Tax reforms under Budget 2026

BUDGET 2026, scheduled to be tabled by the prime minister on Oct 10, is the last opportunity for the Madani government to turn bold with a strong message on tax and fiscal reforms.

This, as the government’s term ends on Dec 19, 2027, and the 16th General Election (GE16) must be called within 60 days of its automatic dissolution.

Nevertheless, the Madani government, riding on its super majority of more than two-thirds, is expected to call GE16 much earlier, most likely in late 2026 or early first half of 2027.

This would make Budget 2027 more subtle in terms of measures, as well as likely to be an election budget by then.

The Finance Ministry has stated that Budget 2026 will focus on strengthening governance, driving high-value economic growth, and lifting living standards.

Budget 2026 is also the first fiscal plan under the 13th Malaysia Plan (13MP), and hence, the expected revenue and expenditure will reflect the five-year strategic plan.

SST — the new GST

Having widened the sales and service tax (SST) scope, the government will likely use this indirect tax method to boost revenue by casting the net wider on goods and services that have yet to be taxed under the SST regime.

In some cases, the SST rate may be moved even higher.

This will see revenue from SST rising rapidly and may even hit RM60bil by 2026, more than a 17% increase from the projected RM51.7bil this year.

This will make the SST the second-largest tax revenue for the government, surpassing individual tax collections but still below taxes collected from corporations.

Government revenue for 2026 is also expected to be driven by higher tax compliance following the implementation of electronic invoicing (e-invoicing) for companies with annual turnover of between RM1mil and RM5mil, with effect from New Year’s Day in 2026, and companies with annual turnover of above RM1mil with effect from July 1, 2026.

Carbon tax

Among the key fiscal reform measures mentioned in the 13MP the introduction of a carbon tax.

While there are no definite or clear directions on how this tax will be imposed, it will likely see Malaysia adopting a more balanced approach, which may not be burdensome initially.

Carbon tax punishes companies that are heavy greenhouse gas emitters, and the likely targets are those in the heavy industries, like iron and steel, or even energy producers that use coal or gas.

In a more sophisticated economy and where green energy is widely adopted, a carbon tax on petroleum is an added tax measure. However, given the current fuel subsidy rationalisation, which is yet to be implemented, a carbon tax on petrol is unlikely for now, but may be implemented in the future.

Tax on dividends

The government introduced a 2% tax on dividend income exceeding RM100,000 for individuals in Budget 2025, and it is likely the rate will stay for the time being. To expand revenue, it is recommended that the 2% tax be expanded to include all recipients (both resident and non-resident) in the form of withholding tax.

However, an exception to this rule should be made for payment of dividends made to pension funds, unit trusts, insurance funds, or asset managers to ensure that their income is not severely impacted, which may have a cascading effect on unit holders or members.

Higher wages

One of the key incentives under the 13MP is to raise the compensation of employees to the gross domestic product (CE/GDP) to 40% from the 33.6% achieved in 2024.

Having raised the minimum wage to RM1,700, Malaysia’s latest median income still shows that we are not adequately compensated. Almost 50% of formal sector wages covering 6.79 million workers earn less than RM3,000 per month, with just over 55% of them earning less than RM2,000 per month.

In line with the Madani Economy Framework on wage reforms, the government should announce a new minimum wage structure effective in 2027 with a new threshold of RM2,000 per month. This will lift up wages in other income brackets, and hopefully, Malaysia could reach 36% of CE/GDP by the end of 2027. The effort in raising the floor must be applauded, as it is sad when a low wage structure has only resulted in the influx of foreign labour while Malaysians are sidelined due to higher wage demand. Malaysia should also introduce a new five-year wage reform plan, which will see minimum wages raised to at least RM2,500 by the end of 2030.

Review tax brackets

Malaysia’s narrow tax brackets require urgent attention from the government. Although progressive in nature, an individual taxpayer could easily hit the 25% tax bracket if the chargeable income is more than RM100,000.

Tax rates, allowing a slower progression in the rates for the different brackets, should be reviewed.

Malaysia should also review the current chargeable income buckets, or reduce the tax rates, or both, to allow higher disposable income, especially among middle-income earners.

To offset the lower income tax collection, it is also about time to review some of the personal reliefs that are granted, which will see a wider tax net cast, lowering the current tax-free income threshold from RM37,333 per annum and RM41,333 per annum for self and those married with two children to a lower threshold of RM30,000 per annum and RM33,000 per annum, respectively.

As recommended by this column last year, the government should impose a tax rate of 3% (from the current 1%) for the chargeable income bracket of more than RM5,000, and increase the tax rate by three percentage points for every subsequent chargeable income bracket.

This will see the above RM20,000 bracket being imposed a 6% tax rate (from 3%) while the thresholds above RM35,000, RM50,000, RM70,000, and RM100,000 will see tax rates of 9% (from 6%), 12% (from 11%), 15% (from 19%), and 18% (from 25%) respectively.

However, for the richer taxpayers with chargeable income more than RM400,000, RM600,000, and RM2mil, their respective tax rates should be fixed at 26% (unchanged), 30% (from 28%), and 35% (from 30%), respectively. With this, the biggest beneficiaries will be those with chargeable income of between RM70,000 to RM400,000, as they enjoy a lower effective tax rate under this new structure.

Budget 2026 is another opportunity for the Madani government to keep to its promise of “raising the floor” and, at the same time, promote greater wage equality. These are clear reform agendas that the government must pursue to meet the targets set under the 13MP.