This article first appeared in The Edge Malaysia Weekly on February 27, 2023 - March 5, 2023

AFTER 26 years, Datuk Seri Anwar Ibrahim returned to the Dewan Rakyat to table the federal government’s budget, after last doing so back in 1997 when he was deputy prime minister and finance minister.

Since then, much has happened to the country and to the man himself. His turn as the 10th prime minister as well as the finance minister of Malaysia comes at a time when the country is beset with a plethora of challenges and structural issues. (Although some may argue that the situation was not that different in 1997.)

However, Anwar seems focused on his mission to address the challenges faced by the man in the street, rather than the big corporations of the country. While there are similarities and the broad measures are more or less the same as the one tabled last October, one can’t help but feel that the thinking behind it is different.

“I think the prime minister hits the critical points of addressing poverty issues, vulnerable members of society, and how we should devise strategies that the wealth pie can actually be equally distributed,” says Dr Zokhri Idris, CEO of Policy and Economic Affairs Centre of Malaysia Foundation (PEACE).

Anwar started the budget announcement by saying that the budget needed to address two main factors — transparency, honesty and accountability in saving and spending, as well as responsiveness to address the people’s needs.

“In this crisis [that the world economy is going to be growing much slower than last year], the question that must be addressed is the number of people who are living in poverty. Are the funds being channelled in a transparent manner to avoid leakages and wastages?

“Responsiveness based on understanding the needs of the people — how do we act in a responsive, smart and cautious manner in managing the budget of the country,” he said when presenting the revised budget for the government’s spending this year.

Budget 2023 is the largest on record, with a total allocation of RM388.1 billion, of which RM289.1 billion is tapped for operating expenditure and RM99 billion for development expenditure, including a RM2 billion allocation for contingency savings.

In contrast, the preliminary development expenditure for 2022 amounted to RM71.6 billion (versus a budgeted RM75.6 billion). The higher development expenditure will be focused on poverty eradication programmes, improving public infrastructure, as well as rural facilities, said Anwar.

The budget will be funded by RM291.5 billion of revenue and the rest by debt, for a projected fiscal deficit of 5% of the country’s gross domestic product (GDP). The fiscal deficit is expected to decline to 3.2% in 2025. The revenue assumption is only less than 1% lower than the revenue of RM294.4 billion (budgeted RM234 billion) in 2022.

“Overall, Budget 2023 was the most comprehensive one addressing all segments of society. The commitment to narrow the fiscal deficit in 2023 is necessary and what we hope to see in the next budget are clear strategies to repurpose Malaysia’s attractiveness as an investment destination based on our comparative advantage,” says Veerinderjeet Singh, non-executive chairman of Tricor Malaysia.

But with the global economy expected to slow this year, is it rational for the government to assume that revenue will only be 1% lower from the previous year? Lee Heng Guie, executive director of the Socio-Economic Research Centre (SERC), doubts it.

“I doubt that revenue will only decline by less than 1%. The tax restructuring measures that were introduced come to a net revenue loss of RM753 million, based on our calculations. Where will the rest of the revenue come from?

“If the government is going to depend on Petronas’ dividends, that depends on the oil price,” he says, adding that if the decline in revenue is much higher than projected in the budget, the government will not be able to meet the 5% fiscal deficit target.

Nevertheless, Anwar said in his speech that new borrowings must be lower than before, and the funds raised through debt should only be used for programmes that will have a direct impact on the people.

The government will also table the Fiscal Responsibility Act this year, he added.

Concern over tax restructuring

To be clear, the budget also introduced new taxes aimed at those with higher incomes than the majority of the population. Meanwhile, middle-income earners will benefit from lower taxes.

In the budget, the government proposed a Luxury Goods Tax (LGT) starting this year, and said it would be studying a Capital Gains Tax (CGT), to be implemented next year. The CGT will be imposed on gains arising from the disposal of shares in private companies.

On this, Wong Muh Rong, founder and managing director of Astramina Advisory Sdn Bhd, says the introduction of CGT on unlisted entities will encourage more companies to list on Bursa Malaysia.

“But it needs clarity whether divestments of unlisted shares within a listed entity group will also attract capital gains [tax]. The public or capital market at large will need more clarity on this and it is best to wait for the details,” says Wong.

Farah Rosley, Malaysia tax leader at Ernst & Young Tax Consultants Sdn Bhd, says the proposed CGT is a fundamental departure from the current Malaysian tax framework where capital gains are not taxed except by way of the Real Property Gains Tax (RPGT).

“While this may increase future revenue collections, the projected benefits will need to be balanced with the impact on Malaysia’s attractiveness as an investment destination,” says Farah in a statement.

She adds that a CGT of this nature may discourage group restructuring exercises, which are typically undertaken to streamline group structures and to bring about efficiencies.

“It is encouraging that the government has indicated that it will hold consultation sessions with the relevant stakeholders to study this proposal in greater detail. We hope this consultation will be robust and the feedback will be considered prior to any implementation decisions being made,” she says.

