With more light thrown on the goods and services tax (GST), a new income tax structure, lower sugar subsidies, increased BR1M payments as well as the real properties gains tax (RPGT), these measures Budget 2014 is slated to address the country’s current deficit.
In an attempt to strike a balance between fiscal prudence and economic growth, the rakyat well-being policies continue to receive focus.
Industry observers note that the thrusts are not much different from that in the previous one, reflecting continuity of the government policies on economic transformation and rakyat well-being.
Notably, these objectives would be carried out with an allocation amount that is not much different from what was spent in 2013, specifically RM264.2 billion or 1.1 per cent increase from 2013 allocation and with a smaller deficit of RM37.1billion or 3.5 per cent of gross domestic producttion (GDP).
Analysts at MIDF Amanah Investment Bank Bhd (MIDF Research) opine that the significantly smaller deficit/GDP ratio is based on much faster nominal GDP growth – deviation in actual spending in 2013 that is much smaller than seen in previous years. The deficits in 2014 is projected to be at RM37.108 billion, a decrease of 5.5 per cent from the 2013 level, but deficit/GDP ratio is expected to improve to 3.5 per cent from four per cent in 2013 as nominal GDP is projected to rise by eight per cent against 4.3 per cent in 2013.
The government has shown that it is serious in strengthening is fiscal position by allowing smaller deviation in actual spending in 2013 from planned earlier – the deviations tend to widen in previous years, although it could be said that the overshoot in revenue in 2013 was also much smaller than recorded in previous years.
The rather subdued expenditure growth is consistent with government’s endeavour to strengthen its fiscal management, as the urgency, present and now, is to retain Malaysia’s sovereign rating and preserve global investor confidence in the country. But at the same time, all these must be achieved without jeopardising the nation’s economic growth as well as well-being of the rakyat.
MIDF Research noted in a report that, in late July, the Fitch Ratings revised Malaysia’s rating outlook to negative from stable. It specifically indicated that the nation’s ‘public finances are its key rating weakness’.
Moreover, it opined that “The government is likely to continue to encounter difficulties in implementing far-reaching, and much delayed, revenue-enhancing reforms such as the GST.”
It further remarked that real enhancement in Malaysia’s sovereign credit profile may only be achieved via sustained reform implementation, and structural measures to broaden the revenue base.
But it added that “such an intensification of reforms that can also withstand potential growth headwinds, is not on the cards at present.”
The government also announced that the chargeable individual income subject to the maximum rate will be increased from exceeding RM100,000 to exceeding RM400,000. The current maximum individual tax rate at 26 per cent will be reduced to 24, 24.5, and 25 per cent.
This measure is expected to raise the disposable income of the people which may in turn help to improve the level of consumer spending going forward.
Furthermore, corporate income tax rate will be reduced by one percentage point from 25 to 24 per cent. Based on the current trajectory of equity market is principally hinged upon the expected performance of its corporate earnings. Hence, reduction in corporate income tax rate should, ceteris paribus, provide a fillip to the local equity market.
RHB Research Institute Sdn Bhd (RHB Research) also noted that overall spending in the consolidated public sector, which includes the state governments, statutory authorities, local governments and non-financial public enterprises (NFPEs), is projected to decrease by 3.6 per cent in 2013, after rising by an estimated 15.6 per cent in 2013.
“If this materialises, it will imply that the consolidated public sector will likely contribute less to the country’s economic growth in 2014,” it said.
“This is mainly on account of a smaller allocation for development expenditure, which is projected to decline by nine per cent in 2014, after sustaining a doubledigit rate of 32.5 per cent estimated for 2013, mainly on account of a cutback in development expenditure by the NFPEs.”
Indeed, the NFPEs plan to reduce their development spending by 13.2 per cent in 2014, a reversal from an increase of 50.2 per cent estimated for 2013. Still, the NFPEs’ development spending has been revised upward in the last three years, suggesting that it could surprise again on the upside in 2014.
Meanwhile, the operating expenditure of the consolidated public sector is projected to slow down in 2014. As a whole, the consolidated public sector is projected to record a smaller deficit of 9.4 per cent of GDP or RM99.5 billion in 2014, compared with a deficit of 13.5 per cent of GDP or RM132.9 billion estimated for 2013.
Budget’s impact on property sector
There has been mixed views on the new real properties gains tax (RPGT) rate that was announced during the Budget 2014 aimed at cooling the current skyrocketing property prices.
Kenanga Investment Bank Bhd’s research team (Kenanga Research) believed the goods and services tax (GST) implementation, speculation cooling measures such as RPGT hikes and subsidies for PR1MA housing came as no surprise as these measures were already anticipated.
Positively, the measures announced were less severe than market expectations with no stamp duty hikes and further loan-to-value (LTV) ratio caps. Nevertheless, it is slightly below expectation as the research house did not see the need for the cessation of Developer Interest Bearing Scheme (DIBS).
