Malaysia: Star Exclusive – Tax stimulus needed in budget

• Oct 22, 2020

PETALING JAYA: With the domestic economic recovery still fragile despite signs of green shoots, there is a growing need for additional stimulus measures to spur consumption and business sentiment.

To meet the need, economists have called for a reduction in taxes and other forms of tax stimulus measures to be incorporated in the upcoming Budget 2021.

While the government has introduced five rounds of stimulus packages totalling RM305bil, on top of Bank Negara’s move to lower the overnight policy rate to induce borrowings, experts feel more can be done by the government despite concerns of limited fiscal space.

Speaking with StarBiz, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie (pic below) said Budget 2021 should introduce “measured tax stimulus”, given the uneven economic and business recovery pace.

This is important as Malaysia is currently into the third wave of the Covid-19 pandemic that will further undermine consumer sentiment and business confidence.

Lee suggested a tax holiday for individuals with an annual chargeable income bracket of RM100,000 to RM150,000.

He also said the government could consider a reduction in the personal income tax rate and selected personal tax relief for middle-income wage earners and below.

In addition, a sales tax reduction or exemptions for big-ticket items and consumer durables to encourage consumer spending could be considered.

As for businesses, especially the small and medium enterprises (SMEs), Lee said there needs to be tax incentives, financial relief and assistance to ease the 3Cs – cash flow, cost and credit.

“These include an extension of the wage subsidy programme, electricity tariff discounts, the exemption of foreign workers’ levy as well as the extension of rental rebates.

“For SMEs, the income tax rate for chargeable income up to the first RM600,000 should be reduced by 1%-2% to 15%-16% from the 17% currently, ” he said.

While these tax measures may result in lower tax revenue for the government in the short term, Lee believes the resulting economic and business revival will lead to increased revenue for the government in due course.

Sunway University professor of economics Yeah Kim Leng, (pic below) however, felt the government was unlikely to introduce tax cuts, given the country’s expected revenue shortfall and continuing fiscal deficit position.

“A taxation tweak, however, is possible to reduce the tax burden of the middle 40% population (M40) by widening the income tax brackets. The current high tax rate of 24% is quickly reached for those who earn RM100,000 and above.

“Widening the tax bracket will enhance the disposable income of the lower middle-income households.

“Last year, the tax rate on those earning above RM2mil was increased from 28% to 30%. We may yet again see the top 20% (T20) group being called upon to shoulder an additional tax burden, ” he told StarBiz.

Asked if the government should consider imposing a windfall tax on glove makers to raise more tax revenue, Yeah said such a move would have undesirable consequences.

These include deterring the firms from capital investment and business diversification and engaging in unproductive tax avoidance activities.

“It also raises an equity issue since the firms are already being taxed as they could argue for symmetrical fiscal support when the industry is in the doldrums, ” he said.

For context, glove makers have recorded Astronomical growth in net profits following the Covid-19 outbreak, thanks to the sharp surge in glove demand.

This has sparked speculation that the government may impose a windfall tax to partially offset the drop in oil- and tax-related revenue.

Analysts expect the glove manufacturing industry to continue enjoying strong bottomline growth in 2021 and even in 2022, if the development of the coronavirus vaccine drags on.

The long-term impact of a windfall tax could be counter-productive

RHB Research Institute had said earlier that chances were low for the windfall tax.

It pointed out that up to mid-October, there had been no consultations between the authorities and industry representatives to discuss the implementation of such a tax.

“The rubber glove industry has been paying corporate taxes and foreign worker levies to the government.

“In line with the higher profits within this sector, we estimate that the tax paid to the government should be at least triple the amount paid during pre-Covid-19 times.

“Lastly, imposing a windfall tax may be counter-productive, as it could encourage local glove makers to adjust their future expansion plans overseas to countries like Thailand and China, ” it said in a report dated Oct 19.

On the contrary, SERC’s Lee did not discount the possibility of a windfall levy on the rubber glove sector.

While the move could be seen as a revenue stabiliser in times of fiscal stress, Lee cautioned that the long-term impact could be counter-productive.

“Proponents would argue that the windfall tax penalises companies that are already paying large amounts of tax and planning to invest billions in the expansion of plant capacity.

“It would sour Malaysia’s investment climate in a global race for resource-based investments.

“The timing of introducing new taxes and the sequencing of tax reforms must be implemented in line with the state of economic and business conditions, ” he said.

According to Lee, the Windfall Profit Levy Act 1998 allows the government to slap a windfall tax on businesses enjoying excessive or supernormal profits to help plug the tax revenue gap and keep a manageable fiscal deficit.

“The windfall taxes were imposed on the plantation sector during the 1997-1998 Asian Financial Crisis due to the substantial gains brought about by the sharp depreciation of the ringgit.

“During the 2008-2009 Global Financial Crisis, a 30% windfall profit levy on independent power producers was structured on a return on assets in excess of 9%, ” he noted.

Despite the concerns on low tax collections, RHB Research Institute pointed out that the government would benefit from the digital tax and the higher sin taxes on cigarettes and alcoholic beverages.

“The digital tax is expected to rake in about RM300mil this year. While this is positive for the government’s coffers, it is well below the RM2bil to RM4bil previously estimated by the market.

“Nevertheless, we expect the digital tax collection to grow by 9% this year, given the strong and steady growth of Malaysia’s digital economy, ” it said.

The research house added that sin tax collections could be higher, given that the authorities’ focus is tilted towards curbing the sizeable shadow economy.

“The government has proposed stronger penalties on illegal gambling activities, which could lead to higher collections through returning legal gambling market share, ” it said.

Source: https://www.thestar.com.my/business/business-news/2020/10/22/star-exclusive—tax-stimulus-needed-in-budget