Budget 2019 Tax: How much is too much?

In a roundup of the new federal government’s Budget 2019, experts toe the line changes and how these affect individuals or businesses.

Budget 2019 released several measures of change to taxes in a move to enhance the taxation system.

This came after the Ministry of Finance ( MOF) formed Tax Reform Committee ( TRC) in September 2018 to conduct a comprehensive study on the whole Malaysian taxation system.

The aim is to make the system more efficient, neutral, and progressive, while being capable of generating high- quality economic growth.

As the committee faces high expectations from the rakyat to propose meaningful tax reforms in Budget 2019, the TRC was targeting only low- hanging fruits for this budget, given that this body had only been in existence for two months.

This comes as Malaysia’s tax base was rather narrow, as income tax payers numbered only about two million out of the 1 million labour force, or six per cent of the country’s 32 million population.

By comparison, Singapore’s income tax payers stood at approximately 20 per cent of the population.

To reduce the existing tax gap, the TRC is focusing on ways to reduce tax leakages, exploring new sources of revenue, studying taxation in the digital economy, and reviewing the effectiveness of various tax incentives vis-àvis the conditions imposed.

“PrimeMinisterTunMahathir Mohamad’s administration is expected to work with local and foreign authorities to curb contraband smuggling, false declarations, or fake invoices colluded by freight forwarders.

“Greater focus wil l also be on material cases of tax evasion, transfer pricing, and tax planning abuses by businesses,” said Datuk Chua Tia Guan, a member of the TRC earlier this week during a post-Budget talk in Kuala Lumpur.

“This can already be seen in some of the measures proposed in Budget 2019, reviewing tax treatments on unabsorbed business losses and capital allowance, and enforcement of smuggling activities.”

New tax moves in Budget 2019

The TRC is to carry out a thorough review of the 130 types of tax incentives available, which are administered by 32 approving agencies with the intention to eliminate incentives that are no longer relevant or can be deemed as duplicitous.

On the other hand, new incentives that can support the current stage of the economic development may be introduced in the near future.

To plug the hole from tax leakages, the government is proposing the removal of the RM20,000 cap for taxes on Labuan-based businesses. It is also removing the restrictions for Labuan businesses to trade with their local counterparts. To avoid base erosion and profit shifting, the government has also imposed new conditions for Labuan-based businesses.

One of the ways the government intends to widen the revenue base is through the Real Property Gains Tax ( RPGT).

Budget 2019 saw a new rate of five per cent

introduced for Malaysians, while foreigners’ RPGT was increased to 10 per cent from fivefor the sixth and subsequent years.

Regarding the implementation of the digital tax, the government is waiting for the Organisation for Economic Cooperation and Development – along with more than 110 countries and jurisdictions – to come up with an agreed approach towards taxing the digital economy by March 2020.

Meanwhile, foreign suppliers who provide services to consumers in Malaysia – ie business-to- consumer or B2C – are also required to register and be charged a service tax by January 1, 2020.

To increase the efficiency of the Sales and Services Tax ( SST), the government will introduce a credit system for sales tax deduction – this is to help small manufacturers that buy sales-taxable raw materials or components from traders.

For services providers, there will be an exemption for specific B2B service taxes for certain registered SST entities. This is expected to prevent compound taxation and reduce the cost of doing business.

The increase in fiscal deficit arises after we have taken into account previously unbudgeted items such as RM1 billion interest servicing cost for 1MDB debts, RM1.3 billion in compensation for the acquisition of Eastern Dispersal Link in Johor which was announced last year, RM1 billion for Prasarana, RM1.4 billion for Ministry of Transport rail projects and paying back some GST refunds of RM3.9 billion. Lim Guan Eng, Finance Minister

In other words, it eliminates the chances of a tax getting charged twice in the supply chain before it reaches the final customer.

Lastly, the Special Voluntary Disclosure Program (SVDP) is a tax amnesty programme for tax evaders to come forth with their tax disclosures and be allowed a low penalty rate of around 10 to 15 per cent before June 30, 2019 on their tax liabilities.

The government has obtained the information and tax record of Malaysians – including bank accounts from other countries – via the Automatic Exchange of Information (AEOI) global standard signed with 102 countries.

By uti lising this, the government will be able to go after tax evaders, including those involved with transfer pricing and profit shifting, as well as those with unexplained extraordinary wealth.

What the experts say

Many are pleased to see the government commit, usher and inculcate fundamental fiscal discipline, such as head of tax at KPMG in Malaysia Tai Lai Kok, who saw a balance between the government’s efforts to fix the country’s fiscal finances and improve the well-being of the rakyat.

“Being saddled and grappled with the financial state of affairs has not deterred the government in providing a comprehensive budget that meets the needs of the rakyat.

“The announcement also focused on careful fiscal policies and tax reform measures which will be seen by many as bold and progressive for the betterment of the nation,” Tai said.

Ernst & Young Tax Consultants Sdn Bhd’s partner and Malaysia Tax leader Amarjeet Singh believed that the proposed measures in the Budget were commendable, particularly the focus on encouraging the private sector to spur growth.

This was especially since the government has had the unenviable task of managing a higher than expected government debt against a continued budget deficit trend and rumoured risk of a credit rating downgrade, Singh pointed out.

Finance Minister Lim Guan Eng highlighted in the Budget speech that Malaysia’s fiscal deficit is projected to be 3.7 per cent for 2018.

He had explained that in spite of the current government’s best efforts to reduce cost and postpone non- critical expenditures, it was unrealistic to achieve the previous 2018 deficit target of 2.8 per cent.

“The increase in fiscal deficit arises after we have taken into account previously unbudgeted items such as RM1 billion interest servicing cost for 1MDB debts, RM1.3 billion in compensation for the acquisition of Eastern Dispersal Link in Johor which was announced last year, RM1 billion for Prasarana, RM1.4 billion for Ministry of Transport rail projects and paying back some GST refunds of RM3.9 billion,” Lim stated.

However, on a more positive note, the government has projected a gradual downward trajectory in deficits over the next few years.