and potential) tax measures.
Addressing the rising costs of living
Improving the quality of livelihood and welfare of the rakyat remains the central focus amid the weakening of ringgit, stagnant wages and the looming specter of climate change risks.
This commitment is evident with the roll-out of the Madani Economy Framework and Rahmah initiatives, as well as the announcement of a progressive wage model policy in the bid to boost the rakyat’s disposable income.
Preceding these initiatives, the re-tabled Budget 2023 saw income tax cuts for middle earners, alongside an increment of the tax base for higher-income individuals.
Considering these fiscal adjustments, another significant change in the country’s individual tax regimes in the upcoming budget may be unlikely.
An alternative that warrants the government’s consideration is the simplification of tax reliefs. Currently, Malaysia boasts over 20 individual tax reliefs.
The government could consolidate these tax reliefs i.e., combining or merging multiple tax relief provisions into a single, simplified and comprehensive category.
This is beneficial for both taxpayers and tax authorities, as the consolidation of tax reliefs can facilitate compliance, improve efficiency and enable the government to align tax relief policies with broader economic objectives.
Business rejuvenation
In the 2022 fiscal year, Malaysian micro, small and medium enterprises’ (MSMEs) gross domestic product (GDP) recorded a growth of 11.6% – surpassing the overall national GDP growth of 8.7% – and contributed 48.2% to the nation’s employment.
It should come as no surprise that the Finance Ministry has placed a clear emphasis on empowering MSMEs in the upcoming Budget 2024.
This then begs the question: What avenues can the government consider to ensure the momentum is not lost?
To empower MSMEs in their digitalisation efforts, the government can explore implementing a higher capital allowance rate, specifically for the expenditures of computers as well as information and communications technology equipment.
A potential approach is to elevate the annual allowance rate to 80%, as opposed to the current rate of 20%.
Such a move will result in reduced tax liabilities, effectively putting more money back into the hands of MSMEs, which can be crucial for their day-to-day operations and investments, and ultimately, improving their cash flows.
It may also be worthwhile to consider the possibility of implementing double tax deductions for digital upskilling, so as to support MSMEs to be aligned with the demands of today’s digital era.
To stimulate the growth of MSMEs, the government may also consider introducing or extending effective tax incentives, particularly reinvestment allowances, as this would allow MSMEs to reinvest a portion of their profits or capital directly into their business.
Preferential interest rates targeted at high-potential industries, such as fast-moving consumer goods, could also prove beneficial to businesses with significant growth potential seeking to venture into international markets.
Fiscal sustainability through taxes
In the Mid-Term Review of the 12th Malaysia Plan, the government recently announced its aspiration to achieve a fiscal deficit target of 3% to 3.5% by 2025.
It is rather a challenging feat, especially considering external headwinds post-pandemic.
The following tax regimes are considered instrumental in achieving this objective, provided they are effectively implemented.
> Capital gains tax (CGT) – A tax net for private equities
Malaysia is mulling to impose CGT at a low rate starting in 2024. The primary aim is to increase tax revenue from unlisted share sales but potential drawbacks must also be evaluated such as impacts on merger and acquisition and business competitiveness.
Encouragingly, the government assures that the proposed CGT will not be imposed on listed share gains and unlisted share disposals through approved initial public offering.
Clear legislation and guidelines, a reasonable transition period, and potential exemptions (for example, internal group restructuring share transfers) are essential for a successful CGT implementation.
> The “wealth” tax
While the effectiveness of a luxury tax implementation in Malaysia remains uncertain, it has the potential to serve as a tool for narrowing the income gap and generating revenue from the T20 group.
For an effective implementation, defining luxury items clearly is critical, and a one-size-fits-all threshold may not be feasible.
Perhaps a different threshold for different types of goods while taking into account the unique culture, needs and geographical landscape in Malaysia would be more palatable.
> Global minimum tax (GMT) – Between a rock and a hard place
In another effort to bolster government revenues, Malaysia is poised to implement GMT by 2024, which poses a challenging timeline for affected multinational enterprises.
To secure widespread business support and enhance its effectiveness, the government must kickstart the process by enacting clear legislation and providing a reasonable transition period.
> Goods and services tax (GST) ... again?
As a consumption-based tax would align with the principles of the Madani Economy Framework, perhaps now is the time for Malaysia to reconsider a consumption tax, albeit an improved version.
Introducing a reasonable initial rate, say 5%, in 2025, along with the possibility of revisiting it after five years, would provide the necessary assurance for both businesses and the rakyat.
Should there be any tax reforms tabled in Budget 2024, their effectiveness still hinges on responsible utilisation of the tax revenues collected.
Beyond broadening the tax base, effective enforcement and compliance measures are pivotal in curbing revenue loss and leakage.
This approach will foster a populace eager to wholeheartedly contribute collectively towards achieving a sustainable, prosperous and high-income nation – in alignment with the goals set forth in the 12th Malaysia Plan.
Soh Lian Seng is head of tax, KPMG Malaysia. The views expressed here are the writer’s own.
