BUDGET 2027 has introduced several tax relief measures for individuals and businesses, with the government staying committed to reducing the fiscal deficit.
From a tax policy perspective, Budget 2027 can be seen as a tactical tax policy shift designed to redistribute the fiscal burden from middle-income earners and micro, small and medium enterprises (MSMEs) to upper-income segments.
By combining the individual tax relief increase (from RM9,000 to RM12,000) with a one-percentage-point cut for selected M40 brackets, the government is basically targeting short-term living-cost relief.
To balance the estimated RM3bil revenue loss from these concessions, the government has imposed the 30% top marginal tax rate for tax resident individuals with chargeable income of RM1mil (an increase from 28% to 30%). At 30%, Malaysia remains structurally competitive against regional peers like Thailand, Indonesia, and Vietnam (all at 35%).
However, it widens the talent-retention gap with Singapore (24% top rate), potentially acting as a minor deterrent for hyper-mobile, high-skilled executive talent and local wealth builders.
Having said that , there is a 15% tax rate for high value talent that is attracted to Malaysia under the Global Services Hub tax incentives meant for non-citizens employed by Malaysian companies enjoying this tax incentive.
Budget 2027 expands personal tax relief to several categories, including artificial intelligence (AI) software subscriptions, care expenses for parents and grandparents, and pet-related expenses.
How should the government assess whether these reliefs are genuinely benefiting the intended groups and generating meaningful economic or social outcomes?
Assessing reliefs for AI software, elderly care, and pets requires rigorous data mapping through the Inland Revenue Board’s e-invoicing and MyTax platforms.
Instead of packing the tax filing system with arbitrary, compliance-heavy categories, the government should review these every three years via behavioural data to ensure they drive genuine social outcomes (eg, domestic tech adoption or lower public elder-care burdens) rather than acting as a deadweight tax reduction for the affluent.
There is reliance on non-tax revenue as well, such as an expanded RM32bil Petroliam Nasional Bhd dividend and efficiency-driven tax compliance, like mandatory cashless payroll tracking for non-MSMEs. This framework allows Malaysia to project a narrowing of the fiscal deficit to 3.3% of gross domestic product without introducing broad-based consumption taxes like the goods and services tax (GST).
The government has been mindful in not burdening the MSMEs with additional costs (such as exempting MSMEs that have less than RM50mil annual revenue from implementing the minimum wage of RM2,000), a reduction of the corporate tax rate by 1% for the first RM600,000 of their chargeable income and an increase in the amount of accelerated capital allowances to be claimed in respect of small value assets.
With regard to the exemption of the increased minimum wages for MSMEs, this would affect about 40% of the Malaysian workforce.
These workers run a severe risk of feeling a compounded inflationary pinch because without a synchronised increase in their take-home pay, their real purchasing power will drop relative to peers in larger corporations.
This also risks a “two-tier” workforce economy and could prompt a talent-flight away from local small businesses towards companies that offer the mandated RM2,000 wage base.
For eligible MSMEs, the tax rate has been reduced from 15% to 14% on the first RM150,000 of chargeable income, and from 17% to 16% on the next band up to RM600,000.
While this offers some cash-flow relief, is a lower tax rate enough to strengthen business resilience when companies are also grappling with rising operating costs, wages and financing expenses?
Dropping the rates by 1% in the above manner saves up to RM6,000 per year for an estimated 300,000 eligible small businesses. This cash buffer is however easily swallowed by broader systemic cost increases, such as regional logistics expenses.
MSMEs would perhaps gain far more from productivity-linked automation grants, immediate reinvestment allowances, and direct digitisation subsidies over a simple 1% headline rate reduction.
From Year of Assessment 2028, non-MSME companies will need to pay salaries through financial institutions or prescribed cashless payment instruments to qualify for salary-expense deductions. Restricting cash payrolls strengthens the tax audit trail and restricts shadow-economy leakages.
While this could improve transparency and tax compliance, to keep compliance costs low, the government should provide co-matching software grants, basic open-source digital payroll tools, and extended implementation hand-holding for legacy firms transitioning fully into digital banking and Social Security Organisation/Employees Provident Fund data alignment.
Under the New Incentive Framework, tax incentives are being linked more closely to reinvestment, productivity gains and the creation of higher-quality jobs, pivoting firmly away from “blanket” corporate tax holidays to a modern outcome-based investment model.
With the focus on measurable reinvestment, upskilling, and automated capacity building, this will help to move the economy up the value chain rather than rewarding passive presence.
Looking beyond this budget, Malaysia needs to prioritise certain tax reforms to ensure sustainable government revenue whether through broadening the tax base, improving compliance, reducing leakages or reviewing existing tax incentives without undermining household purchasing power and business competitiveness.
Tax compliance could be strengthened using digital tools, better data analytics, and enforcement against evasion.
Plugging compliance and informal leakages by fully implementing end-to-end e-invoicing across all business tiers is critical to capturing informal business transactions, preventing corporate transfer pricing mismatches, and lowering the national tax gap without altering headline tax rates.
The government cannot permanently avoid broad-based consumption taxes. A modernised GST featuring a wide net of zero-rated essential items (to protect lower-income purchasing power) appears to be the most effective tool to widen revenue collection.
And of course, enhancing transparency and accountability in public finance cannot be overstated.
Harvindar Singh is a council member of the Chartered Tax Institute of Malaysia and tax partner at SCS Global (Consulting) Malaysia Sdn Bhd. The views expressed here are the writer’s own.
