Plummeted oil and commodity prices, economic slowdown in China, ringgit depreciation, political instability, goods and services tax (GST) introduction have impacted the domestic and external consumption, slowing down our economy considerably.
With an aim to achieve a balanced budget by year 2020, cautious spending limits our ability to increase public spending to pump prime the economy. Our Government indeed will have a mammoth task rafting Budget 2016. With strong economic headwinds ahead, due attention can be given to several critical aspects.
Come with the challenges are opportunities. The softening ringgit will undoubtedly enhance our export competitiveness. The Government should encourage more Malaysian companies to export their goods and services. Malaysia now provides tax exemption of 15% of the value of increased exports generally.
In the Philippines, established industries that are primarily export-based enjoy full-tax holiday for eight years and a concessionary tax rate of 5% thereafter.
To promote international trade, Singapore lowers the tax rate to 8%-10% for a five-year renewable period under the Global Trader Programme.
China offers lucrative export tax rebate as high as 17% for certain strategic industries which has significantly enhanced its export capabilities.
To boost export competitiveness, if the Government’s cashflow permits, export tax rebate of 1%-2% may be considered for SMEs (small and medium entreprises) and some strategic sectors.
To compete meaningfully in international market, businesses must continuously reinvest to increase production capacity and productivity as technology may become obsolete after some years.
The present rule allows companies to claim reinvestment allowance of 60% of the capital expenditure incurred for a period of 15 years. The Government may consider giving companies that have export capabilities an extended five-year period of reinvestment allowance incentive.
Similarly, the services industry such as tourism, healthcare, education can take advantage of the ringgit depreciation to attract foreign clients. Income-tax exemption can be offered to businesses in these sectors that have shown increase in revenue from foreign clients. For instance, in healthcare services, tax exemption on the value of increased service to foreign clients which expired in 2014 should be extended.
Malaysia has gradually lost its competitive edge to emerging countries such as Myanmar, Vietnam, Indonesia in terms of cheap labour and natural resources.
Our corporate tax rate is now 25%, compared with 17% in Singapore, 20% for Thailand and 20% for listed companies in Indonesia. Vietnam is making another move to cut its tax rate by 2% to 20% in 2016. These neighbouring countries have in place enticing tax incentive framework.
Hence, continually offering tax incentives for strategic investments is critical for Malaysia to remain a top choice for foreign investment. The Government agencies played a successfully role in attracting investment through trade missions and other promotional activities.
However, due to limited government resources, private sector can be depended to play a part in attracting foreign investments (FDI).
In his regards, businesses which develop special industrial or commercial zone such as high-tech industry park, halal food processing hub, regional financial services and shared service centre may be given bracket incentives in term of income tax exemption, withholding tax exemption for both the master developer and investors that put up their business activities in the designated zone.
Talents are key to driving the performance of our economy. The ringgit depreciation, political instability and dwindling skilled jobs availability may lead to talents exodus. Moving to Singapore for instance gives rise to instantaneous pay jump of 20% just on currency exchange alone.
In addition, its personal tax structure is also more competitive. For comparison, the personal income-tax rate for chargeable income in the bandwidth of S$40,000-S$80,000 is 7% whilst in Malaysia income falling under the bracket of RM50,000-RM70,000 is taxed at 16%.
With the introduction of the GST, the highest tax rate of 25% should be trimmed to 20% over 3 years. Further, the tax bracket should be widened especially at the middle income band of RM50,000 to RM100,000.
The personal tax relief of RM9,000 currently could be increased to RM12,000 to help taxpayers to cope with the rising cost of living.
Prop up property sector
Recognising that a vibrant property market is vital to our economy as it creates multiplier benefits for many other business sectors such as construction, architectural, financial, manufacturing and legal services, measures should be taken to avoid any hard landing of our property market.
In Hong Kong, tax deduction is given on home mortgage interest payments of up to HK$100,000 annually against employment income for 15 years and first time home buyers would enjoy full stamp duty exemption which is normally levied at 1.5% to 8.5%. China has provided capital tax exemption for properties held more than two years which would otherwise be taxed at 20%. The Australian government provided the first home owners grant of A$7,000 to A$12,500 with the purpose of offsetting the impact of GST.
To assist the first time home buyers, our Government should re-instate the Developer’s Interest Bearing Scheme (DIBS)and re-introduce the 50% stamp duty exemption given for the purchase of house not more than RM400,000 which had expired in 2014.
More funds should be allocated to Private Affordable Ownership Housing Scheme (MyHome) which was introduced in 2014 where a subsidy of RM30,000 is given for each unit built by the developers participating in the scheme with a total allocation of RM300mil.
Deduction of housing loan interest expense against employment income of RM10,000 per annum for up to three years should be reintroduced.
The authorities have been contemplating to increase to stamp duty rate from the 1%-3% to 1%-4% for transfer of property and to bring forward the timing of payment to within 30 days from date of execution of purchase agreement instead of the date execution of instrument of transfer. In view of the present market condition, it is hoped that this proposal will be deferred.
Amid a series of uninspiring developments in the economic and political landscapes, the nation eagerly awaits novel and bold measures to be tabled in the Budget 2016 to lift our country’s aspiration towards achieving a high income nation by 2020.
Yee Wing Peng is the country tax leader of Deloitte Malaysia. The view expressed above is solely his.