ALL eyes are on the re-tabled Budget 2023 under the new Unity government, totalling RM388.1 billion as an effort to support economic growth so that the spillover benefits can be enjoyed by the people.
Themed ‘Membangun Malaysia Madani’, Prime Minister Datuk Seri Anwar Ibrahim, who is also Finance Minister said the revised Budget 2023 would be achieved through the 12 initiatives based on three objectives namely driving an inclusive and sustainable economy, institutional reform and governance to restore confidence, and social justice to reduce imbalance.
He also announced that the national budget comprises of RM289.1 billion for operating expenditure and RM99 billion for developing expenditure including RM2 billion for contingency savings.
The objectives under this Budget 2023 are ensuring fiscal sustainability; meeting the economic needs of the people; facing disaster; luring high-impact investment; public sector reforms; empowering public-private partnership; prioritising digital agenda; strengthening roles of agencies and government-linked companies; eradicating hardcore poverty; minimising cost of living; ensuring racial harmony and unity; and providing quality basic amenities.
Under the revised Budget 2023, the government also projected GDP growth of 4.5 per cent in 2023 compared to a forecast range of four to five per cent by the previous administration.
To achieve this goal, a total budget of RM386 billion has been announced as allocated for overall spending, which is 5.1 per cent higher than the initial allocation announced earlier of RM367 billion.
Another RM97 billion is allocated for the development expenditure, which is 2.1 per cent higher than the previous budget, while the other RM289 is allocated for operation expenditure, which is 6.2 per cent higher than the previous budget announcement.
On the revenue side, the government is expected to generate around RM292 billion while the fiscal deficit ratio is expected narrow to five per cent of GDP, which is smaller relative to initial budget of 5.5 per cent of GDP. The current fiscal deficit ratio is 5.6 per cent of GDP.
The narrower fiscal deficit is in line with the long- and medium-term commitment in practicing fiscal discipline. The Medium-Term Fiscal Framework (MTFF) is maintained, where the fiscal deficit per GDP is projected to average at 4.1 per cent between 2023 to 2025.
“We commend the revised Budget 2023 as a comprehensive effort to tackle the country’s pressing economic challenges whilst promoting greater social responsibility, as well as fiscal accountability and transparency.
“That said, while the government has emphasized the need to reduce Malaysia’s high debt burden, we reckon there will be challenges to reach the lower deficit target of 3.2 per cent of GDP by 2025 given the delicate and highly uncertain economic environment post-pandemic.
“Nonetheless, we welcome the proposed presentation of the Fiscal Responsibility Bill later this year and think it reflects a commitment towards ensuring long-term stability alongside sustained economic growth,” the research team at Kenanga Investment Bank Bhd (Kenanga Research) commented in a report.
Growth moderation is still expected in 2023, with the exception of the agriculture and construction sectors, the research team noted. The services sector is projected to moderate to 5.3 per cent (2022: 10.9 per cent) but slightly higher than the five per cent announced by the previous administration. Growth is expected to be supported by domestic demand and buoyed by consumer-related sub-sectors.
The construction sector is also expected to expand sharply by 6.1 per cent (2022: five per cent), higher than the previous forecast of 4.7 per cent, amid improvement in all subsectors due to the implementation of new projects such as upgrading the Klang Valley Double Track (KVDT) Phase 2 and acceleration of ongoing major projects such as LRT3, ECRL, and 5G infrastructure development.
Sabah and Sarawak are also allocated the highest share of fund allocation to state with allocations of RM6.5 billion and RM5.6 billion given respectively, which include the plans to develop towns bordering Kalimantan, Indonesia, such as Kalabakan in Sabah and Ba’kelalan in Sarawak, involving costs of RM1 billion.
More than RM2.5 billion is allocated to implement projects involving public infrastructure in the two states, such as road and street lighting as well as water and electricity supply projects.
