BRACING FOR NEW TAXES

They may worsen stock decline and stifle growth, say asset managers

MALAYSIA is keeping investors guessing as to what new taxes will be unveiled in next year’s budget. For now, the market is bracing for the worst: capital gains and consumption taxes.

Levies on returns from capital investments may worsen stock declines.

The benchmark equity index has not recovered from last week’s steepest plunge in four months, after Prime Minister Tun Dr Mahathir Mohamad announced the tax plans.

A consumption levy may further constrain economic growth that had eased to the slowest pace in more than a year.

“Taxes will definitely be introduced especially on the rich and on consumption,” said Fortress Capital Asset Management Sdn Bhd director Geoffrey Ng.

Capital gains tax was “definitely a widespread worry among investors, but it was unlikely as most markets in Southeast Asia did not have such taxes”, he said.

Investors had not fully priced in any form of taxes, so volatility could increase in the market, said Ng.

Clarity may only come on November 2 when Finance Minister Lim Guan Eng is set to reveal his plan to shore up state revenue in the 2019 Budget.

Malaysia is seeking new sources of income as it grapples with filling in the gap left by the replacement of a sweeping consumer tax with a more targeted levy. The government is also saddled with debt exceeding RM1 trillion. Slowing economic growth is limiting the country’s options.

The central bank lowered its forecast this year to about five per cent, from 5.9 per cent last year, after expansion slowed to 4.5 per cent in the second quarter.

Thorough feasibility studies on a capital gains tax were necessary given the “massive impact” it might have on financial markets, said BNP Paribas Asset Management fund manager Cynthia Lum.

“With increased government’s focus on digitisation, it will not be surprising to see new taxes introduced in the digital and e-commerce sectors.”

Investors, who are also expecting levies on inheritance, may have some time to decide on what to do with their assets.

The government might only introduce taxes on capital gains and bequests over the next few years if they were found to be feasible, said media reports.

A levy on capital gains “might make Malaysia less attractive and investors would then look for similar opportunities in other markets”, said Areca Capital Sdn Bhd chief executive officer Danny Wong.