Business

Monday November 2, 2009

Baby steps by Malaysia towards high-income economy

By RONNIE LIM


Budget 2010 proposals need to be well-executed to ensure success

WHILE compliments and divergent views have been flowing liberally in respect of Budget 2010, most would admit that it was a challenging budget to craft. I will comment on selected aspects of the budget.

Retirement funds

With the phasing in of the single-tier system of taxation, retirees will soon no longer be able to gain tax refunds from tax deducted from dividends. I am, therefore, glad that some prominence was given to retirement funding in Budget 2010. The 1Malaysia Retirement Scheme was introduced.

Tax relief of RM1,000 or more for premiums paid to insurance companies for annuity schemes was proposed. In addition, employees can elect to restore their own Employees Provident Fund (EPF) contribution to 11% of remuneration.

Currently, some employers contribute to the EPF at 19% of their employees’ remuneration and a few exceed this threshold. Nineteen per cent is often taken to be the ceiling because this is the maximum tax deductible by the employer.

A green building near Kuala Lumpur. Under Budget 2010, Malaysia’s green tax initiatives have once again took the form of an incentive.

I consider it unfortunate that employers were not given an option of increasing their contribution to 30% with full tax deduction and hope that this facility will be introduced soon as it would increase funds for retirement.

Broad tax base

Businesses often try to broaden their sources of revenue. For example, businesses which sell equipment like high-end printers have enlarged their revenue streams by offering home printers, rental of printers and printing services.

Thus, in poor economic conditions when sales of high-end printers are impacted, their other revenue streams augur well for the business. Countries act in a similar fashion by broadening their tax base.

The Finance Minister also sought to broaden Malaysia’s tax base through Budget 2010, a technically good move.

Malaysia’s sole capital gains tax will be revived from January 2010 and disposals of real property irrespective of holding period by any person will be subject to an effective rate of tax of 5%.

The tax base will be widened at the expense of equity and the already soft real estate industry in Malaysia.

I refer to inequity because real property gains tax at an effective rate of 5% will be levied on gains upon disposal from property acquired many years ago, for example 20 years or more ago when the purchasing power of the ringgit was far higher than its current value.

I recommend that there be indexation of the acquisition price of real property, especially where the holding period exceeds five years and an exemption order for this purpose be issued. Owners of such properties should also take immediate action to review and restructure their property holdings.

I had expected the scope of service tax to be enlarged such that many more services, especially those patronised by the higher income group, would be caught, but regrettably this did not materialise.

Instead, only one additional item was brought within the scope of service tax – charge and credit cards. Unless the issuing companies bear the service tax, this move will cause the number of credit and charge cards to be vastly reduced within a year and promote other forms of plastic money.

Consumption may therefore be impacted and cost of finance increased.

Green taxation

Malaysia’s green tax initiatives once again took the form of an incentive. I trust that consideration will be given to levying green taxes which are sufficiently high to affect behaviour positively.

For example, there could be a tax on usage of electricity, with a reasonable exemption level for the low income group, such that consumers are encouraged to be more energy efficient. Britain is proposing such a tax while a number of countries already operate a green tax on electricity.

Green taxation can also be used as a means to broaden Malaysia’s tax base and also cater for environmental concerns by providing funding created from sources which negatively impact the environment.

Innovation, productivity and prudent spending

Did you notice that the word “innovate” or words derived from it featured no less than 18 times in the budget speech? The word “innovation” was used within the first five minutes of the speech in the context of advancing into a high-income economy, the first budget strategy.

Another component of the budget speech which attracted my attention was tucked just prior to the conclusion of the speech.

In his Budget 2010 allocation, the minister reined in operating expenditure (as well as development expenditure) such that the budget deficit was capped at 5.6% of gross domestic product.

In that connection, reference was made to productivity and prudent spending with priority to value-for-money.

Innovation, creativity, high value-add, productivity and prudent spending are values which I appreciate and many businesses practise.

I was pleased to see the reference given to these values in the budget speech, and the emphasis on innovation. The “battle cry” was innovate or stagnate. May these aspirations be realised in substantial measure for the good of the country.

Implementation

Many companies and countries have similar objectives – innovation, creativity, high-income, prudent spending, productivity, reducing expenditure and reducing loss of talent. Why do some of these companies succeed while others fail? Why do some countries fare better than others?

Part of the answer lies in the realm of implementation. Execute well and reap success. Implement poorly and suffer loss. I wish the country will execute the budget proposals well as baby steps are taken to transform Malaysia into a high-income economy.

·Ronnie Lim is the country tax leader of Deloitte Malaysia.

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