Budget 2019 – a tough balancing act
THE Finance Minister has set the record straight on the rate that the government intends to impose upon the re-introduction of the Sales and Service Tax (SST) in place of the Goods and Services Tax (GST) come Sept 1.
At the rate of 10% for Sales Tax and 6% for Service Tax, the rate is no different than what was imposed previously under the SST regime. In addition, the Minister also clarified that the Sales Tax applicable to selected manufactured or imported products will have two different rates of 5% and 10% for different products while the Service Tax of 6% applies to selected services and not all services as per under the GST regime.
In terms of collection on an annual basis, using the current year as a benchmark, the new SST is expected to generate some RM21bil against the GST’s full-year collection of RM44bil, effectively implying that consumers will benefit with some RM23bil in savings on an annual basis.
While the government’s revenue gap for this year will be met by some cost-saving measures, higher dividends from GLCs/ Petronas or potentially higher Petroleum Tax receipts, the worry for market is effectively the revenue and expenditure projections for 2019 as next year will see the full impact of the shortfall of revenue of about RM21bil under the new tax regime compared with GST.
Hence, what can the government do to meet this projected short fall next year?
In Budget 2014 and Budget 2015, the Prime Minister cum Finance Minister then granted to individuals and companies tax breaks in lieu of the implementation of GST and to reduce the burden of the new GST tax regime.
Among them were reduction of 1 to 3 percentage points in the individual income tax rates, restructuring of the income tax brackets as well as raising the chargeable income subject to maximum rate and the maximum tax rate itself was reduced from 26% to 24%, 24.5% and 25%.
In addition, Budget 2015 also reduced tax rates for cooperative income by 1 to 2 percentage points while for corporates and SMEs, income tax rate was reduced by 1 percentage point from 25% to 24% and from 20% to 19% respectively effective year of assessment 2016.
Hence, it will be interesting to see if in addition to the re-introduction of SST, will the government roll back some of the tax breaks that were given in lieu of the GST introduction in 2015.
After all, the government will be short of its revenue target and to continuously improve the budget deficit targets from this year’s projection of 2.8% to 2.5% or 2%, the government would need to find new sources of income.
First, let us look at what is the government’s potential projection for GDP growth in 2019. It is estimated that GDP growth will slow this year to 5%-5.5% and assuming GDP growth in 2019 is at about 5%, we are looking at nominal GDP to rise from this year’s projection of about RM1.45 trillion to about RM1.55 trillion next year (after taking into account inflation of about 2% in 2019).
Assuming the government is targeting a budget deficit of 2.5%, we are looking at an absolute amount of RM39bil and if the budget deficit target is stretched to about 2%, the absolute budget deficit amount will be RM31bil. Compared with the projected RM40bil budget deficit estimated this year, next year’s goal is only stretched if the Pakatan government turns aggressive and looks at a budget deficit target of 2% instead of 2.5%.
Even at 2.5%, the government would need to relook at how it intends to overcome the RM23bil shortfall in revenue from the switchback to SST from GST. Rolling back the previous tax breaks is one option while another option that needs to be considered is to raise other taxes or introduce new ones.
Among the potential tax revenue could be from sin taxes, in particular related to gaming industry as the sector has hardly been impacted in recent times unlike the tobacco
Among the potential tax revenue could be from sin taxes, in particular related to gaming industry as the sector has hardly been impacted in recent times unlike the tobacco and liquor segments.
and liquor segments.
Malaysia should relook at its broader taxation regime to introduce two unpopular but required taxation. This include Capital Gains Tax, especially those related to gains made on stock trading and investments held for short term (i.e. for less than one year) as well as Inheritance Tax, a necessary taxation system to tax the rich but obviously with some clear guidelines as to what is taxable and not taxable (for example Inheritance Tax can exclude primary home or assets in other forms of certain value so as to capture the upper end of the market segment).
Another area where the tax burden can be imposed upon is on wholesale funds which are managed by asset management companies and where the unit holders among others include companies as well as life and general insurance companies.
While it is perfectly acceptable for these funds to target individuals as unit holders to enjoy the tax-free status of income earned, the loophole whereby companies earned this tax-free income must be addressed.
It is estimated that 60%-70% of the current fund size of about RM83bil is held by companies and at an average return of 3.5% a year at least, the tax foregone by the Inland Revenue Board is RM400mil to RM500mil a year.
Maintaining a fiscal discipline is important in ensuring Malaysia stays the course in reducing budget deficit as this will be well regarded in sustaining our ratings at the international level and to ensure we are still able to borrow at a reasonable cost via the fixed income market.
Indeed, Budget 2019 is not going to be an easy maiden budget for the Finance Minister, neither is it going to be people friendly as the government simply cannot afford to do so.