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Malaysia Gets Election Budget, Not Tax Reform

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

02 October 2012


In his 2013 Budget Speech, Malaysia’s Prime Minister and Minister of Finance Najib Razak produced a number of measures to help ordinary voters, reflecting the election next year, but failed to introduce any of the tax reforms which are thought necessary to broaden the country’s tax base.

For 2012, despite moderate global economic growth and trade, the Malaysian economy is estimated to expand at between 4.5% and 5%, continuing to be driven by foreign and domestic direct investment. The implementation of projects under the Economic Transformation Programme is supporting a surge in the construction sector by 15.5% in 2012, up from 4.6% in 2011.

In 2013, the Malaysian economy is forecast to expand at the same levels and, for the first time, the country’s gross domestic product (GDP) is expected to exceed MYR1 trillion (USD326.5bn). The higher growth should be supported by rises in private investment and construction of 13.3% and 11.2%, respectively.

Given the budget’s measures, the government’s tax revenue next year is expected to increase only marginally to MYR208.6bn, compared with MYR207.2bn in 2012. That will also mean that the country’s fiscal deficit will reduce by less than had been hoped to 4% of GDP in 2013 from 4.5% in 2012.

Najib confirmed the government’s commitment to continue reducing the fiscal deficit to a lower level, and gave an assurance that public debt will not exceed the self-imposed level of 55% of GDP. However, government debt is already close to that level, and it is forecast that the fiscal deficit will still be at 3% in 2015.

As a continuation of the ‘one-off’ cash assistance given to the lower income groups in Malaysia, he confirmed that MYR250 (reduced from MYR500 in 2012) will be given to families where the head of the household has a monthly income of less than MYR3,000, and will be extended to single unmarried individuals aged 21 and above earning not more than MYR2,000 a month. Najib disclosed that a total of 4.3m households and 2.7m single unmarried individuals, involving an allocation of RMYR3bn, will be paid in January 2013.

In addition, the government proposes that the individual income tax rate will be reduced by 1% for those earning up to MYR50,000. It is said that the measure will remove 170,000 taxpayers from paying any tax at all, while, for example, an unmarried young professional with a monthly income of MYR5,000 will enjoy income tax savings up to MYR425.

Furthermore, to aid families with education costs, the existing tax relief on children’s higher education amounting to MYR4,000 per person will be increased to MYR6,000 in 2013, while to encourage the savings habit for education, the current relief of MYR3,000 for savings in the National Education Savings Scheme will be increased to MYR6,000.

In addition to increased financial assistance for people to own their first home, Najib also announced an extension of the 50% stamp duty exemption on documentation for the purchase of the first residential property to December 31, 2014. The price limit on residential properties for exemption will be raised from MYR350,000 to MYR400,000.

Recognizing that the limited supply of property especially in urban areas has provided opportunities for speculative activities, the government also proposes that capital gains made from the disposal of properties will be taxed at the rate of between 10% and 15% for disposals made within a period of up to five years. Gains from the disposal of first residences once in a lifetime and between family members will be exempted from the tax.

Tax incentives are also to be provided for the revival of abandoned housing projects. To encourage the involvement of the private sector, the government will provide a tax exemption for banks on interest income received from the rescuing contractor/developer, who will be given a double deduction on interest paid and all direct costs incurred in obtaining loans, plus stamp duty exemption on all instruments executed for the purpose of transferring land or houses and loan agreements to finance the cost of revival.

The tourism industry is also singled out for help as it contributes almost 12% to GDP. In conjunction with Visit Malaysia Year 2013/2014, and the provision of development expenditure, tour operators who bring in at least 750 foreign tourists, or handle 1,500 local tourists a year, will have their income tax exemption extended for three years.

The government also aims to transform Malaysia from being not just a producer of oil and gas, but also a global trading hub for that sector. In addition to the launch of the Global Incentive for Trading (GIFT) programme in 2011, and in line with the global demand for liquefied natural gas (LNG) which is expected to reach 400m tonnes a year in 2025, the GIFT programme will be enhanced with a 100% income tax exemption on statutory income for the first three years of operations for LNG trading companies.

To stimulate further its capital markets, where Malaysia accounted for 71%, or MYR171bn, of total global sukuk issuance in the first seven months of 2012, the government intends that the additional expenses incurred in the issuance of retail bonds and retail sukuk will be given a double tax deduction for a period of four years from 2012. At the same time, individual investors are given stamp duty exemption on instruments relating to transactions of those bonds.

Only towards the end of his speech did Najib make reference to tax reforms such as the transition from general to targeted subsidies and the introduction of a goods and services tax (GST) - reforms generally considered necessary to enhance tax revenues by broadening the country’s tax base.

In particular, he restated that a GST “would not be implemented hastily but through a thorough study and in an orderly manner. It will not affect medium- and low-income groups as all the basic needs such as food, housing or public transport will always be protected. However, the government will give sufficient time to all parties to make the necessary adjustment. Public acceptance of this new initiative will be solicited through information programmes, education and extensive consultations.”

Action on the implementation of a GST in Malaysia has been repeatedly delayed by the government since the end of 2009. The reason for the delays has been, and still is, explained by the need for the government to be certain that the new tax would receive public support, especially in an election year.

At the previously-suggested 4% rate – lower than the current sales tax and services tax rates – it has been estimated that a GST would provide MYR6.3bn additional annual revenue, while a 7% rate (as in neighbouring Singapore) would yield proportionately more.

TAGS: individuals | tax | economics | business | tax incentives | banking | capital markets | real-estate | gross domestic product (GDP) | budget | corporation tax | oil and gas | ministry of finance | education | tax rates | stamp duty | Malaysia | tax breaks | revenue statistics | tax reform | construction | individual income tax | services

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