This article first appeared in The Edge Malaysia Weekly on November 9, 2020 - November 15, 2020

BUDGET 2021, the first for Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz, at a behemoth RM322.5 billion, is the largest in Malaysian history, befitting the times we are in.

“The year 2020 is a tumultuous period for Malaysia, marked by many challenging circumstances. Never before in modern history has an epidemic wrought such profound changes. The spread of Covid-19 has not only taken people’s lives but stifled economies. There are no guidelines nor precedence that can be used as reference because this is an unprecedented crisis,” Zafrul said early in his budget speech in parliament last Friday (Nov 6).

Out of RM322.5 billion, RM236.5 billion will be allocated to operating expenses, RM69 billion to development expenditure and RM17 billion under the Covid-19 fund.

Themed “Resilient as One, Together We Triumph”, Budget 2021 was formulated on three integral goals: the rakyat’s well-being, business continuity and economic resilience. This was also the first time where the budget involved consultations covering all 14 states and involving over 40 businesses and industries, the finance minister added in his speech in parliament last Friday (Nov 6).

Tax consultants and the business community agree that the budget this time round is detailed and targeted, providing assistance to relevant industries.

“Overall, Budget 2021 addresses three main things: the immediate needs, economic recovery as well as implicitly longer-term reforms,” says Amarjeet Singh, Ernst & Young Tax Consultants Sdn Bhd’s (EY) Asean and Malaysia tax leader.

Notably, the budget speech jumped straight to the allocation to fight the Covid-19 pandemic and to the healthcare sector after the opening remarks. It is no surprise, given the damage the coronavirus has inflicted on the economy since March.

The government is proposing to raise the ceiling for the Covid-19 fund by RM20 billion to RM65 billion.

“The main purpose is to fund the Kita Prihatin package, additional assistance for the people’s well-being, needs of our frontliners, and expected procurement of vaccine. I hope the members of this august house will collectively approve this proposal,” Zafrul said.

In addition to the Covid-19 fund, RM1 billion will be allocated for the healthcare sector for 2021 to fight the resurgence of the Covid-19 pandemic, covering the purchase of reagents, test kits, consumables for Ministry of Health (MOH) usage, personal protection equipment and hand sanitisers as well as the purchase of equipment, laboratory test supplies, and medicine for university teaching hospitals and for the National Disaster Management Agency to coordinate efforts to fight Covid-19.

MOH frontliners can also look forward to a RM500 one-off payment from the government next year, besides the existing RM600 monthly allowances.

While it is expected, many are happy to see that the Bottom40 (B40) group will continue to benefit from Budget 2021, especially in present circumstances.

KPMG Malaysia head of tax Tai Lai Kok notes that the B40 will continue to benefit from the measures that were announced in the budget and adds that the Middle40 (M40) group are also not left behind.

Many personal tax reliefs were expanded under the budget, which should help alleviate the burden of the tax-paying M40 group.

For one, tax relief for medical treatment expenses has been expanded to include vaccination expenses of up to RM1,000. Besides, there is also a generous RM2,000 increase to RM8,000 for the tax relief limit on medical expenses for serious diseases, and for full medical check-up, expanded to RM1,000 from RM500 previously.

The tax relief on expenses for medical treatment, special needs and parental care will be increased to RM8,000 from RM5,000.

“This will alleviate the people’s financial burden, as medical expenses have become a necessary and significant cost of living,” says Chartered Tax Institute Malaysia president Farah Rosley.

Malaysia Institute of Certified Public Accountants president Dr Veerinderjeet Singh is surprised, however, by the amount of personal tax reliefs that were announced.

“This will only help 15% of the workforce, and the thing about reliefs is that they are difficult to remove later on once they have been given out,” he says.

That said, the initiative to reduce income tax by 1% to 13% for those with chargeable income between RM50,001 to RM70,000 is helpful, especially for the M40 group, says Veerinderjeet.

A rough calculation shows that this reduction would benefit those earning RM5,000 to RM6,500 a month — or an estimated 1.4 million taxpayers, says the finance minister.

PwC Malaysia Tax leader Jagdev Singh says this will reduce the tax bill for those in that chargeable income category by RM200.

There was also an increase in lifestyle tax relief by RM500 to RM3,000, with the additional relief targeted for sports-specific purposes.

