No Match Found
KUALA LUMPUR, 13 October 2023 – Budget 2024 in the spirit of the Madani Economy introduces key measures that are necessary to build a sustainable foundation to drive the future growth of the country whilst ensuring the well-being of the Rakyat is taken care of. In the absence of any measures which will increase government revenues significantly, the Finance Minister has worked within these constraints to target a lower budget deficit of 4.3%.
Improving revenue collection
The Finance Minister got the “not-so-good” news out of the way at the start of his Speech by sharing the measures intended to improve our country’s revenue collection. The announcements relating to the introduction of Capital Gains Tax on disposal of unlisted shares by Malaysian companies at the rate of 10% with effect from 1 March 2024 and the introduction of the Luxury Goods Tax at the rate of 5% to 10% do not come as a surprise as these have been shared in the Re-tabled Budget 2023 earlier this year.
The announcement to increase the Service Tax rate from 6% to 8% appears to be a stopgap measure until the government is ready to implement a broad-based consumption tax in the form of the Goods and Services Tax or GST. Although the strategy to maintain the rate of Service Tax for Food & Beverage and Telecommunications services is prudent as these are consumed by the masses, some of the other services consumed by businesses will result in an increase in the cost of doing business. Also, expanding the Service Tax to cover logistics services will have a cascading effect on costs, and businesses will seek to pass these on to consumers in the form of increase in prices of goods and services.
Global Minimum Tax
Malaysia remains committed to fulfilling its obligations under BEPS Pillar 2. The decision to defer implementation is consistent with the move taken by many jurisdictions in the region, including Singapore and Thailand. This is a prudent move, as we want to remain on the same footing as our neighbours competing for foreign investments.
Reforming tax incentives
In line with global developments on Pillar 2 and the need to increase Malaysia’s competitiveness in the region, it is timely that Budget 2024 announces a revamped incentive system in the form of a tiered results-based system which incentivises investors based on their contributions to the nation. A tiered-rate approach based on set outcomes also aligns broadly with carve-outs permitted under Pillar 2 rules, thus reducing potential impact of top-up taxes on multinationals.
A good example of the outcome-based approach is the services hub incentive that provides a tiered rate of 5% or 10%, based on outcomes achieved, such as employment of high-value full-time employees, collaboration with higher education institutions, or environmental, social and governance (ESG) elements.
Budget 2024 also recognises that tax incentives is but one of many factors assessed by foreign investors, and the eventual implementation of the Global Minimum Tax may level the playing field when it comes to tax incentives. The commitment to introduce measures to enhance ease of doing business, invest into human capital development and industrial infrastructure is necessary to gain a competitive advantage amidst an increasingly competitive environment.
Is e-invoicing really a go in 2024?
The definitive answer to the question above is “yes”. Although the Finance Minister announced the deferment of the first phase implementation (for businesses with annual revenue exceeding RM100 million) from 1 June 2024 to 1 August 2024, the fact that this extension of time is a two-month extension, reaffirms the government’s commitment to ensuring implementation of e-invoicing in 2024. With a runway of less than ten months, it is important for businesses to start evaluating their e-invoicing implementation strategy.
Measures supporting the ESG agenda
With the recent launch of the National Energy Transition Roadmap (NETR), the ESG agenda is, without doubt, one of the core focuses of the government. Although not announced in the Speech itself, the proposal to extend the application date for Green Technology incentives (which includes renewable energy projects such as solar, biomass and mini hydro) until 31 December 2026 is also much welcomed, along with the expansion in scope to cover emerging technology such as green hydrogen.
The extension of personal tax relief for expenses relating to electric vehicle (EV) charging facility for another four years and extension of tax deduction for rental of EV for another two years will likely continue to boost the take-up of EV vehicles in Malaysia.
The announced phasing out of diesel subsidies (except for selected groups such as freight companies) may be the start of a wider subsidy reform. However, a more comprehensive strategy for subsidy reforms is needed to reduce the burden on government finances. This can be then used to fund a greater level of development expenditure to help build world-class infrastructure and progress towards a developed nation.
For the Rakyat
It is no surprise that there are no further personal tax rate reductions, given the tax cuts already announced in the Re tabled Budget 2023. However, Budget 2024 continues the emphasis of its predecessors in ensuring that the Rakyat are taken care of, and there are targeted measures in Budget 2024, particularly in increasing and expanding the scope of relief for medical and lifestyle expenses to drive certain behaviours.
What remains missing
Whilst consumption tax such as GST is seen to be regressive, its approach of being broad based achieves many other objectives besides being revenue accretive. Implementing GST with a targeted cash transfer programme allows for the specific groups such as the B40 to be effectively sheltered from potential increases in costs of living.
The Finance Minister focused on addressing leakages and the need for the right amount of taxes to be paid. There are a number of measures already in place such as e-invoicing and Tax Identification Number (TIN), but there is certainly a need to consolidate the gathering of data relating to direct taxes and indirect taxes in order to improve the level of compliance.
Budget 2024 delivers on a strategy working within the constraints of fairly flat government revenue. It ticks the box in terms of being slightly expansionary, reducing the deficit and addressing many of the needs of the Rakyat. However, more significant measures to increase government revenue will be required to provide the headroom for Malaysia’s transformation into a high income nation.
PwC Malaysia Tax Leader
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