This article first appeared in The Edge Malaysia Weekly on October 16, 2023 - October 22, 2023

A targeted fuel subsidy is likely one of the most bitter pills for Malaysians to swallow, having been a nation that has enjoyed fuel subsidies for decades.

In the months leading up to Budget 2024, there have been reminders to the public about the unsustainably high subsidy bill — some RM81 billion this year — and how it will need to be reduced to ensure the fiscal sustainability of the nation.

Many had anticipated that Budget 2024 would entail some form of targeted petrol subsidy. But the government only announced the removal of the diesel subsidy last Friday.

However, Prime Minister Datuk Seri Anwar Ibrahim did say that a retargeted subsidy approach would be implemented in phases. In fact, this has been set into motion with the electricity bills households fork out each month.

In July, Malaysia started to impose higher electricity tariffs on high-consumption households, or those that spend more than RM708 a month on electricity. That meant the end of the blanket rebate of 2 sen/kWh for domestic consumers that was introduced during the Covid-19 pandemic in 2021.

In this budget, the federal government had chosen to start with the rationalisation of diesel prices in stages. The subsidy for diesel makes up about RM1.5 billion a month.

Economists say it makes sense to start with diesel, given the severity of the leakages in the fuel. Anwar highlighted in his speech that the sale of subsidised diesel had increased by up to 40% since 2019, even though the number of vehicles using diesel had only increased by less than 3%, implying smuggling activities taking place in view of the cheap Malaysian diesel.

Experts applauded the government for taking the first step in moving towards subsidy rationalisation by starting with diesel.

“It is good that the government starts by explaining why it is necessary. For targeted subsidies to work, it needs buy-in from the people. There are three important elements — credible, comprehensiveness and communication. The government needs to be transparent in what happens to the net savings from the rationalisation,” says Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre.

The government has also proposed to lift the price controls on chicken and eggs while it continues to apply a targeted subsidy approach for electricity based on consumption, but at the same time provide an electricity bill rebate of RM40 a month for the hardcore poor, with a total allocation of RM55 million.

“The decision to move away from blanket subsidies/controlled prices on electricity, diesel and chicken/eggs produces some savings, though more could be done as a signal of intent on targeting subsidies. That said, there is scope for more targeted subsidies to be implemented when the Padu database is ready, including around RON95,” says CIMB Investment Bank regional head of treasury and market research Michelle Chia.

UOB Malaysia Global Economics and Market Research senior economist Julia Goh says the missing link in the budget are plans to retarget subsidies for RON95, which will have a larger bearing on inflation and the cost of living. “The government mentioned that retargeting of subsidies will be done in phases, hence we expect a gradual approach that will help keep inflation manageable,” she adds.

Even as Malaysians managed to avoid the painful targeted fuel subsidy this round, they may have been taken by surprise by the two percentage point increase in service tax proposed by the government. The government plans to raise the service tax to 8% from 6% currently, but it will not include the food and beverage sector as well as telecommunications.

However, it was announced that the scope of taxable services would be expanded to logistics, brokerage, underwriting and, oddly enough, karaoke services.

“The increase in service tax is a surprise. However, as a longer-term solution [to increase revenue], the goods and services tax (GST) would have been better,” says Lavindran Sandragasu, tax partner at PwC Malaysia.

A back-of-the-envelope calculation shows that the two percentage point increase would raise revenue by RM900 million to RM5 billion, according to tax experts.

Deloitte Malaysia’s country tax leader Sim Kwang Gek says the immediate impact from the increase is a rise in the cost of doing business as it will be passed on to consumers and businesses at the end of the day.

“As we all know, the sales and service tax regime has a ‘tax on tax’ effect and will result in higher prices. To cushion this, it is hoped that the government will expand the Business-to-Business Exemptions that are currently applicable to certain prescribed taxable services,” she adds.

Likely to affect the T20 group will be the proposed luxury goods tax at a rate of 5% to 10% on certain high-value items such as jewellery and watches, which will be based on the threshold value of the price of the said item.

