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Changes In Tax Structure To Attract More Investments
Malaysia Perspective | 24 October 2012

By Yang Ming Wan

When Prime Minister Datuk Seri Najib Tun Razak revealed Budget 2013 in end-September, he hinted at changes in the tax structure in the immediate future – from one that had been over-reliant on direct taxes and petroleum returns to one that focuses on indirect taxes.

Furthermore, the Government had been saying repeatedly that it will review the subsidies system to benefit those who truly need them, rather than a blanket subsidy system that applies indiscriminately to the poor as well as the rich.

Due to the huge impact that these two changes will have on the people and the economy, they will need to be implemented in stages over a minimum of one year, while the effects of the complete package will only come into play in 2014, which is after the coming election.

Up Goes Goods and Services Taxes (GST), Down Goes Corporate Taxes
The PM disclosed in early-October that his administration intends to lower corporate taxes in the near-term in order to make the domestic companies more competitive. However, this measure will only kick in after the tax structure has been reorganised. This confirms again that the Government will shift its focus from income-driven direct taxes to GST-driven indirect taxes.

This implies that the Government will soon implement GST, followed by a gradual reduction in corporate and personal taxes.

Last year, the Federal Government collected RM 185.4 billion in revenue, of which direct taxes contributed a massive RM 102.2 billion, or 55%. This was the first time the direct taxes collected exceeded RM100 billion. As a result of the Government’s emphasis on direct taxes, revenues from indirect taxes paled in comparison. This was in relation to special taxes such as specific sales and services taxes.

Revenue from direct taxes comes from four sources, of which the biggest contributor is corporate taxes which amounted to RM 46.9 billion or 46% of the total tax received, followed by RM 27.7 billion in corporate taxes filed by Petronas alone, which accounted for 27%. Personal income taxes came in third with RM 20.2 billion or 20% of the total venue. These three revenue sources alone accounted for 93% of Malaysia’s direct tax receipts. The rest was made up for by stamp duties at RM 4.9 billion (5%) and other taxes (2%).

Attracting foreign direct investments (FDI)
The timing of the Government’s ‘metamorphosis’ hinges on two factors: Firstly, the current low tax collection efficiency is lagging behind the Government’s expenditures, causing the Federal Government’s budget to be in deficit over the past 15 years, which in turn caused a rise in government debts and put the pressure on the Government to lower its deficits.

Secondly, the Government needs a massive amount of foreign and domestic direct investments to realise its Economic Transformation Plan. The country needs to make its taxation competitive so as to attract more FDI.

Malaysia’s corporate tax rate is currently pegged at 25%, which is the same as that of Indonesia, Vietnam and China. However, we are unable to compete with these countries for labour-intensive industries, while our tax rate is much higher than other technology-driven i economies such as Singapore and Taiwan (17%), Hong Kong (16.5%) and Korea (10-22%).

Thailand, which is in a similar economic situation as Malaysia, used to peg its corporate tax rate at 23%. This makes it slightly more competitive. This year, the country announced that it will lower its corporate tax rate to just 20%, which would make it more competitive than Malaysia.

The reason why these countries can afford to keep such low corporate tax rates is because their primary source of tax revenues is derived from indirect taxes, rather than direct taxes such as corporate and personal taxes.

Becoming The Preferred Capital Raising Market
The Najib administration tasted sweet success in its plan to list large-scale corporations during economic downturns in Europe, US and major Asian countries this year. The launch of the world’s second and third largest IPOs, namely Felda Global Venture Holdings (FGVH) and IHH Healthcare in Malaysia has significantly raised the country’s profile in the international equity markets.

However, before Malaysia can truly become the choice market for global capital raising and corporate operations, the Government needs to lower its corporate tax to compete with regional financial hubs, such as Hong Kong and Singapore. This is what the Prime Minister aims to achieve.

The news of the impending ‘metamorphosis’ of the tax structure has already stirred up a buying frenzy in the stock market. Indeed, Malaysia is heading down the right track.

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