A three-phased approach to Budget 2021: The now, next and beyond

By EY Tax Leaders,

In response to the Covid-19 pandemic, the Malaysian Government has announced stimulus packages of more than RM300 billion to date. We are not alone. Governments across the globe view stimulus packages as necessary to protect livelihoods and save lives in the face of the pandemic. Some reports indicate that US$17 trillion of stimulus packages have been announced by Governments globally. This equals to a whopping 20 percent of global GDP.  

We expect Budget 2021 will continue to roll out stimulus measures focused on addressing the now – the key issues of saving lives and livelihoods in the short term, and positioning ourselves for the next – the recovery in the medium and longer term.   

It will be a tough Budget, as it has to balance taking care of the rakyat, especially the vulnerable, creating and protecting jobs and livelihoods, paving the way for sustainable growth and positioning us to be nimble to seize and realize opportunities during the recovery phase. At the same time, we are looking at a 5.8 percent to 6 percent budget deficit and debt levels above the statutory limit of 60 percent.

Hence, we also expect some immediate measures to increase the tax revenue of the country, including changes to existing tax provisions to broaden the tax base and tighten  gaps .

In the meantime, Malaysia needs to continue to be attractive to investors. ASEAN is expected to be the world’s fourth largest economy by 2030 and Malaysia needs to secure her fair share of the investment pie. We therefore expect some measures, including fiscal and non-fiscal incentives, to continue to help attract targeted FDIs.

Beyond the Covid-19 pandemic and Budget 2021, Malaysia needs a comprehensive reform of her tax framework if we want to be in a better fiscal position – one that is balanced in achieving revenue growth whilst encouraging economic growth, and also, alleviates the challenges or burden on those requiring our support, the B40. There is no short cut in tax policy formulation.

In isolation, changes introduced in an annual national Budget will not be comprehensive enough. The Government needs to look at these together with the country’s economic agenda and its focus on the engines of growth, in order to formulate holistic tax reform based on the above overarching goals. There is also need for more consultation and engagement with stakeholders, particularly businesses and foreign investors.

Sales and Service Tax (SST)

In the past two years, there have been several legislative updates and developments in the SST regime, which were effected to expand its scope, resolve ambiguities and administrative difficulties, and mitigate the tax cascading effect that drives up the cost of doing business. Given the adverse economic impact of the Covid-19 pandemic, among other reasons, the Government aims to broaden its revenue base to help stimulate the economy. The SST regime, in its current limited scope, may not offer the desired level of contribution to Government revenue.

Re-introducing the Goods and Services Tax is still an option to be assessed, but appropriate timing and the ensuing consequences need careful consideration. The Government may further widen the scope of the SST instead – probably  introducing new types or categories of taxable goods and services – to obtain  higher tax collection without the need to implement a different indirect tax regime.

Alongside widening the SST scope, the Government may consider introducing an input tax mechanism or a credit system into the SST regime, especially for Service Tax, in order to:

  • Further counter the tax cascading effect;
  • Encourage businesses to register for SST, resulting in increased tax collections as well as indirectly managing the shadow economy; and
  • Ease the administrative burden of businesses,  as compared to a situation where businesses seek to utilize various SST facilities 

Personal tax

With the negative impact of Covid-19 on the Malaysian labour market, the Government should consider providing temporary tax breaks to individual taxpayers who have suffered salary reductions or job losses. These could be in the form of tax rebates designed specifically to cater to the impacted individual taxpayers.

Even if the individual taxpayers may have been re-employed during the year, the income lost during the months of unemployment would have had a significant financial impact. Such a tax proposal would provide additional cashflow support to manage the needs of the impacted individual taxpayers and help them weather the impact of income loss during this crisis.

In addition, the Government should consider broadening and reducing the number of income tax bands. A broader income tax band provides individual taxpayers with incentive to improve their earning capabilities, as they would be able to keep a larger proportion of their increased wages, which would  inevitably lead to increases in the individual taxpayers’ consumption of goods and services.

