Farah Rosley is the Malaysia Tax managing partner at Ernst & Young Tax Consultants Sdn Bhd.
BUDGET 2026 marked a significant milestone in the journey toward sustainable and inclusive growth as Malaysia unveiled its largest-ever budget of RM470bil. In alignment with the 13th Malaysia Plan (13MP), Budget 2026 signals a strategic shift from stabilisation to transformation, with ESG principles being central to fiscal strategy and national development.
The introduction of a carbon tax, set to take effect in 2026, is a bold and necessary step. Taking a step-by-step approach by starting with specific sectors, that include iron, steel and energy, Malaysia is aligning itself with global climate standards and signaling to industries that environmental costs must be factored into business decisions. This move complements the broader climate agenda, including the National Carbon Market Policy and the anticipated Climate Change Bill.
The government has acknowledged the need to align its carbon tax framework with international policies such as the European Union’s Carbon Border Adjustment Mechanism (CBAM). This alignment is crucial to mitigate the risk of double taxation on Malaysian exports and to encourage the country’s carbon pricing system to be recognised and interoperable with global markets. It also enhances Malaysia’s credibility in the eyes of international investors and trading partners.
Equally important is the government’s support for green investment and innovation. Budget 2026 expands financing schemes and tax incentives for companies adopting certified green technologies, particularly those sourced locally. These measures are designed to accelerate the transition to low-carbon operations while strengthening Malaysia’s position in the regional green supply chain. The allocation of funds for renewable energy, conservation efforts and other green initiatives further demonstrates a holistic approach to environmental stewardship, which balances economic opportunity with ecological responsibility.
Social sustainability also features prominently. The extension of targeted cash aid schemes such as Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (SARA) reflects a continued focus on protecting vulnerable households from inflationary pressures. In addition, the expansion of PERKESO coverage to include gig workers further recognises the evolving labour landscape.
From a governance perspective, Malaysia continues various reforms aimed at improving transparency, compliance and administrative efficiency. The nationwide rollout of e-Invoicing by mid-2026 will modernise tax administration, reduce evasion and enhance real-time oversight. The introduction of digital tax stamps and a self-assessment system for stamp duty further supports this shift toward a digitised system.
The Tax Corporate Governance programme by the Inland Revenue Board provides the foundation in achieving good tax governance. It promotes co-operative compliance and a more collaborative relationship between taxpayers and the tax authority. We look forward to seeing an Indirect Tax Governance Framework being rolled out in the future as well. Taxpayers would also welcome increased and expanded deductions and incentives for ESG-related expenses in the future.
As Malaysia nears the end of its Asean Chairmanship, its commitment to ESG is extending beyond domestic priorities. The Asean Economic Community Strategic Plan 2026–2030 places sustainability at the centre of regional cooperation. Initiatives such as the Asean Taxonomy for Sustainable Finance and the Asean Power Grid Financing Initiative reflect a collective effort to harmonise ESG standards, encourage cross-border investment and support the region’s energy transition.
Budget 2026 represents more than just a financial framework. It outlines a broader direction for Malaysia’s development priorities. The government’s approach demonstrates an openness to adapt and respond to evolving economic and environmental needs. As these policies begin to take shape, it will be crucial to shift the focus to effective implementation. Progress will depend on clear policy direction, community engagements, how various stakeholders respond and how these efforts come together over time.
As Malaysia moves forward, ESG principles are expected to continue playing a role in shaping the country’s fiscal and development priorities. While progress may be gradual, the measures introduced in Budget 2026 provide a practical foundation for further integration.
The views reflected above are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.