As for the B40 group, they will see an increase of cash handouts next year. The allocation for the cash handouts, under Bantuan Prihatin Rakyat, formerly known as Bantuan Sara Hidup, will increase to RM6.5 billion and benefit 8.1 million individuals.

Depending on household income and the number of children, a household could receive up to RM1,800.

The government will also allocate RM1.5 billion to implement the Jaringan Prihatin Programme to ease the burden of the B40 group in accessing internet services. Meanwhile, telecommunication companies will match that by providing benefits valued at RM1.5 billion, such as free data.

Besides the tax relief and cash handouts for the rakyat, the budget also emphasised generating and retaining jobs, Measures on hiring incentives were announced, including a special incentive for employers looking to replace their foreign workers with locals.

The wage subsidy programme also saw an extension of three months, targeting the tourism sector, including the retail sector.

Emphasis was also given to the reskilling and upskilling of workers, with a RM1 billion allocation.

One aspect that certainly got the nod of approval from tax consultants are initiatives to make Malaysia a destination for high-value service activities. It includes a move to relax the conditions imposed for the setting-up of a Principal Hub and to extend the tax incentive to Dec 31, 2022, and a new tax incentive for the establishment of a Global Trading Centre.

“The tax incentive for the establishment of the global trading centre of 10% corporate income tax rate for five years and renewable for another five years will put Malaysia as a strong competitor to Singapore as an international trading hub. Currently, Singapore offers a 5% or 10% concessionary tax rate on qualifying trading income for three or five years for companies under the Global Trader Programme,” notes Deloitte Malaysia Tax leader Sim Kwang Gek.

Furthermore, Jagdev believes the announcement of the expansion of the tax incentive for relocation to Malaysia, included in previous stimulus plans this year, to selected businesses in the services sector will have a significant multiplier effect on the Malaysian economy.

“The targeted sectors relate to Industrial Revolution 4.0 and digitalisation. Manufacturing remains the core of the overall business ecosystem and, thus, it was timely for the government to introduce a game-changing incentive package.

“The expansion of this tax incentive to the services sector sends the right signal to the market that the sector is also a key driver [of] Malaysia’s recovery as we strive to have an overall ecosystem that investors desire,” Sim explains.

That said, Tai hopes the guidelines and processes regarding the enhanced incentives will be done quickly.

Meanwhile, tax consultants see indications of a tax reform process in the works. One is the blanket two-year extension of tax incentives ending in 2020, as the government is in the midst of a comprehensive study of the existing tax incentive structure to provide a competitive, transparent and more attractive tax incentive framework, says Amarjeet.

Tai also sees the allocation of RM300 million towards driving an online trading environment for local manufacturers and traders as a positive move, as he believes it will help move the country and economy more quickly towards recovery.

Interestingly, some observers say small and medium enterprises saw few goodies from the budget.

“It could be because the previous stimulus packages had been focused on them,” notes Veerinderjeet.

Nevertheless, the SMEs were not completely left out, as JanaNiaga, or the National Supply Chain Finance Platform, was announced to help alleviate the cash flow of SMEs, especially in terms of their engagement with the government and government-linked companies.

“This is a win-win situation for the SMEs and the government as well as the banks,” says Jagdev.

Many had anticipated that the government would announce some form of broadening of the tax base, whether in the form of a broader sales and service tax scope or a possible reintroduction of the Goods and Services Tax (GST), given the state of the government coffers.

While that did not come to pass, the government’s revenue collection strategy this time around banks on addressing the smuggling of high-duty goods.

Effective from Jan 1, 2021, cigarettes and tobacco products will no longer be duty-free goods on duty-free islands and on any free zone where the sale of duty-free cigarettes has been permitted. Some say this is a great move, as it would have required much political will.

Along with other measures such as disallowing the transshipment of cigarettes and re-export of cigarettes by small boats, and limiting the transshipment of cigarettes to dedicated ports only, many believe this could help boost government revenue by reducing the incidence of illicit cigarettes.

An excise duty of 10% on all types of electronic and non-electronic cigarettes, including vape, will be effective from Jan 1, 2021. The liquid used in electronic cigarettes will also be imposed an excise duty at a rate of 40 sen per milliliter.

As it is the biggest budget the nation has seen, the fiscal deficit for 2021 is expected to come in at 5.4% of GDP. Meanwhile, GDP growth for 2021 is projected to be between 6.5% and 7.5%.

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