EY: A fit-for-purpose budget that meets short-term needs

By Amarjeet Singh, EY Asean Tax Leader; Tax Managing Partner, Ernst & Young Tax Consultants,

At RM322.5 billion, Budget 2021 is the largest budget in Malaysian history and did not see any new taxes being proposed or any existing taxes being increased. It is a fit-for-purpose Budget which meets the immediate needs of the country to encourage recovery, growth and investment.

It is now key to monitor and measure the implementation of the Budget closely against the desired objectives and also consider how our neighbours in the region are reacting, especially in terms of incentive offerings. As we saw at the beginning of this year, the Covid-19 pandemic has created significant uncertainties and economic conditions may change very rapidly, depending on the continued impact of the virus and the length of time it takes to develop a vaccine. As such the Government needs to be agile and prepared to revisit and supplement the Budget measures as and when necessary.

In response to the Covid-19 pandemic, four economic stimulus  packages (namely Penjana, Prihatin, Prihatin SME Plus and Kita Prihatin) worth more than RM300 billion were announced this year, focusing on protecting the rakyat’s lives and livelihoods, ensuring business continuity and building economic resilience.

Budget 2021 continues to address the immediate needs of the most vulnerable, through continuation of targeted stimulus measures, especially for the B40 group. The proposed measures include allowing additional EPF withdrawals of RM500 per month for 12 months, additional  cash support under the Bantuan Prihatin Rakyat scheme, targeted health-related tax reliefs for individuals, as well as extending the wage subsidy programme.

There were also measures to encourage the public sector and GLCs to offer short-term employment for positions such as nurses, medical attendants, social welfare officers and temporary teachers, as well as incentives for reskilling and upskilling.

As a result of the stimulus packages and the Budget 2021 proposals, the Government expects the economy to grow by between 6.5% and 7.5% in 2021, representing a significant improvement from the projected contraction of 4.5% in 2020.

To spur this growth, the Government has proposed various new and enhanced incentives designed to make Malaysia more attractive to foreign investors. On this, we saw a proposed extension of the Principal Hub incentive with relaxed conditions and the introduction of a new Global Trading Centre incentive.

The PENJANA proposal of a preferential tax rate of 0% to 10% for selected manufacturers has also been extended to 2022 and the scope has been extended to cover selected services, particularly high technology, reserach and development and medical-related services.

These proposals, combined with the proposed relaxation to the licensed manufacturing warehouse and free zone regimes, will certainly enhance Malaysia’s attractiveness, particularly as a supply chain hub.

The Government continues to take a strategic long-term view by providing the highest allocation of the Budget to the education sector for the third year in a row. The allocation for development expenditure is also encouraging, at more than 40% of public expenditure, the highest in 10 years.

The development expenditure budget sees RM15 billion allocated for key infrastructure projects such as the Pan-Borneo highway, the Gemas-Johor Bharu double-tracking and electrification project, and Phase 1 of the Klang Valley Double Track project, to spur spending in the short term. The building of a strong infrastructure network, including an upgrade of broadband infrastructure, is also noteworthy.

It is also encouraging to see concrete steps being taken to prevent the loss of tax revenues through illicit trade and the black economy, particularly  targeting contraband cigarettes, with measures such as limiting trans-shipment activities to certain ports and imposing tax on cigarettes and tobacco products as duty-free islands.