Malaysian budget highlights: 3 key areas of focus

The three focus areas for the Malaysian Budget, delivered by the country’s finance minister on 2 November 2018 are:

• implementing institutional reforms
• ensuring the socio-economic wellbeing of Malaysians; and
• fostering an entrepreneurial economy

The Government is forecasting that the budget deficit will grow to RM53.3 billion in 2018 from RM40.3 billion in 2017.

In 2019, the budget deficit is expected to fall slightly to RM52.1 billion. As a percentage of GDP, the deficit is forecast to fall from 3.7 per cent in 2018 to 2.8 per cent in 2021.

According to the Minister of Finance, the Federal Government’s debt and liabilities as at 30 June 2018 stood at RM1065 billion, including RM725.2 billion in direct federal government debt, RM155.8 billion in committed contingent liabilities and RM184.9 billion in other liabilities including leased payments for Public Private Partnership (PPP) projects.

According to the Budget papers ‘The outlook for the Malaysian economy remains resilient in the near term despite considerable external and domestic headwinds.’ 

This is reflected in the key economic forecasts in the Budget, including: 

• Malaysia’s GDP is forecast to grow 4.8 per cent in 2018 and 4.9 per cent in 2019 – supported by domestic demand, especially household spending.
• Malaysia’s exports are forecast to increase 4.4 per cent in 2018 and 3.9 per cent in 2019, despite concerns over global trade.
• Inflation is expected to 1.5 to 2.5 per cent in 2018, and 2.5 to 3.5 per cent in 2019
• Malaysia’s unemployment rate is expected to remain unchanged at 3.3 per cent in 2019

The Government also used the Budget to restate its commitment to implementing institutional reforms including strengthening fiscal administration through strategies such as zero-based budgeting, adopting accrual accounting by 2021 and increased transparency in government procurement.

Specific budget announcements:

Taxation

• The corporate income tax rate for taxable income of up to RM500,000 and SMEs with less than RM2.5 million in paid up capital, will be reduced from 18 per cent to 17 per cent.
• The Government will launch a Special Voluntary Disclosure Program to offer taxpayers the opportunity to voluntarily declare any unreported income for Malaysian tax purposes and in turn have a substantially reduced penalty apply (10 to 15 per cent depending on when the disclosure occurs). The program will end on 30 June 2019, at which time penalty rates will go back to 80 to 300 per cent.
• Related to this, Malaysia is now a participant of the Common Reporting Standards, which will see Malaysia receive automatic exchange of financial account information from foreign tax authorities.
• The Government proposes to introduce a time limit on the carrying forward of losses and allowances for tax relief measures to a maximum of seven years.
• The Real Property Gains Tax rates will be increased for companies and foreigners from five per cent to 10 per cent. For Malaysian individuals, the rate will be increased from zero to five per cent (however housing with prices below RM200,000 will be exempted).
• The stamp duty on the transfer of property valued at more than RM1,000,000 will increase from 3 per cent to 4 per cent.
• Imported services will be subjected to Service Tax from 1 January 2019
• Foreign service providers will be required to register with the Royal Malaysian Customs, charge and remit the relevant Service Tax on the transactions with effect from 1 January 2020. 
• The tax exemption for interest earned on wholesale money market funds will cease 1 January 2019.
• The tax ceiling of RM20,000 under the Labuan Business Activity Tax Act 1990 will be removed.
• The Government proposes to impose a departure levy for all outbound travellers by air from 1 June 2019 - RM20 for outbound travellers to ASEAN countries and RM40 to countries other than ASEAN.
• The annual casino license fee will increase from RM120 million to RM150 million. 
• Casino duties to be increased up to 35 per cent on gross collection.
• Machine dealer’s license to be increased from RM10,000 to RM50,000 per annum.
• Gaming machine duties to be increased from 20 per cent to 30 per cent on gross collection.
• To assist the problems faced by small manufacturers who purchase their products from importers instead of other registered manufacturers, the Government will introduce a credit system for Sales Tax deduction starting 1 January 2019.
• The government is offering a Pioneer Status incentive of 70 per cent or Investment Tax Allowance of 60 per cent for five years for companies that manufacture environment friendly plastics that are bio-resin and bio-polimer based.
• The Government will add “sugar sweetened beverages” to the list of manufactured goods subject to excise duty. The duty proposed will be at RM0.40 per litre to be implemented on 1 April 2019
• All donations to national schools and public institutions of higher learning (IPTA) registered with the Ministry of Education for the purposes of upgrading infrastructure will be tax exempted starting 1 January 2019.

In addition to these announcements, the Government established the Tax Reform Committee in September 2018. The Committee is tasked to identify and propose improvements and additional measures to create a more progressive and effective taxation system.

The Government will also review the existing tax relief and incentives under the various tax acts. Further, the Royal Malaysian Customs will step up enforcement against cigarette smuggling.

