The 2020 Economic Stimulus Package – Tackling the impact of COVID-19

The 2020 Economic Stimulus Package unveiled today introduces measures to mitigate the impact of COVID-19, encourage domestic economic growth and promote quality investments.

To cushion the economic impact of COVID-19, various measures were proposed to help alleviate cashflow pressures on affected businesses, particularly in the tourism sector. These measures include deferment of tax instalments (for a six-month period), allowing companies to revise their tax estimates early, exemption from the Human Resource Development Fund (HRDF) levy, and exempting hotels from service tax. Financing assistance comes in the form of a RM2 billion Special Relief facility by Bank Negara for SMEs at a 3.75 percent interest rate. Banks have been asked to be flexible with respect to loan restructuring or rescheduling during this difficult period. A one-off amount of RM600 will be given to individuals whose livelihood is reliant on tourism, such as taxi drivers and tour guides.

These measures should provide some relief to businesses and individuals who are bearing the brunt of the disruption and challenges caused by COVID-19. It is also acknowledged that many of our fellow citizens are working tirelessly to keep Malaysians safe from this terrible outbreak. As such, special allowances will be given to medical personnel and immigration staff.

Various measures have been introduced to boost local consumption and stimulate domestic tourism, including personal tax relief and vouchers for domestic tourism.

Amarjeet Singh, EY Asean and Malaysia Tax Leader

The proposed reduction of 4 percentage points in EPF contribution by employees from April to December 2020 is a major move, as it could potentially unlock up to RM10 billion to shore up domestic consumption, whilst not adding additional pressure on the budget deficit.

The Stimulus Package reiterates and accelerates certain earlier commitments aimed at attracting and encouraging quality investments in Malaysia, including accelerating projects such as the 1400MW solar power generation bids, which are expected to generate 25,000 new jobs and RM5 billion in private investments. The RM3 billion National Fiberisation and Connectivity Plan (NCFP) will also be implemented.

To spur private investments, loans / financing facilities have been proposed, together with tax incentives such as accelerated capital allowances for machinery and equipment including ICT assets, tax deduction of up to RM300,000 on renovation and refurbishment costs, and import duty and sales tax exemptions on machinery and equipment used in port operations.

Compared to the stimulus packages announced by other countries, Malaysia’s RM20 billion package is sizeable. Singapore’s stimulus package totaled USD4.6 billion, whilst Indonesia unveiled a package of around USD742 million.

During the global financial crisis in 2009, Malaysia unveiled a stimulus package of approximately RM60 billion (over 2 years). At that time, the budget deficit increased from 4.8 percent to 7.6 percent. In comparison, the 2020 Stimulus Package is expected to increase the fiscal deficit by only 0.2 percentage point, to 3.4 percent.

Notably, the measures are not mainly reliant on Government spending. Private sector investments and expenditure by GLCs such as Tenaga Nasional Bhd will play a big part. The increased spending arising from additional disposable income of individuals, particularly from the reduced EPF contribution, is also expected to boost economic activity. Whilst there will be a reduction in income tax and service tax collections, the introduction of the digital service tax and improvement in tax enforcement will hopefully help to close the gap.

It is hoped that the bold, targeted and timely measures proposed today will provide a much-needed boost to the economy in these challenging times.

Comments by Amarjeet Singh, EY Asean and Malaysia Tax Leader

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