The State of the Nation: Making sure Cukai Makmur is worth the (negative) surprise

This article first appeared in The Edge Malaysia Weekly, on November 8, 2021 - November 14, 2021.
Johan assures that the government only intends Cukai Makmur to be a one-off tax. (Photo by Patrick Goh/The Edge)

Johan assures that the government only intends Cukai Makmur to be a one-off tax. (Photo by Patrick Goh/The Edge)

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WHATEVER one thinks of the one-off prosperity tax (Cukai Makmur), policymakers must now make sure that the move is worth the surprise it sprang on large companies that are already paying taxes here. After all, the small pool of about 250 companies with more than RM100 million taxable profits that will be paying the higher rate of 33% for every ringgit above that threshold for the year of assessment 2022 are likely to also be significant dividend payers, employers and investors in the local economy.

“It definitely hits sentiment [knee-jerk or otherwise], since [Cukai Makmur] was a surprise. How much investments will be impacted remains to be seen, given that good companies would continue to invest to build up their competitive advantage. Tax benefits are more of [a bonus] and really exist more to nudge those who are still contemplating and slower adapters to go where policymakers want,” a seasoned economist tells The Edge.

He reckons that the impact on consumption “could vary, depending on the actual size of the additional tax” to be collected and how the companies react.

The government expects to collect “at least RM3 billion” of Cukai Makmur, Deputy Finance Minister II Yamani Hafez Musa said in parliament on Nov 2. Economists at Maybank Investment Bank Bhd estimate the haul for Cukai Makmur plus taxes on residents’ foreign-sourced income at just above RM5 billion, citing guidance on the impact of Budget 2022 measures appended in the Ministry of Finance’s Federal Government Revenue Estimates.

Rakuten Trade Sdn Bhd head of research Kenny Yee’s estimate is RM8.5 billion from at least 120 companies while experts at Affin Hwang Capital reportedly see an additional haul of as much as RM9.5 billion with 85 of the 118 companies under its coverage potentially being affected.

The estimated additional taxes of RM3 billion to RM10 billion would represent a 6% to 20% boost to the RM50 billion in corporate income tax collected in pandemic-hit 2020 and a roughly 5% to 15% boost to the RM63.75 billion collected in 2019 and RM65.5 billion estimated for 2022.

Against the federal government’s estimated revenue haul of RM234 billion, however, an additional RM3 billion to RM10 billion one-off tax haul only represents a 1.3% to 4.3% difference.

If the additional haul from the prosperity tax is closer to RM3 billion, wouldn’t the feel-good factor in Budget 2022 have been more widespread if the government chose to tap its own “savings” at institutions like the National Trust Fund (KWAN) or Retirement Fund Inc (KWAP) instead? Could Bank Negara Malaysia, Khazanah Nasional Bhd, KWAP and KWAN each not have given a bit extra?

It is after all unlikely that government-linked institutions have been pressed for dividends so much that they cannot pony up the amount the one-off tax would bring.

Petroliam Nasional Bhd (Petronas), which is currently benefitting from higher oil as well as natural gas prices, for instance, had been asked for RM7 billion more in dividend this year after giving an extra RM10 billion in 2020 and a RM30 billion special dividend in 2019. KWAP, which is being tapped for RM5 billion in 2021 and 2022 to help pay civil servants’ retirement charges, also has the capacity to do more.

Are 2022 revenue estimates really overly optimistic, as some critics speculate, that policymakers have chosen to tap their own institutions later should the need arise? These are among the questions that have been asked following the surprise sprung by Budget 2022 on Oct 29.

Not everyone is against Cukai Makmur. Tony Pua, DAP member of parliament for Damansara, told participants at UOB KayHian’s post-Budget 2022 roundtable on Nov 2 that the government came up with “a rather creative prosperity tax” instead of a windfall tax that may be seen to discriminate against specific sectors. “The [prosperity tax] is the only choice the government actually has without stepping on too many toes,” says Pua, who is against reimplementing the Goods and Services Tax (GST).

Datuk Johan Mahmood Merican, director of the National Budget Office at the Ministry of Finance, mentioned policymakers’ hope of there being “a sense of corporate citizenry [coming] into play [during] this time of need” when asked for an estimate of the tax haul during BFM’s Breakfast Grille. Since the targeted corporate taxpayers have a track record with the Inland Revenue Board (IRB), he told BFM that these companies would likely not be “too creative” when asked about the tendency to appear less prosperous in 2022. He also assured that the government only intends Cukai Makmur to be a one-off tax.

Doubts may well linger on for as long as the government’s debt pile remains high and its revenue growth continues to be far slower than its expenditure and many annual “fixed” commitments. If nothing else, there has to be more revenue for the government to provide aid to all that need them using the new poverty line income.

“It’s not rocket science. Either revenue goes up or expenditure comes down … let’s see when targeted subsidies can happen,” another observer says, hoping to be proven wrong on there not being political will to make tough but necessary strategic changes.

“This time they went with ‘paksa rela’ (forced willingness) rather than the patriotism-cum-philanthropy route with those so-called war bonds,” he adds, referring to the RM500 million digital Sukuk Prihatin launched in August 2020 by the previous administration, where investors can choose to donate the principal amount to the government for tax exemption.

“Having the right incentives to encourage investments in the economy in the right places and rewarding employers that willingly pay higher salaries and bonuses to their employees would boost both domestic investment as well as consumption. That would have made Budget 2022 really great.”

 

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