Business

Monday October 26, 2009

Unexpected tax moves

Comment by Yeo Eng Ping


It’s a fair budget and makes a good attempt to address the key economic challenges

I CAN imagine the policy-makers would have had a difficult time formulating the Budget package – a balancing act between managing a high budget deficit and at the same time being sensitive to the needs and reaction of the people.

For example, it must have been a tough choice to decide whether to commit to the introduction of the goods and services tax now, or to propose other “interim” measures to alleviate the deficit while seeking greater clarity on the Malaysian economic outlook, sustainability of the recovery we are experiencing and the people’s perception of the situation.

From that perspective the Budget package promised to be interesting, and it was indeed peppered with some unexpected moves in the tax area.

For one, the re-introduction of the real property gains tax to be effective from 1 Jan 2010 came without forewarning, and was explained as a measure that will be taken to increase the tax base of the nation.

This does not seem congruent with the fact that revenue from Real Property Gain Tax (RPGT) has not been particularly significant historically. For example, RPGT collections for 2006 was about RM220mil, representing about 0.35% of total direct tax collections of RM66bil.

Nevertheless, the tax base for the new RPGT regime will be widened to include the taxation of gains on individuals who dispose real property assets held for more than five years (which under the previous RPGT regime was not taxed).

Another new feature of the proposed RPGT is for the acquirer to withhold a portion of the consideration to be remitted to the IRB within 60 days of the date of disposal – this is something which should help improve the speed of tax collections.

The proposal for petroleum businesses to be taxed on a current year basis from 2010, is well-timed indeed. When companies and individuals moved to the current year basis of taxation in year 2000, the Government waived the collection of tax for 1999. In contrast, it was announced that petroleum businesses will be required to pay their 2009 taxes over fived years while 2010 taxes will likely be substantially paid in 2010.

By this skilful move,the Government will accelerate the collection of petroleum tax revenue – this could be a fairly significant amount as petroleum taxes contribute approximately 30% of direct tax collections.

Another “first-of-its-kind” tax proposal is where knowledge workers for specific sectors who work and reside in Iskandar Malaysia would be subject to a flat tax rate of 15% on chargeable income.

Coincidentally, the rate Singapore tax resident individual is progressive with a cap at 20%, and for a non-tax resident, the tax for employment income is a minimum of 15%. This incentive applies to both Malaysians and non-citizens, and appears to be designed to ensure that Iskandar Malaysia will be an attractive workplace for foreign and local talent.

It was quiet from the perspective of “sin” taxes during this Budget, though this was not necessarily unexpected. Excise duty on cigarettes was increased by 1 sen per stick (or 5.6%) three weeks ago, on the back of a 20% increase in 2008.

Excise duties on beer have remained unchanged for the past four years, following several hikes up to 2006 which resulted in the highest excise duty in Asia (and second highest in the world).

Some analysts have raised concerns any further excise duty increase on beer may result in a significant consumer switch to compounded hard liquor and home brews.

Overall from a tax perspective, the Budget was fair and makes a good attempt to address the key economic challenges faced while providing some additional time to consider the next moves, including the introduction of the goods and services tax (GST).

The Prime Minister alluded to the fact that the study on the impact of GST is in its final stages, and indicated that if introduced the rate of GST would be less than 5%.

In my view, the Prime Minister has in his few words, laid the foundation to prepare the business community and the people for this eventuality.

· The writer is a partner in Ernst & Young Tax Consultants Sdn Bhd. The views expressed above are the personal views of the author, and do not necessarily represent the view of Ernst & Young.

  • E-mail this story
  • Print this story