Veerinderjeet says the fact that an LGT and the possibility of a limited form of CGT have been announced does signal that the tax structure is being reformed and that future budgets may have more measures included. “The Goods and Services Tax also has not been fully discounted as well and this could well see some development in a year or so,” he adds.

In the proposal to increase the income tax rate of higher-income earners, starting from the year of assessment 2023, those in the chargeable income bracket of more than RM100,000 a year to RM1 million will be charged a higher income tax rate, by between 0.5 and two percentage points.

Again, SERC’s Lee is concerned that the increase in income tax rate on the highest income earners could lead to a brain drain as this group comprises the professionals and talents that the country needs.

“And if they decided to migrate because the tax rate is just too high, that would be a loss to the country. The highest income bracket is now taxed at 30% of their annual income. Just next door, Singapore is taxing 15%,” he points out.

Nevertheless, PEACE’s Zokhri opines that just because high-income earners are being taxed more, it will not necessarily lead to them migrating.

“I don’t think that will be a good calculation [for high-income earners]. The priority right now is that the wealth needs to be distributed. The T20, or the privileged ones, have been enjoying the privileges of living in this country all this while,” he says.

“At the same time, the government is giving more incentives to increase the competitiveness of local industries and attracting higher-quality foreign direct investments, which will end up benefiting high-income earners through better job creation and higher income.”

Meanwhile, those with taxable incomes of between RM35,000 and RM100,000 will see their income tax rate reduced by two percentage points. According to Anwar, this will lead to disposable income of up to RM1,300 for about 2.4 million taxpayers.

As a stop-gap measure, the government has restarted the special voluntary disclosure programme (SVDP), which the previous Pakatan Harapan government introduced in 2018. There will be no penalty on disclosures made between June 1, 2023, and May 31, 2024.

According to Soh Lian Seng, head of tax at KPMG in Malaysia, the reintroduction of the programme is a smart move as a means of collecting additional tax revenue. He adds that the programme could net the government more than RM10 billion in tax revenue.

“A total of 286,482 taxpayers participated in SVDP 1.0, bringing in an additional RM7.877 billion in taxes for the government’s coffers at that time. With SVDP 2.0 providing a full penalty waiver to voluntary participants [compared to a 15% to 30% penalty in SVDP 1.0], the take-up rate should far exceed that of SVDP 1.0, and we can expect SVDP 2.0 to collect more than RM10 billion,” says Soh.

He adds that this is conditional on the full mechanism yet to be revealed. For example, will participants of SVDP 2.0 reap the same benefits, whereby the Inland Revenue Board will not carry out audits and investigations into their companies for the years involved?

The budget cannot be said to be for the people if it doesn’t address the need to revive the economy. On this, the government is committed to improving the country’s ease of doing business, as well as continuing with proposed infrastructure projects.

At the same time, it is reforming the incentives that are offered to foreign direct investments. This is based on the findings of Bank Negara Malaysia, which showed that the benefits from FDIs are shrinking due to the availability of high incentives as well as low value-added investments.

On this, Anwar said, “Investment incentives will be restructured towards tiered tax rates, based on whether the investments are creating high-value jobs, deepening the industries’ value chains with local firms, as well as creating new industrial clusters.”

The government will also strengthen the monitoring of investments that receive incentives to ensure that the benefits are gained by the country and its people.

Despite relooking at the incentives being offered to FDIs, the government has proposed several improvements on the incentives. For example, for manufacturing companies in the electrical and electronics sector as well as the aerospace manufacturing sector, the government will extend the tax incentives offered to those that relocate their operations to Malaysia, as well as a 15% income tax rate on the C-suite until 2024. Specifically for the aerospace industry, the government will extend the corporate income tax as well as investment tax allowance until Dec 31, 2025.

MIDF Research says the efforts to increase high-impact investments and FDI via various incentives such as relocation incentives to attract affected electrical and electronics sector investors and incentives for the aerospace industry are commendable. “Measures focusing on science, technology and innovation can be seen as necessary to ensure Malaysia’s economy remains competitive,” says the research firm.

Budget 2023 could be seen as setting the tone of the unity government on what it considers important for the country. While the budgetary measures can be construed as having the same intentions as the previous budgets, a statement on the redistribution of wealth made by the PM resonates the most.

“Considering the income and the wealth of the country that are concentrated in the upper class or super-rich elites, it is rational for the distribution of the country’s revenue to focus on those in the low- and middle-income groups,” Anwar said.

However, Veerindeerjeet says that what is lacking in this budget is a clear roadmap on the tax reform framework that the Ministry of Finance is considering, as well as the lack of any announcement on the reform of the tax incentive framework that had been alluded to in the past three budgets.

“We also hope that all the allocations or funds announced will have clear guidelines, simpler rules and actually end up in the businesses that really need them so that there will be a positive contribution to the economy,” he adds.

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