13 September 2002. It is expected that the Budget 2003 will be tabled in Parliament on 20 September 2002, rather early this year. As the Budget will have far-reaching repercussion for the economy, affecting trade and industry as well as the common man on the street, it is therefore awaited with some expectations.
This year's Budget comes at very testing time with the past memories of Sept 11, 2001 attack on the United States. The war jitters does not auger too well for the international economy and national economies of emerging countries particularly affecting the oil prices, which has gone from US 17 per barrel in October 2001 to US 29 in early June this year – a whopping 70% increase. The rise is bound to affect all aspects of production, output, business, trade and commodity prices - basically boosting cost and plunging profitability. In such context, what can we expect from the Budget 2003?
This year, a deficit budget could be tabled, say at about 3-4% of the GDP as compared to 5% as planned for 2002. Given the Government debt level of about 44% of the GDP, and the debt servicing at about 14% of the revenue, this should not be a problem. If this is so, then this is the sixth year in running for a deficit budget.
Regional economic development and foreign direct investment
East Asia, including Malaysia, and the rising economy of China is estimated to chalk up the highest growth rates in the emerging global economic system. For example, the East Asian Economy block is expected to chart an impressive 7% growth for 2002 as compared to the Latin American and the African economies with a dismal 3-4%. It would therefore be prudent for Malaysia to encourage further investment in business activity in the wake of the uncertainties caused by the sluggish European and the United States economic performance.
The Malaysian domestic economy is presently contracting due to the excess capacity in the manufacturing sector. Private investment is proving to be a very weak link in this scenario. This is partly due to the bulk of the foreign direct investment (FDI) and even some local entrepreneurs capital moving away from Malaysia.
Interestingly, China is attracting the bulk of the investments from the Asia-Pacific (excluding Japan). This is partly contributed by China's ascension to the WTO and its larger domestic market, cheap labour and preferential tax rates.
Besides China, the other South East Asian countries like Indonesia, Singapore, and Thailand too pose a real threat to FDI attraction into Malaysia, partly due to the very conducive tax incentive offered in these countries.
It is of great concern to the treasury that the FDI in Malaysia has been dropping recently. For example, application to MIDA by the manufacturing sector has dropped by a scary 64% in 2001. And application by the local entrepreneurs also dropped a frightening 69% in the same period. The MIER report for Q1 2002 indicates that the FDI inflow has dropped to RM 2.1 billion. in the year 2001 from the RM 14 billion. in 2000. This is really worrying.
Malaysia should therefore endeavour to offer an extremely competitive, if not better range of tax incentives package (some call it second generation incentive package) to draw in some FDI from the competing countries. Certainly, a lot of homework has to be done to get the FDI coming in. On this score, we can expect a new investment incentive strategy and fine-tuning of the administrative procedures, like a one-stop approval, liberal assistance and broad interpretation of the relevant enabling legislations, etc.
Malaysia has the advantage of political stability and smooth succession of power, unlike other countries in the region – and this should be used to the hilt.
Globalisation and group tax relief
With globalisation, companies operating in a global presence would like to see group tax relief for their operations. This would offer an attraction to operate from Malaysia. At the moment, limited opportunities exist for such tax relief in Malaysia.
With group tax relief, it will be easier to persuade conglomerates and multinationals to undertake risky adventure in the burgeoning and competitive leading edge sectors like aeronautics, pharmacy and medical technology, as well as information and communication technology, not to mention resource based industries like mining and agriculture and have their operations in Malaysia.
Lower tax rates
The global trend is to cut on tax rate and let the spin off effects of FDI to roll in the revenue to finance development in emerging economies. A tax cut has many advantages, one being to cut the cost of operations, thus offsetting to some extent Malaysia's relatively higher land and labour cost in the region, while making the Malaysian operations globally competitive.
The common notion that reducing the tax rates will reduce the government's coffer is a total myth. This is illustrated by more than 14 countries that have in the last three years cut back on their tax rates, including major economies like India, Australia and South Korea. In Malaysia, the corporate tax cuts from 1993 to 1995 indicates that the revenue has not fallen, but instead has risen (see table below).
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Presently, Malaysia's 28% corporate tax rate stands somewhere a little above halfway between 16% of Hong Kong and 32% of Philippines.
Individual relief
Incentive for the consumer to spend to create a buoyant economy could be boosted with some special tax incentives. This could be done by way of a higher tax rebate – by increasing the existing bracket from RM 35,000 to may be RM 40,000, releasing money for consumption expenditure.
Relief for EPF and insurance deduction could be revised to a maximum of RM 10,000 instead of the present RM 5,000. With the high cost of education and hospital and medical benefits, this will alleviate the financial burden to some extent.
The incentive for caring your parents could be made with specific deductions for such care. The present deduction is rather limited and restrictive.
Child deduction too could be increased from the present RM 800 to say RM 1,000 per child. The cost of bringing up a child is getting more expensive, and the effect can be seen in the new demography pattern.
Incentives for woman
The number of women entering the workforce over the past two decades has risen sharply, and more interestingly, the number of active men has fallen over the same period. In Malaysia, Asian Development Bank studies show woman workers are more concentrated in manufacturing sector.
The Budget could therefore address woman issues by giving more relief for workingwoman, working mothers and single mothers. Incentives could take the form of increased child relief for single mothers, more as well as higher and liberal childcare facility incentives for employers, and deductions for child care cost for working single mothers against employment or business income.
AFTA and import duties on motor vehicles
The budget is expected to introduce a schedule to reduce import duties for motor vehicles in readiness for the total liberalisation of the market in 2005 under the ASEAN Free Trade Area. Under the Common Effective Preferential Tariff, all member countries of ASEAN are required to reduce the tariff rate to between 0-5% for those vehicles complying with 40% local content requirements. Reducing the tariff rates should be done rather carefully and in a selective fashion to prevent any sharp fall in the price of second hand and used motor vehicles. Perhaps the Government may start with commercial vehicles, proceeding to four-wheel drives before coming to the passenger car segment.
Bi-monthly tax instalments
As a result of change in tax system such as payment of monthly tax instalments under Self-Assessment System, there are increasing administrative works especially in preparation of payment and issuance of tax receipts both by IRB and the taxpayers. It is hoped that while anticipating some goodies on tax incentives, the authority will also look into the administrative problems and suggest improvement, for example, to change the monthly tax instalment payment to bi-monthly basis.
Foreign tax residents
Another practical problem that arises due to recommendation of high technology into Government's system is the scanning of passport without putting on the “in & out” stamps as proof of travel. Taxpayers are currently facing practical and realistic problem such as the Immigration's print out of travelling records does not tally to that of the travellers. This has posed difficulties both for IRB and the taxpayers for verification and reconciliation of number of stays.
With the Budget only a few days away, Malaysian and foreigners alike are watching with expectation to see an effective budget propounding a mechanism for prudent fiscal measures and much awaited economic recovery. Hopefully, as usual, it will be a people friendly one. |