“It will increase revenue by some measure, but it won’t be a significant increase,” says Soh Lian Seng, head of tax at KPMG Malaysia.

There is also the introduction of the capital gains tax on the net profit derived from the disposal of shares in local unlisted companies, at a rate of 10% beginning March 1, 2024. It was announced that the government would consider the exemption of the capital gains tax on the disposal of shares related to certain activities such as approved initial public offering, internal restructuring and venture capital companies, subject to stipulated conditions.

The capital gains tax on unlisted shares was mentioned during the retabling of Budget 2023 in February, but it seems that the government is planning to take a decisive step in implementing it this time round.

“Businesses have to be prepared. It is not new but they have finally pulled the trigger. Most countries in Asean have implemented this and I would say Malaysia has been an outlier in this aspect,” says Lavindran.

However, the concern is that it could impact the capital markets down the road, says Lee. “With capital gains tax, one cannot be sure that it will not be widened to include other asset classes in the future,” he adds.

Lee believes that Malaysia should move away from taxing capital income and towards indirect tax.

“For a sustainable tax system, it cannot depend on a small group of taxpayers to carry the burden while the rest piggyback on them. The burden must be shared equally,” he says.

Meanwhile, the proposed implementation of e-invoicing for taxpayers with an annual income or sales exceeding RM100 million next year has been deferred to August from June.

Tax experts say the impact from e-invoicing in terms of increasing revenue will not be immediate.

“I don’t think there will be a significant impact from this exercise just yet. When everyone falls into the net by 2027 as planned, that will help increase the level of compliance and those who were previously not in the tax net will then be part of it,” says Soh.

Having said that, many conclude that the budget, at a whopping RM393.8 billion, is fiscally sustainable and responsible and puts the country on the right path towards sustainable economic growth. Experts say the budget reflected the government’s commitment to fiscal consolidation without straining the vulnerable groups.

The fiscal deficit target for 2024 stands at 4.3% of the gross domestic product from an estimated 5% of GDP in 2023, which marks the lowest deficit in five years.

“We applaud the fiscal consolidation efforts with the 2024 fiscal deficit to improve to 4.3% of GDP versus 5% in 2023. However, other debt metrics look to worsen as government debt is projected to rise to 64% of GDP (2023: 61.9%) and debt service charges rising to 15.9% of revenue (2023: 15%),” says CGS-CIMB Research economist Ahmad Nazmi Idrus.

“On a more positive note, parliament’s passing of the Public Finance and Fiscal Responsibility Act days before the tabling of the budget somewhat improves the medium-term fiscal outlook.”

Economists agree that there has been a big emphasis on social and environment. For example, cash assistance for the B40 group will be increased to RM10 billion from RM8 billion last year.

The education sector continues to be a prime beneficiary, with an allocation of RM58.7 billion going to the Ministry of Education. The allocation will be used to build, upgrade and maintain schools all over the country as well as to implement measures for the well-being of students.

The development of Islamic affairs has received a significant allocation this time around, with RM1.9 billion for the management and development of Islamic affairs.

The budget also reflected the government’s commitment to the sustainability agenda with measures like a tax deduction of up to RM50,000 for each year of assessment for ESG-related expenditure, green technology tax incentives being extended up to 10 years, a four-year extension on the tax deduction for Sustainable and Responsible Investment (SRI) sukuk and a tax exemption on the fee income for SRI fund management services.

“As Malaysia strives to be a preferred investment destination, the focus on sustainability is something of a necessity in order to attract investment,” says EY Asean tax leader Amarjeet Singh.

There were some measures aimed at encouraging the move to automation, but some have voiced out that the incentives are not enough. The targeted group was the micro, small and medium enterprises (MSMEs), with the government encouraging them to move towards automation and digitalisation.

A total of RM100 million in grants have been allocated for digitalisation, which will benefit 20,000 MSME entrepreneurs while a RM900 million loan fund under Bank Negara Malaysia is provided to encourage SMEs to increase productivity through automation and digitisation.

