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Thursday, October 24, 2013

Tax expectations in Budget 2014

First Published: 3:08pm, Oct 23, 2013
Last Updated: 3:15pm, Oct 23, 2013
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BUDGET 2014 is themed "Fulfilling promises, accelerating transformation". With much support from the electorate in rural areas in the May general election, the government has been given the mandate to fulfil its promises and transform the country into a high-income nation.

Among others, it has committed to increase BR1M to RM1,200 per household, reduce car prices by 20% to 30%, build one million affordable homes and abolish the stamping fee for the first home below RM400,000. Meanwhile, our tax system has to be reformed to generate more revenue to help the needy without jeopardising the country's competitiveness. 

Some of our major tax expectations are:

Introduction of a broad-based tax system

In the aftermath of Singapore's general election in May 2011 where the ruling party's popular votes were reduced to an all-time low of 60.14%, the PAP government, in attempting to regain support, boosted social spending to include affordable housing, pre-school education and nursing homes.

Its Prime Minister Lee Hsien Loong commented that tax rates would have to be raised in the next two decades to fund the additional spending. Whilst Singapore has room to raise taxes because its corporate tax and personal tax rates of 17% and 20% respectively are among the lowest in the world, Malaysia's relatively high tax regime of 25% for corporate tax and 26% for personal tax has little upward potential.

Having only 6% of the population paying income tax does not speak well of Malaysia. While it is true that lower income people should be materially tax-free, consumption taxes provide a means to help spread the tax burden more equitably.

The government has committed to reform the tax structure towards a more broad-based tax system. The Goods and Services Tax (GST) is expected to be introduced soon and be effectively implemented within the first two years of this fresh five-year term, by 2015. Based on some simulations, if GST is set at 7%, it may generate RM25.7 billion in the first two years of implementation or slightly more than 10% of the government total expenditure this year of RM250 billion.

Gradual reduction of income tax rates

The introduction of GST should be accompanied by a gradual reduction of personal and corporate tax to 20% over three to five years. Such reductions are necessary as individuals will pay more tax as they spend.

Further, Malaysia's personal and corporate tax rates are currently no longer as competitive as they once were. It should be noted that the cash-strapped UK has set out a road map to reduce the corporate tax rate from 28% this year to 20% by 2015 in order to be the lowest tax regime in the Western world in its effort to woo investment. This bold corporate tax cut is made possible by its broad-based tax system which includes the high consumption tax in the form of VAT of 20%.

Interestingly, a reduction in income tax rates often leads to increased tax revenue as people generally are more inclined to operate in a lower tax regime and become more compliant by channelling their energy towards generating income instead of tax mitigation. A lower cost of doing business will spur business growth and expand the tax base correspondingly. As evidenced by the UK, 30 years of tax cuts from a high of above 50% has not put a dent in its corporate tax collections.

Closing the tax gap

The tax gap is the difference between taxes collected and taxes that should be collected. This is mainly due to under-reporting or non-reporting of taxes. 

Malaysia's tax gap is an estimated 20%. This is rather high compared with the UK's 6.7% in 2011. Narrowing the gap is another means of boosting revenue. Based on the direct tax revenue collection of RM129 billion in 2012, every one percentage drop in the tax gap would give rise to an additional tax revenue of RM1.29 billion. 

It is expected that the efforts of the Inland Revenue Board and the Royal Customs Department will be intensified to widen tax audits and investigation coverage. This will include collaboration with other government agencies and private organisations. In addition, the tax base will be enhanced by registering new taxpayers and further easing the submission of returns and tax payments.

Creating more higher income earners

The government has also committed to attract RM1.3 trillion worth of investments and create 3.3 million new jobs, of which two million would be in the high income sector. This goal within the next five years is part of its initiative to achieve a per capita income of US$15,000 by 2020. 

On the part of the corporate world, investors, especially foreign ones, generally favour continuity and stability in the investee country's government and policies. The outcome of the general election has eliminated this uncertainty.

Several states may see intensified investments through the award of tax incentives. Johor will no doubt be one of the states that will benefit, given the interest in the Iskandar region, considerably spurred by the improved relationship between Singapore and Malaysia. The development of the RM60 billion RAPID petroleum hub in the strategically located Pengerang, Johor, will be another major contributor.

The Sarawak Corridor of Renewable Energy is an attractive area for investors, especially those that use much energy. Seeing the interest Samalaju Industrial Park is receiving, Sarawak is set to score big. 

Sabah should also benefit from the economic transformation with the Sabah Development Corridor. The building of the 2,300km Pan Borneo Highway will improve connectivity and promote development like eco-tourism. The Northern Corridor, which includes Kedah, can also expect more investments in the tourism and agriculture sectors.

Following the introduction of new tax rules to incentivise investment such as tax exemptions for marginal oil field operators, the oil and gas sector will see significant investment by both local and foreign investors. Petronas has planned a RM300 billion capital expenditure over the next five years. The oil and gas sector is the largest of the 12 National Key Economic Areas (NKEAs). 

In addition, InvestKL, an agency that aggressively promotes the setting up of command centres in the greater Kuala Lumpur NKEA, seeks to secure such investments from Fortune 500 companies. Typically, regional principal companies hire scores of top personnel. A much larger group of higher income earners would contribute meaningfully to the tax revenue pool.

Competitive tax incentives are vital to attracting investment. Knowing this, our present tax incentive framework should be further sharpened and enhanced to attract higher value-added activities in the 12 NKEAs, while dated incentives given to low value-added labour intensive activities should be removed. 

Yee Wing Peng is country tax leader of Deloitte Malaysia.

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