Small and Medium-sized Enterprises (SMEs)

The SME sector continues to be the backbone of Malaysia’s economy. The Covid-19 pandemic has forced SMEs to change their business strategies, operations and conduct, as well as to search for new sources and opportunities for business.

Whilst SMEs recognize that technology, digital platforms and online trading infrastructure are crucial to survive their challenges, their workforce also needs to be upskilled. During these difficult times, SMEs may also be looking to divest their non-core assets or investments in order to finance their business operations and survive. 

As part of Budget 2021, the Government could consider supporting the SME sector in the following manner:

  • Provide an Investment Tax Allowance on targeted capital expenditure to encourage SMEs to invest in improvements and improvisation to their business operations
  • Allocate funds by Development Financial Institutions to SMEs to invest in technology, digital platforms and online trading infrastructure
  • Provide double deduction on training expenditure to reskill or upskill  employees
  • Extend the exemption from Real Property Gains Tax (RPGT) to SMEs disposing real properties during the Covid-19 pandemic period (this exemption is currently only available to individuals)
  • Provide tax deduction on costs incurred by SMEs in rescheduling and restructuring their existing financing arrangements and in undertaking internal group restructuring, including mergers and acquisitions
  • Provide stamp duty and RPGT exemptions to SMEs undertaking restructuring or participating in any mergers and acquisitions during the Covid-19 pandemic period
  • Extend the recently introduced seven-year limitation for the carry-forward of business losses, reinvestment allowance and investment allowance

Retail sector

For the first half of 2020, Malaysia’s retail sector experienced the most drastic decline in sales in decades, with a 20 percent year-on-year contraction. With a moderate recovery underway  in the second half, it is expected that full-year performance for 2020 will show a decline in sales of around 9% compared to a year ago.

The Government’s stimulus measures, including the six months loan moratorium and Prihatin B40 and M40 cash aid, for example, have supported consumption spending and helped cushion the impact of the pandemic on the industry. However, the timeline for the recovery of the industry remains uncertain, due largely to its dependency on tourists. The latest round of the Conditional Movement Control Order (CMCO) in certain parts of the country is an added headwind to the recovery trajectory. 

Retailers continue to face mounting challenges in managing cashflow, with both weakness in demand and the burden of expenses such as salaries/wages, rents and interest/loan repayments. Government assistance in the form of a wage subsidy program, offering of discounts on electricity bills, fiscal incentives given to encourage landlords to reduce rents and loan moratoriums for SMEs, for example, have helped to provide much needed financial support to businesses, and some of these initiatives should be continued into 2021.

Some of the Government’s stimulus measures such as the wage subsidy program and Prihatin cash aid have recently been extended for another round. Although this is a positive move and will provide additional support to the retail sector in the near term, additional fiscal measures may be needed to bolster the spending power of consumers, for example, lowering personal income tax rates or extending the lower rate of employee EPF contribution of 7%, into 2021.

The adoption of digital sales channels or e-commerce to boost sales has been an important strategy for many traditional retailers. The Government has supported the growth of e-commerce for retailers through various initiatives, including the recent “Shop Malaysia Online” program and the Penjana e-commerce initiative for SMEs through MDEC. These initiatives should be continued, enhanced and extended to non-SMEs to further support the industry in 2021.   

Real estate sector

The real estate sector remains sluggish with high numbers of unsold properties, softening demand and rising unaffordability amongst Malaysians, and this outlook may continue for a longer period with the prolonged COVID-19 pandemic. The Government continues to focus on the demand side of the equation by providing affordable homes to the low-income group (B40 group), introducing several measures to ease financing for home buyers including the Rent-To-Own financing scheme, Home Ownership Campaign and Youth Housing Scheme. To further mitigate the property overhang issue, the threshold for foreign ownership of condominiums or apartments in urban areas has been reduced from RM1 million to RM600,000.

