Post-Budget 2022 thoughts

NOVEMBER 22 — Budget 2022 has brought out various reactions and opinions from all walks of life in Malaysia since it was announced on 29 October 2021. Prior to the budget announcement, the main issue for the government to address is having a plan to steer Malaysia back to the right direction economically and socially while managing the Covid-19 situation. This is a delicate issue to manage as this is a balancing act between prioritising economic growth and health cost.

The government has responded by announcing a budget with an expansionary focus with a size amounting to RM332.1 billion which is the highest ever allocation for the country. With such an ambitious budget allocation and the deleterious effect on the economy of Covid 19, it begs the question how will the government raise the necessary revenue to fund Budget 2022?

One of the ways to increase revenue in the short term was via the introduction of Cukai Makmur as a special one-off tax imposed on companies that have made significant profit during the pandemic. A tax rate of 33 per cent is imposed on companies that have a chargeable income exceeding RM100 million for the year of assessment (YA) 2022.

The removal of exemption on foreign sourced income of Malaysian tax residents which is remitted to Malaysia is another measure introduced which will be effective from 1 January 2022 onwards. However, it is questionable whether this measure will be effective since this is likely to discourage companies and individuals from bringing foreign income as well as funds back to Malaysia.

Other measures such as the special voluntary programme for indirect tax and withholding tax on payments made to agents, dealers and distributors were also introduced in this budget to increase revenue. It is interesting to note that the government has stated that it is trying to broaden the tax base without increasing taxes on individuals that are in the B40 and M40 category. However, hardly any longer term measures were announced.

Budget 2022 has also focused on initiatives to spur the economy and to address the unemployment issue in Malaysia.

For example, individual tax relief has now increased from RM1,000 to RM2,000 and extended to YA2023 for individuals that undertake courses to upskill and enhance oneself. Double deduction for structured internship programmes and scholarships provided by companies were also proposed in Budget 2022. The proposals seek to enhance the employability of graduates / current workforce and at the same time ensuring that the workforce skillset meets the demands of the market.

The pandemic has also accelerated the transition to the digital economy and Malaysia is no exception in this respect. Besides upskilling the workforce to have the necessary skillsets to navigate the digital economy, tax incentive for the Digital Ecosystem Acceleration Scheme (DESAC) was proposed to support the development of digital ecosystem in Malaysia. This will create new employment opportunities and boosting digital transformation for entrepreneurs.

To encourage companies to invest, the special deduction of RM300,000 for renovation and refurbishment costs for business premises is extended until 31 December 2021. The special Reinvestment Allowance (RA) has also been extended for another 2 years until YA2024 for manufacturing companies that have exhausted its RA / special RA.

By introducing the above measures, it is hopeful that the economy will be strengthened and remains competitive to attract foreign direct investment. The Government is forecasting that Malaysia will have a Gross domestic product (GDP) growth of 5.5 – 6.5 per cent for 2022 as a result of the initiatives announced in Budget 2022.

Despite the positive outlook of Budget 2022, expectations will need to be tempered with the announcement that the debt ceiling is to be raised from 60 to 65 per cent of the GDP in order to finance the budget. The increase in debt ceiling should only be a temporary measure and the Government will need to manage its debt in a more sustainable manner once the economy has stabilised in 2022.

Therefore, it is more important than ever for the government to tighten its enforcement and to cultivate a tax compliance culture in Malaysia.

Illicit tobacco alone has cost the Government RM5 billion in uncollected taxes each year. Enforcement activities such as tackling the entry of contraband will need to continue and strengthened to ensure that the gap in collection of taxes will be narrowed.

The shadow economy is another area where the Government could redouble its effort to bring in more revenue and to plug the tax leakage. The shadow economy in Malaysia is estimated to be a RM300 billion economy. The introduction of Tax Compliance Certificate (TCC) – a requirement for taxpayers to tender for government projects and the Tax Identification Number (TIN) – to be assigned to Malaysian citizens above 18 years old will help in addressing the shadow economy to an extent.

The digitalisation of the economy coupled with the digitalisation of tax administration will also improve the tax compliance and the collection of revenue for the government. This works by casting a wider net over individuals or corporate entities that should be paying their fair share of taxes.

Budget 2022 is an ambitious budget and it presents its own challenges in implementing the reforms and measures introduced. However, if the measures are executed effectively and efficiently, the proposals introduced in the budget are expected to be able to achieve its objectives for the nation.

Source: Malay Mail