Anwar said the government is committed to continuing and expediting the implementation of the Pan Borneo Sabah Highway and the Sarawak-Sabah Link Road which is estimated to involve a total cost of RM20 billion with a distance of more than 1,000 kilometres.
Anwar also said the government would also provide RM209 million to subsidise air transport for the benefit of the people in the interior of Sabah and Sarawak.
Aside from that, domestic demand has also projected to expand by 5.4 per cent (2022: 9.2 per cent), slightly higher than the earlier forecast (5.1 per cent) amid continued improvement in the labour market, and robust economic and social activities following the reopening of China’s economy and border.
Growth is expected be supported by continued cash transfer programmes such as Sumbangan Tunai Ramah cash aid and special financial assistance to civil servants and government pensioners.
On the investment front, Kenanga Research noted that various measures and efforts to enhance good governance, reduce the cost of doing business and facilitate faster investment approvals, as well as to improve competitiveness and investment ecosystem, will sustain growth in private investment by 5.8 per cent (2022: 7.2 per cent).
As for Malaysia’s external demand, the research team pointed out that due to the subdued external demand on the back of geopolitical instability and the expectation of a relatively lower global commodity prices, gross exports are now projected to slow sharply to 1.6 per cent.
“Nevertheless, the government upgraded its gross imports projection to 1.1 per cent (2022: 31.3 per cent) from 0.2 per cent anticipated earlier, attributable to high demand for intermediate, capital and consumption goods in line with improved domestic demand and investment activities,” it added.
Striking a balance in fiscal position
UNDER the revised Budget 2023, the government’s fiscal stance remains modestly expansionary with higher development expenditure (DE) to boost economic growth.
According to its latest Economic & Fiscal Outlook and Federal Government Revenue Estimates 2023, the government is maintaining to its fiscal consolidation path, with the size of fiscal deficit to decline to five per cent of GDP this year.
The narrower fiscal deficit is in line with the long- and medium-term commitment in practicing fiscal discipline.
The Medium-Term Fiscal Framework (MTFF) changed slightly, where the fiscal deficit per GDP is projected to average at 4.1 per cent between 2023 to 2025 (previously was 4.4 per cent) and will narrow to 3.2 per cent by 2025 (previously was 3.5 per cent).
“This is a quicker fall (compared with in October 2022 estimate: -5.5 per cent of GDP) due to both the smaller size of deficit that the government aims to achieve (2023f: -RM93.9 billion; 2022: -RM99.5 billion) as well as the stronger-than-expected GDP growth last year (at 8.7 per cent), which exceeded government’s forecast of 6.5 to seven per cent.
“The smaller deficit will be realised mainly through reduced budget for operating expenditures (OE), in contrast to higher allocation for development expenditure (DE).
“Although there is no more allocation for Covid-19 Fund, this did not translate into significant decline in spending because of the larger budget for DE. Ultimately, the government reiterated its projection that the size of fiscal deficit will consolidate to 4.1 per cent of GDP based on the Medium-Term Fiscal Framework for 2023 to 2025, and down to -3.2 per cent by 2025,” MIDF Investment Bank Bhd’s research team (MIDF Research) said in a report.
Nevertheless, the government expects Malaysia’s revenue to be at RM291.5 billion, which is higher than the previous expectation RM272.6 billion and tax collection is expected to be the primary source of revenue in 2023, with an anticipated increase of 4.6 per cent to RM218.3 billion.
“The main source will be from direct taxes on both corporate income and personal income. In particular, the government anticipates the collection from Prosperity Tax for the Assessment Year 2022 will be received this year. In contrast, other sources of income from petroleum income tax, indirect taxes and even non-tax income are projected to be lower than last year.
“The decline in petroleum-related income is closely linked to the projected decline in oil prices as well as less dividend from Petronas. Overall fiscal revenue is expected to fall by one per cent to RM291.5 billion mainly because of reduced collection in non-tax revenue, taking into account lower dividends from Petronas and BNM,” it said.