“Historically, budget measures on the property sector had only seen one drastic fiscal measure and one monetary measure within a year. So this is highly unusual. However, we reckon this is a smart move on the government’s part as they anticipate a pre-GST panic buying trend.
“So ahead of it, they have introduced harsher measures to deter speculators from taking advantage of this trend, particularly foreigners with currency advantage. This does imply that future demand could be stronger than expected and we think that this factor will still keep property sales buoyant in view of this future cost-push-inflation factor,” noted the analysts.
“RPGT hikes were more severe than expected, although we think this will have the least effect on new launches, such as developers. It will also weed out more speculators in the secondary market, particular those taking advantage of the discounted prices that the secondary market compared to the primary market. However, on the run-up to the Budget, we believe that RPGT hikes have been well factored-in into developers’ share prices.”
Ernst and Young Malaysia Tax leader, Yeo Eng Ping believed the changes made to the RPGT regime will be quite effective in curbing speculative activities which have contributed to rising property prices.
“RPGT has not been a significant source of tax revenue, as the RPGT revenue in 2011 only amounted to RM0.3 billion, representing 0.35 per cent of total direct tax collected.”
The new RPGT rate structure differentiates between individual citizens and permanent residents, companies and non-citizen individuals.
“This is not new and is reminiscent of the RPGT framework prior to the 2007 exemption period. Rates have also increased quite significantly – for the first two categories, the new RPGT rates would be 30 per cent for disposals within three years of acquisition, 20 per cent in the fourth year and 15 per cent in the fifth year.
“Disposals after five years from acquisition will still not be taxed for citizens and permanent residents, whilst companies and non-citizens would be subject to five per cent RPGT,” she explained.
OCBC economist Selena Ling gave her two cents by noting that more macro-prudential measures could help cool sentiments in the housing sector.
“Aside from the RPGT, the higher minimum property price threshold for foreigners, the prohibitions for developers from implementing projects that have features of DIBS to prevent developers from incorporating loan interest rates in house prices during the construction period, and the prohibition for financial institutions from providing final funding for projects involved in the DIBS schemes.
“These also are in line with regional measures to tackle their respective asset inflation stories.”
Gerard Kho, country manager of PropertyGuru.com.my however believes that property prices are still likely to rise.
While the sale and purchase of properties are not impacted by GST, construction materials are liable for GST and such, will have a contributory effect on prices going up. In the long run, a more stringent RPGT regime would see prices stabilising.
Meaning, prices will still rise, but mainly due to natural factors such as property appreciation and construction cost rather than due to speculative activity or properties being flipped upon completion.
There have been no additional measures or restriction on financing, which is good as first-time buyers still have access to financing with low interest rates and plenty of liquidity.
“As for the introduction of the RM1 million minimum price for foreign buyers, I foresee this will only have a minimal market impact as most foreigners are already purchasing properties above that price. However, it may see some overseas buyers pulling out, though not many,” Kho noted.
He further explained that the government’s efforts to provide more affordable housing via PR1MA and other initiatives is a positive step as it ensures the overall property market size, particularly the affordable segment will expand thus helping to cool off some of the pressures from rising demand fuelled by growing population and rural to urban migration. In particular, the effort to encourage the private sector to build more affordable homes is lauded.
But the challenge is for the government to expedite. It needs to accelerate these initiatives as the challenge is a serious concern among the middle income demographic.
Looking at it at a more micro view, specifically to Sarawak, the Sarawak Housing and Real Estate Developer Association (Sheda)’s secretary Sim Kiang Cheok expressed his positivity on the budget stating that, “On the overall the budget is good.”
He added, “The budget this time around has something for everybody and the increase in RPGT rates will have an impact on the developers as well as house purchasers not to mention the government. Developers would probably generate less sales as there would be less speculation hence real estate buyers will have to be careful in their decision in choosing their houses.”
Sim also said that for those transient workers who have to be transferred around, it may not be a good idea to buy a house which if added together means the government will have less stamp duties to collect due to reduced sales and transactions.
The curbing of DIBS also property speculators as genuine buyers will have the repayment capacity to service interest cost during the construction period.
Touching on the DIBS, “It is good that the government want to stop this scheme to stabilise the house prices but this may not be as positive to the developers as well as home buyers. The scheme gives the purchasers more choices on how they want to buy their houses.
“DIBS reduces the risk of abandoned projects despite being blamed for being among the reasons for the increase in house prices. But if you look at Sarawak, the increase in house prices isn’t as bad as those in West Malaysia so the measure might be effective there but not necessarily here,” he explained.
“Property developers will have to display detailed sales price including all benefits and incentives offered to buyers such as exemption of legal fees, stamp duty, sales agreements, cash rebates and free gifts. Implementation of the measure is unclear at current juncture. Nevertheless, we believe strict implementation of the measure will ensure the margin of financing for property purchase falls below banks stipulated threshold.”
