(Post-Budget 2002 Commentary) What Grant Thornton has to say…

 

20 October 2001

The 2002 budget presented in Parliament yesterday by the Honorable Finance Minster was a timely and appropriate budget, focusing on the core issues for a recovering economy facing worldwide recessional trends and the specter of gloom and uncertainty following the September 11 terrorist attack in the United States, according to Consultants from Shamsir Jasani Grant Thornton.

The budget has addressed the issues of generating growth, encouraging spending and boosting the domestic demand with emphasis on the local arena rather than foreign. Altogether twenty-eight taxes related issues and four excise duty related issues were attended to in this budget.

We will look into some of the pertinent proposals and their impact on the economy and to the relevant bodies – corporate and individual business and society in general.

Individual and coperative income tax

The present income tax rates for a resident individual and co-operative range between 0% and 29%. The maximum rate is charged for an individual whose income exceeds RM150,000 while for a co-operative the amount is RM500,000. In the case of a non-resident, the tax is at a flat rate of 29%.

The Budget 2002 has proposed to harmonise the maximum individual tax rate with the corporate tax rate of 28%. It also proposed the individual income tax rates be reduced by between 1 and 2 percentage points, and the chargeable income, which is subject to the maximum tax rate, be increased from the current RM150,000 to RM250,000.

It is certainly good news for taxpayers because there is a definite tax savings. For example, an individual who is in the RM50,000 tax bracket would pay only RM3,475 (compared with RM4,275 before the amendment), thus saving RM800. On the other hand, an individual with a chargeable income of RM100,000 would now save RM1,300 and if you are in the RM250,000 bracket, the saving in tax now is RM3,800.

What is the impact of this reduction in tax to the economy? For one, it is hoped the additional savings would increase consumption and encourage work, not to mention the possibility of increased savings.

For the man on the street, it is certainly good news.

Review of the period for reinstatement allowance

Companies and producers of promoted food products (approved by the Finance Minister) that reinvest in expansion, modernisation, diversification and automation projects are given reinvestment allowance. This allowance is for 5 years from the date the expenditure was incurred. After 5 years, the company may become eligible for an accelerated depreciation allowance for a further 3 years.

This incentive has been given a further boost by an extensive of time from the present 5 years to 15 years. It is a very kind gesture by the government to the business community to encourage it to continually reinvest in the production facility – meaning update the technology and secure that added competitive advantage in preparation for globalisation.

Industrial building allowance for hotels

Industrial buildings are buildings recognised for tax purposes as buildings used for, broadly speaking, manufacturing and processing, for the purpose of the production of gross income from a particular business.

These buildings are given an allowance known as an industrial building allowance, or IBA, at the rate of 10% on the cost incurred in its construction for the first year (initial allowance) and thereafter, at an annual rate of 2% (annual allowance) on the cost until the cost of the building is written off completely.

For buildings that are purchased, the initial allowance is not given, and the annual allowance is given as a percentage of the cost price using a complicated formula, the effect of which is that the recovery period of the cost of the industrial building is longer (from 45 years in the case of a constructed building to 50 years in the case of a purchased building).

The Income Tax Act 1967 is now amended to give cognisance to the significance of an industrial building to business, irrespective of whether the building is constructed or purchased.

The allowances to be given to a purchased building are an initial allowance of 10% and an annual allowance of 3%.

The treatment of a building as an industrial building was also an anomaly in the case of a hotel building. In the case of hotels, only hotels that enjoy pioneer status, or an investment tax allowance, are treated as industrial buildings.

The Budget 2002 tried to introduce some uniformity in the computation of the IBA by treating all hotels as industrial buildings, with the condition that they are registered with the Culture, Arts and Tourism Ministry. Now all such hotels will qualify as industrial buildings and will enjoy the privileges of an initial allowance and the same annual allowance.

This is certainly a boost for the hotel industry because it is now possible to recover the cost of the construction or purchase price in a much shorter time without any “discrimination” between a constructed and a purchased building.

Exemption of income tax on rental of ISO containers

As a normal business practice, shipping companies will not purchase all the containers it needs to meet its requirements partly because it is expensive and its usage fluctuates with the commercial demand. It is more prudent to rent.

Currently, income derived from the rental of ISO containers by non-residents from any lessee in Malaysia is classified under income of movable property, which is subject to income tax under section 4A of the Income Tax Act 1967 (as amended). The income thus received by the non-resident is taxable at 10% of the gross income.

The Budget 2001 sought to exempt the non-resident from any tax on the income it receives from shipping companies in Malaysia. With the new proposed exemption, hopefully the savings will be passed on to local shipping companies that will now benefit from a lower rental rate.

Removal of bonus restriction

This has been an issue with employers for many years. The present tax deduction of bonus is restricted to an amount not exceeding two months of the employees' salary in a year.

This proposal will provide an opportunity for the employer to formulate a more attractive remuneration package that commensurates with the productivity of their workers. The bonus will now be a truly rewarding experience.

Tax incentive for developing websites

The Budget 2002 proposes that income received by companies undertaking offshore trading – buying and selling of foreign goods to non-residents via websites in Malaysia – be taxed at a concessionary rate of 10% for 5 years, on condition the company obtains approval from the Finance Minister.

This move will encourage companies to take the opportunity to trade in a borderless world market.

Also announced in the budget is the deduction on the cost of developing the websites. This is closely tied to the tax incentive for trading via websites in Malaysia.

Extension of the scope of tax incentives for approved food production

Presently, companies engaged in the approved food production enjoy certain relief, including the cost of investing in a subsidiary (that is engaged in the approved food production), and tax exemption on statutory income for 10 years. Alternatively, the companies are given the option to opt for group relief.

To further accelerate food production activity, it is proposed that the tax incentive announced in the Budget 2001 for the company which invests, and the company that undertakes production of approved products, be extended to any company which reinvests in the production of the same food products. The incentive will be given for 5 years.

In line with the concept of “back to basics”, the government is encouraging agriculture and moving away from traditional crops and food production. The approved food production now includes vegetables, fruits, herbs, spices, aquaculture and the rearing of cattle, goat and sheep.

Extension of tax incentives for tour operators

The government is very keen on developing the tourism industry. Towards this end, it had provided incentives to tour operators who bring in at least 500 foreign tourists per year by giving a tax exemption on their income, a similar incentive was offered for promoting domestic tourism on tour packages with at least 1,200 local tourists per year.

The Finance Minister also said that following the Sept 11 incident in America, the number of foreign tourists coming into Malaysia, especially from the US and Europe, has fallen drastically. According to Dr Mahathir, it may be time to promote intra-regional tourism, especially in countries like India and China. Tour operators can now enjoy an additional 5 years of exemption while helping to promote Malaysia.

Conclusion

Overall, this budget provides a lot of incentives to the business sectors to boost production, output or services in the manufacturing and service sectors, and the government has been quite generous in this sense.

Some of the incentives are designed as long-term solutions and some to anchor the economy on more solid ground, with a view to paying long-term dividends.

Overall, we think this is a good budget.