From a tax perspective, Deloitte Malaysia pointed out that Budget 2023 aims to focus on measures that generate tax revenue from higher income groups as well as businesses that were non-compliant in their tax affairs or have been delinquent in paying taxes.
Of note, several key tax measures were proposed under the revised Budget 2023 an this includes introducing a Luxury Goods Tax starting this year with a certain value according to the type of luxury goods, Capital Gains Tax for the disposal of unlisted shares by companies from 2024 at a low rate, and the re-implementation of the voluntary acknowledgment programme similar to the Special Voluntary Disclosure Programme back in 2019.
The revised Budget 2023 also proposed measures to reduce individual income tax rate by two per cent involving the range between RM35 thousand to RM100 thousand. This reduction is expected to provide approximately 2.4 million taxpayers with extra disposable income of up to RM1,300.
While those with high incomes, a higher tax by 0.5 to two per cent involving a range of over RM100 thousand to RM1 million was proposed.
“Measures such as taxing the T20 group, luxury goods tax and voluntary disclosure programmes should boost tax collection as can be seen from the projected increase in tax collection of four per cent over total revenue in 2023 as compared to year 2022,” said Deloitte Malaysia’s Country Tax leader Sim Kwang Gek.
While the two per cent reduction in the personal income tax rates for individuals earning annual chargeable income between RM35,001 to RM100,000 would bring cheer to the M40 group as it provides higher disposable income for this group.
“Although the two per cent cut results in lower tax collection, the impact should be minimal since the money saved would be contributed back to the economy in the form of higher consumption. This proposal is expected to benefit 2.4 million taxpayers,” she added.
Re-implementation of special voluntary disclosure programme
TO boost Malaysia’s revenue, the government plans to re-implement the special voluntary disclosure programme, which was first introduced by the Pakatan Harapan government in 2018.
“A total of 286,482 taxpayers participated in the Special Voluntary Disclosure Programme (SVDP 1.0), bringing in an additional RM7.877 billion of taxes to the government’s coffers that time.
“With SVDP 2.0 providing a full penalty waiver to voluntary participants (compared to a 15 to 30 per cent penalty in SVDP 1.0), the take-up rate should far exceed that of SVDP 1.0, and we can expect SVDP 2.0 to collect more than RM10 billion,” KPMG Malaysia said in a statement.
“The amicable resolution approach through SVDP comes under focus as part of the new Budget 2023 by Prime Minister Datuk Seri Anwar Ibrahim in line with the Madani core values of care and compassion where the SVDP 2.0 extended to taxpayer sees a full 100 per cent waiver on tax penalty for the period from June 1, 2023 to May 31, 2024, trust where such is built with the taxpayer through the taxpayers coming forward in the voluntary disclosure, and prosperity where the tax authority can increase the collection of tax revenue,” KPMG Malaysia Tax Dispute Resolution executive director Ng Wei Wei said in KPMG Malaysia Special Voluntary Disclosure Programme 2.0 insight report.
“The re-implementation of SVDP comes as no surprise as past results have demonstrated the encouraging collection of approximately RM7.8 billion from 286,428 contributors, including 11,176 new taxpayers in the previous SVDP for direct tax.
“The figures show through participation that the existing taxpayers and new taxpayers buy in to the idea of mutual responsibility in fulfilling their tax filing obligations as well as ensuring fair collection of taxes to the eventual dimming of the perception that tax obligations are nothing but a burden.
“An increase in tax awareness would eventually lead to a higher rate of tax compliance,” KPMG Malaysia commented.
“This potential is conditional to the full mechanism yet to be revealed, for example: will participants of SVDP 2.0 reap the same benefits whereby LHDN will not carry out audit and investigation on their companies for the years involved? Will SVDP 2.0 be akin to an amnesty? We will have to wait and see,” it added.
It also pointed out that with the implementation of Automatic Exchange of Information (AEOI) with other foreign tax authorities, information exchange and the circulation of data between countries, taxpayers especially high net worth individuals are urged to be transparent and come forward voluntarily to the tax authorities where found non-compliant in the process.