The one measure that Sim is highly positive about was the PR1MA, Syarikat Perumahan Negara Bhd (SPNB) and the National Housing Department (JPN) which has been allocated and tasked to build substantial numbers of houses in certain budget ranges to help address with the increasing demand for affordable housing.
“The subsidy of RM15,000 to RM20,000 for private and public developers for low and medium cost homes for first time buyers however we rather not disclose any comments until further clarification on the matter.”
Based on the opinions, it is believed that property prices and sales growth will be mode moderate in the future with the implementation of the measures in Budget 2014. Nevertheless, the property market is still supported by real demand driven by population growth, urbanization as well as rising household income.
Shipping
On the local shipping front, the allocation of RM3 billion in soft loans under the Maritime Development Fund in Budget 2014 will help spur the shipping sector, opines Shin Yang Shipping Corp Bhd (Shin Yang Shipping).
Richard Ling, chief financial officer for Shin Yang Shipping stipulated that this was a good move as it shows that the government has responded to the shipowners’ request.
“Although we have yet to see the details in regards to how these loans will help shipping companies, I hope that it will apply to existing shipowners to utilise this fund for the existing financing packaging,” he said.
“Hopefully, this funds is not only targeting new capital expenditures.
“It is hoped to also allow those who had the capital expansion in the past three years to restructure their financing to this fund.”
Ling noted that priority should be given to those shipping companies with vessels transporting cargo to and from East Malaysia.
“This fund should also support shipbuilding support shipbuilding activities with vessels constructed in Malaysian shipyards for export to new international markets,” Ling said.
He further expressed that the existing shipping players from East Malaysia are neither big nor small players and as such, should have strong alliance partnerships with the authority. The existing players should work collectively to gain strength over the stiff competition.
“Budget 2012 had also increased the burden for shipping companies with the reduction of tax exempted income under Section 54A (S54A) of the Income Tax Act (ITA) to 70 per cent,” he added.
“With the appeal from the Malaysian Shipowners Association, the tax exemption had been further extended for another two years to Year 2013.”
Automotive
The lack of any incentive or provision for automotive players in Budget 2014 is seen as a hint for the close approach of the National Automotive Policy (NAP).
According to Damon Rielly, cheif executive officer (CEO) of iCarAsia Ltd (iCarAsia), unlike in previous years, Budget 2014 was silent on the automotive industry, perhaps due to the new National Automotive Policy (NAP) which will be announced in the near future.
“The government had mentioned the possibility of reduction in car prices and total cost of car vehicle ownership,” Rielly said in a statement to the media. “Since Budget 2014 did not touch on these areas, we look forward to seeing this addressed in the NAP.”
Meanwhile, Rielly welcomed the government’s move to improve Internet accessibility and connectivity via Phase 2 of the High Speed Broadband Backbone (HSBB).
“It is a sizeable investment at RM1.8 billion but it is a vital step in the right direction – taking into account current demographic and development trends across Malaysia.
“Increasingly, more Malaysians are using the Internet, particularly for research, interaction and retail purposes, not just in urban but also rural areas.”
The iCarAsia CEO noted that there was a clear demand for improved Internet connectivity across the country as the medium has grown in prominence across all user segments.
“It is likely to overtake conventional media and in many ways, already has,” he added.
“With the continued evolution of the population in terms of sophistication, education, income levels, the Internet will become more essential.
“Providing faster and more stable access is the right step in continuing Malaysia’s march of progress and bringing it on par with First World nations,” he opined.
Tax
Together with a reduction in effective income tax rates for individuals (with reduction in income tax rates, and additional RM2,000 in personal tax relief for the middle income group), the government also proposed an option for employees to do away with personal income tax filing for individual employees.
Yeo Eng Ping of Ernst and Young stated that in such a case, the Monthly Tax Deduction imposed is the final tax on such persons.
The simplified system would allow the IRB to redirect resources to improving tax compliance and enforcement, and individuals will not need to worry about the annual filing in April.
However, the details of implementing this system including the monthly tax deduction amounts should be carefully reviewed, so that the individuals can effectively enjoy this facility.
It is likely that this facility will be available only to those with only employment income, however this remains to be confirmed.
There will also be questions on how tax audits will be conducted to ensure that the system is not unfairly taken advantage of.
It is also notable the incentives to provide an additional tax deduction between the original salaries and minimum wages paid by small and medium enterprises (SMEs), will help ease the pressure by certain lobby groups to review this minimum wage policy.
Hwang Investment Management Bhd’s head of equities, Gan Eng Peng added that the ntroduction of the goods and services tax (GST) would imply a revision to the corporate (currently 25 per cent) and personal (26 per cent for top bracket) income taxes.
As such, this is timely with corporate taxes being lowered to 24 per cent and personal tax rates reduced by one per cent to three that will take effect post
GST. The reduction in corporate tax rates would eventually lead to higher tax revenues because the lower cost of doing business would tend to encourage business growth.