Budget 2021 – strategies for now, next and beyond

EY Tax leaders disclose their expectations and proposals regarding Budget 2021, which is scheduled to be tabled in Parliament on Friday

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

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 (RM70.6 trillion) of stimulus packages have been announced by governments globally. This equals to a whopping 20% of global gross domestic product.

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% to 6% budget deficit and debt levels above the statutory limit of 60%.

Thus, 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 its fair share of the investment pie. We therefore expect some measures, including fiscal and non-fiscal incentives, to continue to help attract targeted foreign direct investmets.

Beyond the Covid-19 pandemic and Budget 2021, Malaysia needs a comprehensive reform of its tax framework if we want to be in a better fiscal position – one that is balanced in achieving revenue growth while encouraging economic growth and also alleviates the challenges or burden on those requiring 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.

Reintroducing 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:

1. Further counter the tax cascading effect;

2. Encourage businesses to register for SST, resulting in increased tax collections as well as indirectly managing the shadow economy; and

3. Ease the administrative burden of businesses, as compared to a situation where businesses seek to utilise 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 pandemic has forced SMEs to change their business strategies, operations and conduct, as well as to search for new sources and opportunities for business.

While SMEs recognise 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 of real properties during the 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 pandemic period;

► Extend the recently introduced seven-year limitation for the carry-forward of business losses, reinvestment allowance and investment allowance.

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 iinclude 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 requirements from the Organisation for Economic Cooperation and Development 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.