“Ultimately, the responsibility lies with the taxpayer to ensure tax records are veracious and abide by the rule of law. Pending the issuance of guidelines on the SVDP, the taxpayer would be wise to see through a thorough tax risk assessment and the evaluation of their tax position,” KPMG Malaysia stated.
New tax on luxury goods
THE re-tabled Budget 2023 also saw the proposal of a Luxury Goods Tax to be implemented this year.
According to KPMG Malaysia, a Luxury Goods Tax is a tax on high value, levied on goods that cost more than a specific amount and are not viewed as essential goods or necessities.
It noted that in some countries, Luxury Goods Tax is implemented as a way of discouraging goods and promote domestic production.
“In Malaysia, it is no doubt that the objectives of the proposed Luxury Goods Tax are to increase government revenue as well as make the tax more progressive,” it said.
“Although new in Malaysia, this form of tax is not unheard of in other countries. Countries such as China, Taiwan, Indonesia, South Korea, Norway, Italy and Chile have implemented some form of tax on high value goods.
“Globally, Luxury Goods Tax (or equivalent) could be imposed via consumption tax (more commonly seen) such as Goods and Servicces Tax (GST) or Value Added Tax (VAT) or levied via import duty or excise duty on luxury items such as cars, yachts, jewelleries, luxury clothing, handbags, perfumes and watches.
“In some cases, the tax rate is a flat percentage, while others could be progressive (tax rate increases as the value of the item increases),” it explained.
“At this point, it may be worth ‘anticipating’ the possible scenarios in the implementation of Luxury Goods Tax and how it may affect the stakeholders – who knows it could serve as a good piece of brainstorming,” KPMG Malaysia said.
In the possible case where the Luxury Goods Tax are levied on imported goods upon customs clearance, the tax advisory company noted that as it stands, goods imported are already subjected to import duty and sales tax, depending on the HS code.
It noted that to increase the existing rates for certain classes of goods may not be straightforward as it needs a review of the affected HS codes and this can be time consuming. Furthermore, it pointed out that the new requirement, if any, may impact the current customs clearance procedures, which may already be complicated and challenging for some players.
In the case of Luxury Goods Tax being implemented by the retailer to the consumer, KPMG Malaysia pointed out that Malaysia’s consumption tax equivalent is Sales Tax (for goods).
“If the Luxury Goods Tax is in the form of sales tax, by imposing the sales tax on luxury goods at the retail level, it could result in tax cascading if import duty and sales tax have already been paid upon importation or charged by sales tax registered manufacturers.
“In the GST/VAT context, most if not all businesses would have already been registered for GST/VAT and charging GST/VAT. The introduction of Luxury Goods Tax could only mean an increase in the GST/VAT rate.
“In Malaysia, sales tax principally covers manufacturers of taxable goods in Malaysia. As it stands, none of the retailers are required to register for sales tax and charge sales tax (with the exception of the newly implemented sales tax on low value goods.
“If this option is adopted, it would mean that retailers are required to register for sales tax and charge sales tax. Accordingly, the concern would be on how to implement and probably what are the costs/resources involved therein,” it explained.
For consumers, in the absence of details, it is hard to predict the impact on consumer behaviour.
“The objective is to expand the tax base of those who can afford and make Malaysia’s tax system more progressive. It is a tax on the wealthy and it would be interesting to see how it impacts consumer behaviour once it is implemented,” said KPMG Malaysia head of Indirect Tax and executive director Ng Sue Lynn commented.
Implementation of capital gains tax: A friend or foe?
THERE is a strong signal of an impending implementation of capital gains tax from 2024, which is now under study by the government in line with international best practices.
According to KPMG Malaysia, generally, gains on capital assets are not subject to tax, except for gains arising from the disposal of real property situated in Malaysia which is subject to real property gains tax up to 30 per cent.
