IN just two weeks on Oct 7, the Ministry of Finance (MoF) will unveil Budget 2023, which will be closely watched given the many potential headwinds ahead.
And as the 15th general election is set to take place no later than July next year, many anticipate that pre-election giveaways are a given.
Only recently, Prime Minister Datuk Seri Ismail Sabri Yaakob announced salary increases for civil servants, with 1.28 million Grade 11 to 56 civil servants set to receive an additional RM100 in their annual salary increment from January 2023. This will reportedly cost Putrajaya an additional RM1.5 billion. But as civil servants make up 10% to 12% of total eligible voters, the move was perceived as part of the pre-election giveaways.
On the economic front, uncertainties continue to abound two years after the Covid-19 pandemic, with key economies — including China and Europe — anticipating slower growth ahead as consumer demand slows amid the continuing war between Russia and Ukraine while inflation remains high.
Global trade could suffer, and US Federal Reserve chairman Jerome Powell has portended more pain ahead.
In a hawkish speech last week, he signalled more rate hikes ahead in a bid to rein in inflation, prompting forecasts of a looming recession in the US, with some economists predicting this would materialise even before the middle of next year.
Malaysia will not be spared if a global economic slowdown happens, given that it is an open economy and relies heavily on exports.
In theory, Budget 2023 ought to function as a blueprint for growth post-Covid-19. A big plus is that Putrajaya will not need to take on extraordinary means and measures to stimulate and support the economy as it was forced to in 2020 and 2021 during the onslaught of the Covid-19 pandemic, like nearly all countries.
Even so, the debt incurred over the past two years has increased dramatically, made substantially worse by fast-rising interest rates, which makes debt servicing a lot more costly.
With so little wiggle room, what can the government offer in the budget?
Malaysia's direct federal debt stood at RM824 billion at end-March 2020, around the time when strict lockdowns were implemented to curb the spread of the virus.
Slightly over two years later, at end-June, Malaysia's direct federal debt amounted to RM1.045 trillion, around 63% of GDP. The RM1.045 trillion does not include the RM32.08 billion owed on 1Malaysia Development Bhd bonds.
In addition to the principal amount of RM1.045 trillion, interest payments also need to be serviced. In Budget 2022, interest payments were estimated at RM43.1 billion, more than 15% of federal government revenue.
Federal government revenue in 2021 was RM221.03 billion, or 14.6% of GDP, whereas in 2022, the amount was estimated at RM234.01 billion, or 14.3% of GDP.
Malaysia's fiscal buffer is extremely thin — a predicament made clear when the Covid-19 pandemic hit, as much of the fiscal stimulus packages relied heavily on indirect measures such as the repeated rounds of withdrawals from the Employees Provident Fund, observed OCBC economist Wellian Wiranto.
Of the more than RM300 billion in fiscal stimulus announced, less than RM100 billion came from direct fiscal injection.
What does the government need to do?
As has been repeatedly advised over the years given that Malaysia has run a fiscal deficit since 1998, the country needs to rebuild adequate fiscal buffers in order to weather the next economic downturn or pandemic that may occur. This is especially crucial after spending heavily during the Covid-19 pandemic.
Socio-Economic Research Centre executive director Lee Heng Guie stressed that this would require the country to address its revenue volatility and instability — namely, its dependence on oil revenue and narrow tax base.
At the same time, spending needs to be prioritised, and irresponsible spending and leakages plugged.
For the fiscal position to be sustainable, higher tax revenue is needed to accommodate growing expenses.
As it is, Malaysia's headline corporate tax rate of 24% is considered high compared to its neighbours, and a hike in the rate may be detrimental to private investment and the development of companies locally.
The prosperity tax, or cukai makmur, that was introduced during Budget 2022 is unlikely to be repeated as Putrajaya had assured it was a one-off tax.
"It was a one-off tax and I do not expect this tax to be repeated in Budget 2023. As the state of the country's fiscal position does not permit any reduction in existing taxes, our current corporate income tax rate is expected to be maintained at 24% unless a broad-based tax, such as the Goods and Services Tax (GST), is introduced in the future," says Deloitte Malaysia tax leader Sim Kwang Gek.
GST has often been touted by economists and tax consultants as one of the key ways to broaden the tax base and raise revenue in an efficient and effective manner.
"Malaysia will need to look at moving back to a GST or VAT regime. There is not much room to expand the scope of the current Sales and Service Tax given the inherent limitations of a single-stage tax. The pandemic has also shown that GST can provide the needed flexibility for the government to reduce costs for consumers and boost consumption for a period of time by lowering the GST rate, like what a number of countries have done in the last two years," says PwC Malaysia Tax leader Jagdev Singh.
"Conversely, a number of countries are also increasing GST rates post-pandemic as a means of increasing the government's revenue," he adds.
For instance, Singapore has proposed to increase its GST rate from 7% at present to 8% in 2023 and 9% in 2024.
Notwithstanding the chatter that GST could make a comeback, the prime minister has said that it would require further study. Realistically, it is a difficult time for any government to introduce new taxes or increase existing taxes when soaring inflation and rising interest rates are eating into disposable incomes.
The political will is expected to shrink in the face of an impending general election.
"While new taxes are key to improving the fiscal deficit and reducing the debt-to-GDP ratio, this may not be the best time to do so. The uncertainties in the global economy remain as we look ahead to 2023, hence potential new taxes may not deliver the desired outcome of providing a significant upside to government revenues," comments Jagdev.
Need to strike right balance, given the constraints
"Striking the right balance remains key," says Wiranto, who thinks supportive measures will likely continue to be adopted in order to boost growth, especially initiatives to bolster Malaysia's attractiveness in high-tech sector investments.
