Business

Tuesday October 27, 2009

Post-budget thoughts

Tax Insights - By Kang Beng Hoe


EACH year what we expected from the budget announcement far exceeded what the Finance Minister would in fact deliver. This year is no exception, especially when he is faced with a difficult situation – a large fiscal deficit and a steep fall in tax revenue.

One can thus be inclined to be philosophical and bring to mind George Bernard Shaw’s famous quote: “There are two tragedies in life. One is to lose your heart’s desire. The other is to gain it.”

The non-announcement of the implementation date of the goods and services tax (GST) is a significant feature of the budget proposals measured against the level of support for the tax as evidenced by articles appearing in the print media in the immediate weeks before budget day.

These attempted to make a cogent case for the tax to be introduced on a timely (urgent?) basis in light of falling tax revenues and a widening budget deficit.

The Finance Minister has turned away from making the anticipated announcement for valid reasons.

Key amongst these are concerns over the plight of the broad spectrum of the rakyat who generally bear the brunt of the current economic downturn.

For them, the GST will be a new tax burden since they do not pay income tax.

No responsible Government will make light of this issue pending full recovery of broad segments of the economy.

In the final analysis, the need to introduce GST must be seen as a structural reform to our tax system to broaden its base.

Like all reforms, this is a process and not an event.

The key feature of Budget 2010 is the commitment to bring down the budget deficit to 5.6% of gross domestic product (GDP) for 2010 from 7.4% in 2009.

This is commendable and reflects the Government’s concern of the dangers in maintaining high deficits for too long.

The overall thrust of the budget has been on promoting growth with a clear decision to continue with the stimulus measures already in place.

The Finance Minister had not attempted an outright correction on the fiscal front, which could set back growth recovery already evident from the recent GDP results.

The measures to cut back on operating expenditure and revamp subsidies must be seen as producing dual benefits i.e. reducing the deficit balance without affecting stimulus spending.

The growth strategies include encouraging greater investments and businesses geared towards a high-income economy.

This will require concerted efforts in the area of education, vocational training and enhanced human capital.

There is a need to ensure their success through in-depth coordination between the public and private sectors.

The refocus away from the public sector to the private sector as the engine of economic growth calls for businesses to rise to the challenge.

Attracting foreign direct investments will be increasingly challenging and it is appropriate that it is recognised that a conducive business environment can play a pivotal role, as can innovative measures.

The increased focus on the services sector has already been recognised with the initial liberalisation.

These should, however, be substantially enhanced to attract new professionals in the related fields.

The budget rightly focuses on agriculture and the rural economy since this will contribute towards the economy as well as enhance the income of a broad segment of the rakyat.

Amongst the tax measures, the following are seen to be positives:

·Incentives for small and medium enterprises to register patents and trademarks;

·Enhancing incentives for health tourism;

·Incentives for Green Building certification;

·The extension of a broad range of incentives for the Islamic finance sector;

·Reduction of the individual and co-operative income tax rate by 1%; and

·Reduction of the income tax rate of foreign knowledge workers in Iskandar Malaysia to 15%.

It seems unlikely that the imposition of nominal service tax on credit cards will curb consumer spending or the increase of employee’s contributions to the EPF to the previous level of 11% have such an effect.

The re-introduction of real property gains tax and the imposition of a minimum 5% tax on gains from real property disposal by any person may have a somewhat dampening effect on the recovery of the broad property sector.

The overall strategic thrust of Budget 2010 is difficult to fault but the success of its measures will depend on how well internal and external challenges are met.

·Kang Beng Hoe is executive director of Taxand Malaysia Sdn Bhd.

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