To stimulate the real property sector, the Short-term Economic Recovery Plan was unveiled on 5 June 2020 and further tax reliefs such as Real Property Gains Tax (“RPGT”) and stamp duty exemptions were granted to encourage real property transactions. However, buyers and investors remain cautious in making purchases.

Despite low interest rates and other efforts, many young B40 and M40 groups find home ownership in cities beyond their reach. Therefore, the Government should continue with measures targeting these specific groups, e.g.:

  • Extending the period of stamp duty exemption on the purchase of a residential property under the Home Ownership Campaign without a cap on property price;
  • Re-introducing the personal relief on housing loan interest for a period of three (3) consecutive years starting from the year of assessment 2020 to encourage the younger generation to own a home in Malaysia; and
  • Providing double tax deduction on housing loan interest subsidized by employers to encourage private sector participation and increase property demand

To further ease the overhang of properties and assist troubled property development companies, the Government may also consider tax reliefs for companies to rationalize through corporate mergers or demergers. There is a pressing need for the Government to consider the above recommendations and at the same time, look into supply side measures for a holistic long-term solution for the property sector.

Oil and gas sector

The oil and gas industry is in a state of significant uncertainty. Just as the industry was adjusting to falling oil prices, the pandemic decimated demand, sending prices plummeting again. As the industry begins to show tentative signs of recovery, Budget 2021 provides an opportunity for the Government to provide some much-needed support, possibly in the following areas:

  • Increasing liquidity and continuing with planned projects 

Industry liquidity and capex spend have significantly declined. On 30 April 2020, the Norwegian Government proposed unique tax measures aimed at the oil and gas industry. These measures have been viewed positively by industry players and rating agencies and should be considered by other countries. The proposals include 100% tax depreciation in 2020 and 2021 (potentially extending to 2023 in certain cases) and cash payments equal to the tax value of losses in 2020 and 2021.

  • Digitalization

90% of oil and gas executives that participated in the EY Digital Transformation and  Workforce Survey in June 2020, either agreed or strongly agreed that their companies need to invest in technology and the workforce, though investment levels varied. A strong digital backbone makes it possible for companies to reduce costs and errors, ensure that tax benefits are maximized, and improve compliance and record-keeping at a time when tax authorities will be increasingly aggressive.

  • Mergers and acquisitions

To survive, small and medium-sized players will seek to consolidate. As assets come on the market, tax breaks may help attract high-quality international buyers or spur local players to make acquisitions, which could be a springboard to future growth. The tax breaks could range from stamp duty and real property gains tax exemptions to unique benefits such as a double deduction on interest expenses on loans taken to fund acquisitions or mergers.

Tax administration

In Budget 2021, we expect that the current tax framework, which is focused on simplifying and enhancing tax administration, will continue to be strengthened. This will include tax administration measures which support greater clarity and transparency, vital for businesses to plan, operate and continue to recover and grow during these uncertain times.

Administering the tax system in a fair and impartial manner and demonstrating an appreciation of industry issues is crucial, to promote greater compliance. Appropriate resources, buy-in from stakeholders, nature of tax policy and legislation enforced, as well as state-of-the-art IT systems are all important to ensure the tax authorities will be able to exercise good judgment and autonomy to perform their functions and at the same time, support taxpayers.

The need to keep up-to-date with fast-paced, voluminous information and data means tax administrations should have the necessary technology and support to provide quick responses and better access. For example, the Standard Audit File for Tax (SAF-T) requirements from the Organisation for Economic Co-operation and Development (OECD) have been gaining traction in Europe as they provide certainty on information required for tax purposes. This will also improve consistency in managing tax audits.

Tax authorities should support businesses during this challenging time by focusing on serious cases of tax evasion and fraud rather than on conducting general tax audits that create pressure on taxpayers. Tax administrations should channel necessary resources towards coming down hard on errant taxpayers and allowing compliant taxpayers to continue focusing on their business.

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