He also expects to see the further rollout of handouts and cost-of-living defraying measures in the budget, especially for the B40 population, given the political cycle and the backdrop of high inflation.
"Still, the degree to which the government can tune up its expenditure for these considerations is limited, given the fiscal constraints imposed by its relatively high level of indebtedness. Moreover, it is probably prudent to leave considerable 'spare capacity' on the fiscal front too, given how exposed the Malaysian economy may be to the global slowdown risks," opines Wiranto.
Lee believes that there should be a focus on the immediate challenges arising from inflation and higher cost of living. "While Malaysia's CPI growth of 4.4% in July 2022 is low compared to other countries globally, thanks to the subsidies buffer, this does not diminish the impact on the low and middle-income groups who are struggling to deal with rising costs," he says.
High operating and production costs have forced many businesses to pass down their cost increases to consumers, and even staples such as bread are now more costly as commodity prices have also shot up.
Experts opine that targeted subsidies are the way forward given that this year alone, the government has spent more than RM80 billion on subsidies after commodity prices shot through the roof.
Finance Minister Datuk Seri Tengku Zafrul Abdul Aziz has stressed that additional revenue from higher-priced commodity exports is not sufficient to cover the increase in Malaysia's massive subsidy bill.
Ernst & Young Tax Consultants Sdn Bhd's Farah Rosley says that in times like these, there needs to be a razor sharp focus on operating expenditure where non-essential spending should be deferred or eliminated.
"A review needs to be conducted on the subsidies given by the government. The right subsidies which are effectively implemented are crucial in helping the rakyat manage the rising cost of living. However, there is a need to ensure that the subsidies given are still relevant and meaningful, and that subsidies are enjoyed only by those who truly need them," says Farah, who is tax managing partner for Malaysia.
Nevertheless, this is easier said than done.
"There appears to be some hesitance in moving to a more targeted approach, and understandably so. It is not as straightforward to ensure that any targeted system will meet its objectives and that the groups that should be subsidised will not be excluded. At the same time, introducing a single system may not be able to address the different areas that need to be subsidised," says Jagdev.
Moving from recovery to reform and e-invoicing
MoF's pre-budget statement said the nation would be moving into the reform stage from the recovery stage of Covid in the last two years.
KPMG Malaysia head of tax Soh Lian Seng says one reform the government will embark on is the introduction of e-invoicing, which is one way to increase tax revenue for the country.
"Such introduction should elevate the tax experience and reduce the administrative burden for companies, in particular, small and medium enterprises (SMEs). The question is the timing of this introduction. Should e-invoicing be introduced at the same time when the government reintroduces GST should this come to pass? Administratively, this would make logical sense, but its effectiveness lies in the implementation," he adds.
Sim says that having an e-invoicing management system that integrates with the government's system can be a powerful tool to tackle evasion, reduce tax leakages and promote greater tax transparency.
"E-invoicing has been implemented in many countries, including Argentina, Bolivia, Brazil and China, and it is an effective tool to bring businesses out of the grey economy into the formal economy.
"The Philippines announced a pilot project for the implementation of its Electronic Invoicing/Receipting System (EIS) in July this year and is committed to mandate e-invoicing by Jan 1, 2023. A clear roadmap on the rollout of e-invoicing in Malaysia should be crafted by taking into consideration the needs of smaller businesses," says Sim.
Meanwhile, a new incentive framework has been long talked about and is a much-awaited reform that the nation needs.
"A new incentive framework is needed to position Malaysia as an attractive investment destination in the light of global tax developments, particularly the introduction of a global minimum tax. This would mean considering an incentive regime that is more balanced — some tax breaks in the form of reduced rates coupled with non-fiscal offerings," says Jagdev.
Suggestions for Budget 2023 abound, but the nation will have to patiently wait for Oct 7 to see how the government plans to tackle the slowing global economy and its fiscal constraints while working on reforms at the same time.
Online shopping to cost more as LVG sales tax comes into effect in 2023
Come Jan 1, 2023, purchasing from your favourite overseas online shopping portal is likely to cost you a bit more.
And it will not be because of the weaker ringgit or higher inflation, but a sales tax on low-value goods (LVG) that Malaysia will impose on overseas online sellers, following the passing of the Sales Tax (Amendment) Bill 2022 in August by the Dewan Rakyat and Dewan Negara. Effectively, this will update the Sales Tax Act 2018 with a provision to tax LVG sold online and delivered to Malaysia from Jan 1, 2023.
The measure was announced in the 2022 Budget.
At present, LVG — understood as goods from overseas sellers that are sold below RM500 — are not subject to any tax when they are imported into Malaysia.
As local traders are subject to a sales tax, however, there is a disparity in prices between domestically produced goods and imported goods.
The sales tax to be imposed on LVG is reported to be 10%, although that has yet to be confirmed by the government.
PwC Malaysia indirect tax leader Raja Kumaran says the legislation allows foreign sellers to register to collect the sales tax, which becomes due at the time when the LVG is sold by the registered sellers or sellers liable to be registered, who are also known as the taxable person.
"This means that the seller collects the sales tax applicable on the LVG at the point of sale," he says.
It is the sellers' responsibility to collect the sales tax and return it to the Royal Malaysian Customs Department online on a quarterly basis, by way of a sales tax return filing and corresponding payments.
Raja adds that the goods will be identified as "sales tax paid" when they move across borders and should not be subject to further imposition of sales tax on importation.
If the seller is not registered for sales tax, however, no sales tax is charged at the point of sale but the sales will instead be subject at the point of import.
"Courier companies that facilitate the delivery will have to pay the tax on behalf of the purchaser," he explains.
Experts estimate that the tax could generate RM500 million in revenue a year for the federal government, assuming that consumers keep up with their online shopping habits despite their diminishing purchasing power.
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