Malaysia's 2011 Budget To Encourage Private Investment

by Mary Swire, Tax-News.com, Hong Kong

20 October 2010

During the 2011 Budget speech, Datuk Seri Najib Tun Razak, Malaysia’s Prime Minister and Minister of Finance, emphasized that the government’s fiscal measures are an integral part of its strategy to produce a developed and high-income economy, spearheaded by investment by the private sector.

He said that Malaysia has already recovered from the economic recession, with a 9.5% expansion in gross domestic product (GDP) in the first half of 2010, compared to a 5% contraction during the same period last year. The government has estimated that GDP growth will reach 7% in 2010, significantly higher than the 1.7% contraction seen in 2009, and a growth rate of 6% is forecast in 2011.

Razak pointed out that, while the government has been assuming a significant role in driving economic growth since the financial crisis in 1997/98, the time had now come for the private sector to resume its role as the engine of growth. In 2011, private investment is estimated to expand by 12.5% to MYR86bn (USD27.8bn).

In that respect, the government is prepared to consider special incentive packages to attract investors to the Kuala Lumpur International Financial District, and measures will be implemented to revitalize the domestic capital market, particularly diversifying investment products, liberalizing equity holding requirements and investment limits.

For example, Bursa Malaysia will launch sukuk and conventional bonds to meet retail investors' demand for fixed income instruments in order to boost the bond market; and the Securities Commission will facilitate procedures for the listing of companies and products, particularly exchange traded funds.

To further promote innovation in Islamic securities products, the government proposes that expenses for the issuance of Islamic securities will be tax deductible. This, Razak said, would “strengthen Malaysia's position as the leading sukuk market and promote transactions in Bursa Suq al-Sila, the world's first syariah-compliant commodity trading platform”. The government proposes that takaful contributions for export credit will also be given a double tax deduction.

To revitalize capital market activities, he announced that the government will launch a Private Pension Fund in 2011. The existing income tax relief of up to MYR6,000 for employee's contributions to the Employees Provident Fund will be extended to the contributions made into the Private Pension Fund, including the self-employed. Employers will also be given a tax deduction on contributions made on behalf of their employees.

In the field of green technology, the government will continue to provide several incentives. The investment tax allowance for the generation of energy from renewable sources will be extended until December 31, 2015; the import duty and sales tax exemption on equipment for the generation of energy from renewable sources will be extended until December 31, 2012; and the tax exemption on the income derived from the trading of emission reduction certificates will be extended until year of assessment 2012.

In addition, full import duty and 50% excise duty exemption was granted to franchise holders of hybrid cars up to December 31, 2010. To further encourage ownership of hybrid cars, import duty and excise duty exemption will be extended until December 31, 2011 with excise duty to be given full exemption.

In the agricultural sector, the income tax deduction incentive for investors, and the income tax exemption for companies undertaking food production activities, will be extended for another 5 years until 2015; while, for the tourist industry, and to promote Malaysia as a shopping haven in Asia by providing branded goods at competitive prices, the government proposes that the import duty of 5% to 30% be abolished on approximately 300 goods preferred by tourists and locals.

Razak also announced that the investment allowance period for last-mile broadband service providers will be extended. In addition, the import duty and sales tax exemption on broadband equipment are also extended for two years until 2012.

Currently, he added, ordinary mobile phones are subject to 10% sales tax but mobile phones with various applications, such as internet and PDA, are exempted from sales tax. For the purpose of streamlining tax treatment, the government proposes that sales tax be exempted on all types of mobile phones.

However, in order to maintain a “strong” financial position for the public sector, the rate of service tax will be increased from 5% to 6%. The government is confident that this measure will not unduly burden ordinary citizens as it is not imposed on all services, and the sales value thresholds for such services are to remain unchanged.

Furthermore, Razak said that the government “will strengthen the revenue collection system by increasing enforcement and audit, as well as expanding coverage on all parties that should be paying taxes.”

Overall, in the Budget, federal government revenue collection is estimated to increase by 2.3% to MYR165.8bn in 2011, compared with MYR162.1 billion in 2010, while the public deficit for 2011 is expected to decline further to 5.4% of GDP, compared with 5.6% in 2010.

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