Saturday October 3, 2009

A taxing issue

By TEE LIN SAY

EACH year about this time – the “budget season” – the spotlight will shine on tax issues.

The Government has already forewarned that it will be looking to cut operating expenditure by 15%. This isn’t surprising considering the Government is sitting on a big fiscal deficit of about 7.6% of gross development product (GDP) this year. Currently the Government is reliant on progressive direct taxation for its revenue, which accounts for more than 50% of total federal government revenue in 2008.

This progressive revenue consists mainly of company income tax (around 24%), petroleum income tax (15%) and individual income tax (10%).

Given that much lower oil-related tax revenue will lead to a decline in federal tax revenue collection next year, economists do not expect significant handouts in the form of tax breaks. Moreover, deficits and the need to spend, more often than not, frustrates tax cuts.

In fact, Prime Minister Datuk Seri Najib Tun Razak has also announced that the country’s tax base will need to be strengthened with the Government looking to claw back some incentives. Not surprising given that tax collections this year are most likely going to be much lower.

Analysts say there are two ways to deal with the current scenario – either by introducing a new tax scheme such as the much talked-about goods and services tax, or GST, or expand on its non-tax revenue.

CIMB expects the Budget 2010 to provide more clarity on the status of GST, even though the new scheme is unlikely to be rolled out within the next two years, lest it could derail the country’s fledgling economic recovery.

The market in general believes that the tax system in the country will remain status quo, even though some form of relief such as rebates are likely. Firstly, they argue that it is unlikely that the Government would introduce a new tax scheme or raise existing taxes, as such initiatives could burden the people; and secondly, they say it will be a surprise if the Government lowers corporate and personal income tax rates, as this could further depress the Government’s revenue collection.

Meanwhile, the question remains whether the Government will increase sin taxes such as that for cigarettes and alcoholic beverages. Increasing sin taxes will likely cause consumers to turn to the black market, and this could cause the Government to lose out in terms of tax collection.

“This is an issue of enforcement ... weak enforcement can cause the Government to lose money and incur extra expenses,” says an analyst. “Generally, the demand for these products is inelastic, so the imposition of sin taxes will have a positive impact on the Government revenue,” he explains.

Corporate and Personal Income Tax

CIMB head of economics Lee Heng Guie says the case for further reduction in both company and personal tax rates is weak given the projected shortfall in government revenue.

“The middle-income group may get some relief in the form of higher child relief, the widening of tax bands as well as other tax rebates,” he says.

KAF Securities research head Chehan Perera feels that two major changes are needed on the consumption side.

First, is the reduction in personal income taxes from the current top bracket of 27% to around 20%. Second, is the reduction in excise duties for a various range of consumer items with the main big ticket segment being passenger vehicles.

Excise taxes on passenger vehicles range from 20%-40% of the on the road price at the moment.

“However, we do not expect these to be reviewed just yet as such changes would need to be done as part of a complete overhaul of the tax system,” he says.

Chehan adds that there should be further incentives to raise affordability among lower income households and measures to stimulate spending among the relatively large base of civil servants that come under the public sector.

For small and medium-sized companies with a paid-up capital of not more than RM2.5mil, Lee proposes that the Government raises the threshold of chargeable income to RM1mil from RM500,000 eligible for the 20% preferential tax.

GST

Talk of a broad-based consumption tax has resurfaced as some parties have brought up the possibility of a goods and services tax (GST) to broaden the present narrow revenue tax base. Petroleum-related revenue accounts for about 42% of total revenue.

The Government had deliberated on the GST in parliament during Budget 2005 with the intention of introducing it on Jan 1, 2007. It however did not take off.

The introduction of a broad based GST will certainly be needed in order to offset the losses in revenues from such changes. The general consensus however, is that the GST will only be implemented in 2011/2012.

Lee says the 2010 budget is expected to provide clarity on the status of GST as part of the overhaul of Malaysia’s taxation system. However, he too feels that the GST will only be ready for rollout two years from now.

OSK Research Head Chris Eng does not expect the implementation of GST during the Budget. He feels that any contractionary fiscal policies will not be welcomed for the next two years as Malaysia is still experiencing a nascent stabilisation in the economy.

Furthermore, the GST may be viewed in an unfavourable political context.

“THe 1Malaysia theme is ‘People First, Performance Now’. Imposing GST could potentially provide the opposition with political mileage as the lower income group would also be affected by the GST when they are currently exempt from income tax,” says Eng.

Furthermore, if GST were to be imposed, the government will also be shifting towards indirect tax, which only accounts for 20% of total federal government revenue in 2008.

Eng says this structural change could give rise to some issues if the balancing of other indirect taxes, are not planned properly.

“It may also stoke inflation just when the economy is beginning to recover,” he says.

Tobacco and Alcohol

Analysts expect the Malaysian brewery sector to enjoy a fourth consecutive year of unchanged alcohol excise duties.

This is due to the fact that current alcohol excise duties are already at an all-time high, accounting for approximately 50% of brewers’ total revenue. An independent study indicates that a further hike in alcohol excise duties will instead translate into a reduction in government excise duty collection.

Tobacco players however may not be so lucky.

“Our house view is that the Malaysian tobacco sector may experience another round of excise duty hike from the current 18 sen per stick. We may potentially see a hike in cigarette excise duties by 2 sen to 3 sen a stick,” says Eng.

A 3 sen hike is closer to its historical 7-year average hike of 23%. Although the present level

of incidence of illicit trades stands at 36.7% (up 11.8% year on year), based on the track record of duty hikes, Eng

believes there is still ample room for revenue from excise duties to increase should there be a duty hike.

Property

Further measures to stimulate property purchases may be included in the budget, as this is considered a key big-ticket item of the economy.

To stimulate investments, CIMB’s Lee says measures to sustain the sector include (i) allowing the early release of unsold Bumiputra units after a six-month holding period, (ii) allowing the bumiputra discount be applicable for houses priced at no more than RM250,000, and (iii) reducing the withholding tax (currently 15% for individuals and 20% for foreign institutions) to boost the real estate investment trust market.

The recent few incentives were focused more on the lower-end market segment, or properties priced below RM250,000, without must enticement rendered to the broader sector.

Under the second Stimulus package, tax relief for interest paid on housing loans up to RM10,000 per annum over a period of 3 years, was introduced.

“However, the quantum was insufficient to have a meaningful impact on the overall sector. We believe a tax rebate of a similar quantum or potentially a higher amount of tax relief would have a more effective and broad based impact to stimulate demand for properties,” Chehan says.

Chehan suggests a full waiver on stamp duties.

At present, there is a 50% stamp duty exemption for the purchase of properties priced below RM250,000.

“We feel a complete waiver or an increase in the qualifying property price range would have a more meaningful effect on property transactions,” says Chehan.

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