In Asia, it pointed out that only Malaysia, Singapore and Hong Kong have yet to impose capital gains tax – for the main reason that most of the income are derived from trading.
“Malaysia has traditionally enjoyed a competitive advantage over other jurisdictions in the eyes of investors, in particular foreign investors, by not having a capital gains tax (CGT) regime.
“Should CGT be implemented in the future, it is hoped that the legislation will be carefully drafted so that Malaysia remains an attractive destination for foreign investors and at the same time, no taxpayer suffer unduly,” KPMG Malaysia executive director and head of coporate tax Tai Lai Kok commented.
It should be noted that the idea of introducing CGT has been floating around for many years, with a broad based CGT being argued by opposers as potentially damaging, particularly to the share market and investors at large.
“Further, there were questions as to how such a CGT would be managed and administered by the authorities to ensure compliance,” KPMG Malaysia pointed out.
“The introduction of this narrower CGT raises the question of equity as disposals of listed shares will not be subject to CGT and surely this will create an uproar within the public domain. CGT will certainly have an impact on organisations intending to undertake a restructuring exercise, especially in the post-Covid 19 era where the economy is recovering and many organisations are contemplating group restructuring exercises to increase overall efficiency.
“It is therefore hoped that should CGT be implemented, exemptions will be made available for internal group restructurings,” it said.
“In view of the impending introduction of CGT, companies that intend to undertake any restructuring exercises and/or divest their interest in unlisted shares in the near future, should consider accelerating their plans and keep a look out for any developments and updates.
“It is hoped that should CGT be implemented in the future, careful consideration of all matters concerning interested parties are taken into account so that no taxpayer suffers unduly,” KPMG Malaysia advised.
Sharing its sentiments, Deloitte Malaysia commented that the proposal to introduce CGT on the disposal of unlisted shares from year 2024 “should be carefully studied before implementation”.
“Considerations such as impact on mergers and acquisitions (M&A) activities in Malaysia, Malaysia’s attractiveness for in-bound M&A, costs of doing business, tax treatment on losses arising from disposal of shares and possible exemptions for internal group restructuring exercises must be given weight.
“It is encouraging to note that the government will be in consultation with relevant parties to study this proposal in greater detail.
“An assessment of the additional tax revenue that will be generated from the imposition of CGT vis-à-vis the downside effects on businesses must be carried out. Currently,Singapore does not impose any capital gains tax,” Deloitte Malaysia country leader Sim Kwang Gek said.
Overall, Sim pointed out that Budget 2023 attempts to strike a balance between fiscal consolidation and strengthening economic recovery while safeguarding the wellbeing of the rakyat.
“The government is also committed to strengthening public trust and upholding integrity in public administration. Despite global headwinds, Malaysia is projecting a 4.5 per cent growth as we transition into the endemic phase with stronger domestic demand and effective government administration,” she said.
Meanwhile, Kenanga Research noted that despite the introduction of new taxes (luxury goods tax), indirect tax collection is expected to decrease marginally due to lower revenue from the windfall profit levy on crude palm oil (CPO) and a decrease in the estimated total industry volume for motor vehicles.
“However, better collection is expected from Sales and Services Tax (SST) due to higher demand on plastics and electrical products and from the food and beverages sector.
“At present, the government has put plans to implement a broad-based consumption tax, such as the Goods and Services Tax (GST) on the back burner.
“In the speech, Prime Minister Anwar said that if the government introduces the GST now it would further burden the people, especially those in the lower income group, given the current economic uncertainty and the rising cost of living. Furthermore, a study will be conducted by the government to introduce a low-rate capital gains tax for companies on the disposal of unlisted shares in 2024,” it said.
All in, it said: “The anticipated improvement in domestic labour market condition and income prospects, coupled with the ongoing recovery in economic and social activities, are expected to contribute to higher tax revenue in 2023, in line with the government’s projection.
“Furthermore, the implementation of new taxes, government efforts to enhance tax compliance and higher taxes for the wealthy are likely to further boost tax revenue.”