Budget Wish List

By Dr Veerinderjeet Singh

THE 2008 Budget is scheduled to be tabled in Parliament on Sept 7, 2007. This year’s theme is `Enhancing Competitiveness and Sharing Economic Prosperity’. As in the past, the Ministry of Finance has set up various focus groups to discuss and develop ideas which could be incorporated in the 2008 Budget. Some of the focus groups are dealing with ways and means of attracting greater private investment, improving the public delivery system as well as energising certain specific sectors of the economy.

This year has been rather interesting in that a number of major announcements/developments have already been made public. This refers to the announcements on the following:

* tax incentives for companies involved in specific services in the Iskandar Development Region,

* the non-imposition of Real Property Gains Tax on transactions entered into after March 31, 2007 (this was enacted by way of an exemption order),

* the salary adjustments for civil servants,

* the 25% hike in excise duty on cigarettes,

* the amendments made to the Promotion of Investments Act intended to update and streamline (by way of removing certain outdated incentives) the Act, and

* the recent launch of the Northern Corridor Economic Region.

The various announcements and other developments have definitely created a `feel-good’ environment in the country. The economy is picking up, with a number of projects having been allocated and some due to commence next year. Private investments, including foreign direct investments, are increasing despite competition from neighbouring countries. The budget deficit is expected to remain at the same level and remain manageable, as there is excess liquidity and the deficit can be financed by way of domestic borrowings.

Nevertheless, reducing the deficit and striving for a balanced budget over the next few years should still be a priority, and the Government should stay focussed on this objective. Of course, it has to ensure that the economy can sustain itself. This can be done by smoothening out the anomalies and inconsistencies that exist and which can be an impediment to enhancing private investment.

Notwithstanding this, we are all aware of the regional challenges that exist, as emerging economies may `steal the thunder’ by offering all sorts of `goodies’ to investors. We need to remain vigilant against such competition, as the business environment, including fiscal incentives, need to be in tune with, if not better than, what is on offer in other regional economies. However, we must not lose sight of the fact that we are in a different stage of economic development and, therefore, our policies and initiatives must be skewed towards what the economic planners have outlined in the Ninth Malaysia Plan and the Third Industrial Master Plan.

As it stands, there has been a buzz about town that there will be some changes with regard to the stamp duty. As usual, nowadays, the talk is all about abolishment, waivers and exemptions. The stamp duty is a transaction tax (in some ways it is very similar to the Goods & Services Tax), although it is restricted to specific legal documents as well as property transfers. Suffice to say that it does provide a significant contribution to the national coffers, more than what was contributed by the Real Property Gains Tax. A reduction in stamp duty rates may be a stronger possibility than a total waiver/abolishment. That would provide a further incentive towards energising the property sector as well as specific capital market activities.

But then again, perhaps the Government may need to create an even greater `feel-good’ environment, given the possibility of an impending general election! However, if ever the stamp duty is waived fully for a period of time, this could be an indication about the eventual imposition of the Goods & Services Tax in the country, which will bring into being a more stable tax revenue-generating mechanism.

What is also crucial is the fact that we are dependent on the contribution of the petroleum sector towards the nation’s total revenue needs. This needs to be looked at seriously as our petroleum reserves are drying up. The need to look at alternative sources of revenue is crucial. Therefore, there is a need to spell out a clear strategic direction in terms of tax policies for the medium and long term. The need for a comprehensive Goods & Services Tax is clear. Perhaps, the 2008 Budget will shed some light on this.

Based on what has been suggested and discussed by various parties, there may be an ongoing streamlining of the corporate tax system so as to make it more efficient and effective. The implementation of tax legislation would need to be improved upon so that there are efficient and effective ways of doing things. Some aspects that could be covered include (see table):

In conclusion, the 2008 Budget is expected to announce a bag of goodies for all and should be reflective of the good showing that the economy has exhibited so far.

The writer is the Managing Director of TAXAND MALAYSIA Sdn Bhd (a member of the TAXAND Global Alliance of independent tax firms), and has extensive experience in government, academia, international accounting firms and publications. He can be contacted at vs@taxand.com.my. Views expressed are his own.

Aspects that Need Attention for More Effective Tax Legislation Implementation

* A possible lowering of the corporate tax rate over the next few years similar to what was announced last year.

* Lowering of personal income tax rates in line with what had been announced in the last Budget for corporate tax rates. In 2008, the corporate tax rate will be 26% and, thus, the top marginal rate for individuals should also be aligned to 26%

* Considering widening the income bands subject to personal income tax rates, and thus lowering the effective rate of income tax for individuals.

* Introducing a one-tier corporate tax system where corporate profits are taxed and recipients of dividends from such taxed profits are exempted from tax on dividend income and, thus, are not entitled to any relief for the tax applicable to such dividends.

* Widening the availability of relief for costs incurred on all buildings rather than the current narrow focus on specific types of buildings, like factories.

* Allowing tax deductions for tax compliance fees and company secretarial fees, as such expenses are `necessarily’ incurred in running a business. Such services are an important part in ensuring compliance with the relevant rules and regulations, just like audit fees which have been specifically allowed as a tax deduction. Similarly, all expenditure connected with compliance with any legislation should be allowed as a deduction, as that will enhance a compliant society. This, thus, requires a change in the Income Tax Act to state that expenses that are necessarily incurred in operating a business should be tax-deductible. The current `archaic’ provision in the law is no longer relevant and should be changed.

* Greater convergence between the accounting and tax treatment of income and expenses.

* New incentives could be developed to encourage new areas of growth, especially in the services sector. Tax breaks should be provided on a selective or case-by-case basis. The focus should also be on intangibles and human capital.

* Fees for certain services rendered by non-residents in Malaysia are subjected to withholding tax. However, reimbursements/ disbursements (such as travelling, accommodation, etc) should not be subject to withholding tax. This will help to reduce the cost of doing business in Malaysia.

* The limit on the qualifying expenditure in order to qualify for capital allowances and rental claims on private motor vehicles should be removed. Currently, the limit is fixed at RM50,000 or RM100,000, depending on certain criteria.

* To further promote REITs and attract foreign investors, resident and non-resident individual unit holders should be exempt from tax on dividends received from the REIT for a specific period of time. In addition, non-resident institutional investors should be subjected to a reduced withholding tax of 10% instead of the current 20%. The withholding tax rate should be at the same rate as imposed on other payments subject to withholding tax such as royalties and technical fees.

* To further stimulate the property sector and ownership of houses, the relief on interest expense incurred on a housing loan to acquire an owner- occupied home should be reintroduced (the previous relief expired in 2005). This will assist the average income earners to own houses and also assist in stimulating the property sector further.

* In order to promote franchising activities and reduce the cost of investment to the franchisee, the lump sum payment of the franchise fee by the franchisee should be tax-deductible over a period of time.

* The relief for insurance premiums and contributions to the Employees’ Provident Fund/other approved schemes should be split such that each category would be restricted to a specific amount instead of the combined premiums/contributions being restricted to RM6,000 as is the current position.

* Relief should be given to individuals who incur costs in attending continuing development courses (as required by their specific profession) on their own so as to keep themselves updated.

* Employers should be granted a deduction for the cost of a new personal computer that is given to an employee for his/her own use, as this will assist in further enhancing the use of Information Technology. Again, this was granted a few years ago but has since expired.

* In order to relieve the burden of retrenched and unemployed staff, the compensation for loss of employment should be fully exempted. This also makes for easier compliance and cuts down the cost of getting approvals from the tax authorities on the tax treatment of severance packages, etc.

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