Social measures

• The Education Ministry remains the single largest recipient of Budget allocation at RM60.2 billion or 19.1 per cent of the total Budget 2019. This includes RM2.9 billion to help students from lower income groups in terms of food, text books and cash assistance; as well as RM652 million for upgrading of schools.
• The Government will allocate nearly RM29 billion for Ministry of Health, which is an increase of 7.8 per cent from the previous budget.
• Households with a monthly income of RM2000 and below will receive a cash grant of RM1000.
• Households with a monthly income between RM2001 and RM3,000 will receive a cash grant of RM750.
• Households earning between RM3001 to RM4000 monthly will receive a cash grant of RM500.
• For every child 18 years old and below or is disabled in the family, there will be an additional top-up of RM120 per child of up to a maximum of four children.
• To encourage an increase in retirement savings of women, eKasih beneficiaries whose husbands contribute at least RM5 monthly into their wives’ accounts, the Government will contribute RM40 a month.
• The Government will provide a targeted fuel subsidy to individual car owners with an engine capacity of 1500cc or less and motorcycle owners of 125cc or less. Each car and motorcycle owner will enjoy up to 100 litres and 40 litres of RON95 petrol per month with a subsidy of at least RM0.30 per litre, depending on the market price of petrol. This scheme is expected to commence in the second quarter of next year. Owners with multiple cars will not receive this benefit.
• The Government proposes that the employer portion of EPF contributions for Malaysians aged between 61 to 65 will be cut to 4 per cent from the current 6 per cent effective 1 January 2019. Further, the current mandatory employee contribution for working retirees will be zeroed. The government also propose to provide additional tax deduction to employers who employ this group up to a monthly salary of RM4,000.
• Government pensioners on less than RM1000 per month will receive a one-off RM500 payment.
• The minimum wage shall be raised to RM1100 per month for the whole of Malaysia starting 1 January 2019.
• Regulations will be implemented requiring public-listed companies in Malaysia to publicly disclose key pay metrics each year in their annual report. This will include ‘the lowest wage paid’, ‘average wage per worker’, the ‘highest and lowest wage ratio’ as well as a statement by the company of how they intend to improve their employees' average pay.
• In partnership with the private insurance industry, the Government will pilot a national B40 Health Protection Fund to provide free protection against four critical illness for up to RM8000 and up to 14 days of hospitalisation income cover at RM50 per day starting 1 January 2019.
• For first-time home-buyers purchasing residential properties priced up to RM500,000, the Government will exempt from stamp duty sale and purchase agreements as well as loan agreements om properties up to RM300,000 until December 2020.

Foster an entrepreneurial economy

• Government-Linked Investment Funds will allocate RM2 billion in matching funds to co-invest with the private equity and venture capital funds.
• To access the venture capital funds controlled by various government agencies, funding disbursements will be tied to the business’s ability to secure matching funds from the private sector.
• A fund of RM2 billion will be available for the Green Technology Financing Scheme with a subsidised interest rate of two per cent for the first five years.
• The Government will allocate RM50 million to set up a Co-Investment Fund (CIF) to invest alongside private investors via Equity Crowdfunding and Peer-to-Peer Financing.
• The Government will allocate RM210 million from 2019 to 2021 to support the transition and migration to Industry4.0. The Government will assist the 500 SMEs to carry out Readiness Assessments to migrate to Industry4.0 platforms via Malaysia Productivity Corporation.
• To incentivise SMEs to invest in automation and modernisation which forms part of the Industry4.0, the Government have allocated RM2 billion under Business Loan Guarantee Scheme where the Government will provide guarantees of up to 70 per cent.
• The Government will create a RM3 billion Industry Digitalisation Transformation Fund with a subsidised interest rate of 2 per cent to accelerate the adoption of automation, robotics and artificial intelligence.
• A RM4.5 billion SME Loan Fund will be made available via commercial financial institutions with a 60 per cent government guarantee, including RM1 billion for Bumiputera SMEs.
• The Government will be allocating RM100 million to upgrade the capability of the SMEs in the halal industry.
• There will be a RM1 billion SME Syariah Compliant Financing Scheme made available via Islamic financial institutions where the Government will provide a subsidy of 2 per cent profit rate.
• The Ministry of Finance will set up a Special Task Force to evaluate the role and functions of statutory bodies and companies owned by Ministry of Finance to reduce duplication of functions and involvement in areas where the private sector is efficient and competent. 
• To encourage greater SME participation in the Digital Free Trade Zone, the government will assist the formation of the e-World Trade Platform hub in Malaysia. The hub provides training programs to assist SMEs take advantage of digital innovations and opportunities in global trade.

Infrastructure

• The Government will proceed with LRT3 and MRT2 after renegotiation. The Government will retender for the Klang Valley Double-Tracking 2.
• The Government will cancel the Multi-Product Pipeline and Trans-Sabah Pipeline projects. The East Coast Rail Link (ECRL) is suspended pending renegotiation. The Government has also cancelled MRT3 project for now, pending completion of MRT2. The Government has also postponed the implementation of the Kuala Lumpur – Singapore High Speed Rail.
• Government will launch the National Fibre Connectivity Plan in 2019 with an allocation of RM1 billion. This plan seeks to achieve access to the internet at 30 Mbps in rural and remote areas within five years.

Other budget measures

• Where the opportunity arises, the government has stated that it will seek to reduce their stake in non-strategic companies and utilise the proceeds to pay down debt. This includes the Government establishing an “Airport Real Estate Investment Trust (REIT)”. The Government hopes to raise RM4 billion from selling a 30 per cent stake of the REIT to private investing institutions.
• The Government will allocate RM17.5 million over the next 5 years to Malaysia Professional Accountancy Centre (MyPAC) to produce 600 qualified Bumiputeras accountants towards meeting the goal of 3,000 Bumiputera accountants registered with the Malaysia Institute of Accounts from the 1,554 today.
• The Government will establish a Debt Management Office responsible for reviewing and managing the government and its agencies’ current and future debt and liabilities. The Office shall have oversight over debt issuance by the Federal Government, statutory bodies and Special Purpose Vehicles.