Capital allowances for the purchase of information and communications technology equipment and software packages have been reduced to three years from four years, beginning the year of assessment 2024.

The government has proposed a slew of initiatives to streamline its agencies. According to the prime minister, the initiatives will improve the revenue sustainability, social protection, governance of government-linked companies (GLCs) and the country’s debt management.

That includes continuing with the plan to merge the country’s four development financial institutions (DFIs) into a single entity, in a bid to strengthen the development finance ecosystem. It is worth noting that the merger of the country’s DFIs started in 2019, when Bank Negara proposed a two-stage restructuring plan to merge the four DFIs into a single entity.

The first step, which was completed earlier this year, was to merge Bank Pembangunan Malaysia Bhd and Danajamin Nasional Bhd. This time around, the government is looking to merge Bank Pembangunan with Small Medium Enterprise Development Bank Malaysia Bhd (SME Bank) and Export-Import Bank of Malaysia Bhd (Exim Bank).

Sunway University economics professor Yeah Kim Leng reckons that the consolidation of the DFIs is timely in realigning their functions and avoiding a duplication of their rules.

“The consolidation of the DFIs would see a greater impact through pooling of resources and achieving economies of scale,” he tells The Edge.

A former fund manager with a government-linked investment company (GLIC) points out that the consolidation of DFIs would expand their balance sheet and provide more stability to their operations. “When it comes to financial institutions, risk management is the top priority. If they face any loan defaults, a bigger balance sheet would provide greater risk management and better governance,” he adds.

The government has also proposed to enhance the country’s venture capital scene by placing state-backed agencies such as Penjana Kapital and Malaysia Venture Capital Management Bhd (Mavcap) under Khazanah Nasional Bhd. Khazanah managing director Datuk Amirul Feisal Wan Zahir says the collaboration with Penjana Kapital and Mavcap will strengthen the local venture capital ecosystem.

Under Budget 2024, the government has proposed to consolidate the country’s bumiputera-focused investment institutions under Yayasan Pelaburan Bumiputera (YPB), a subsidiary of Permodalan Nasional Bhd (PNB), Malaysia’s largest fund manager, following recent experiences where bumiputera agencies fell into losses because of “mismanagement, negligence and procrastination”.

“The main institutions of the country cannot deviate from the original goals of their establishment. Past mismanagement had forced the government to bear the losses of Lembaga Tabung Haji (RM20 billion), FELDA (RM10 billion) and Lembaga Tabung Angkatan Tentera (LTAT). In the face of problems, it is not appropriate for key institutions to have to undertake strategic asset sales,” Anwar said during his Budget 2024 speech last Friday.

Key institutions should be managed well and professionally to realise their long-term investment potential for the benefit of its stakeholders.

The government is planning to place Ekuiti Nasional Bhd (Ekuinas) under YPB to strengthen the development of bumiputera businesses, with the cooperation of PNB and Perbadanan Usahawan Nasional Bhd (PUNB), an agency established to enhance the participation and involvement of bumiputera in entrepreneurship.

Ekuinas is a private equity fund management company that was set up by the government in a bid to enhance bumiputera economic participation and wealth creation towards the development of Malaysia’s next-generation leading companies.

The government also wants to consolidate Pelaburan Hartanah Bhd, a fully-owned subsidiary of Yayasan Amanah Hartanah Bumiputera (YAHB), under PNB and be strengthened by the injection of strategic land assets from the government, especially in Kuala Lumpur, for housing developments.

Many agree that the budget has taken into consideration many aspects of reforms when it comes to the fiscal position of the country. One thing that was missing was the touchy subject of emoluments and retirement charges.

Emoluments are expected to increase by 4.8% to RM95.64 billion next year while retirement charges will amount to RM32.4 billion. To put it in perspective, companies’ income tax collection is projected to reach RM106.42 billion in 2024, less than the total amount needed for emoluments and retirement charges.

It was proposed that civil servants receive an early incentive payment of the Public Service Remuneration System (SSPA), amounting to RM2,000 for all civil servants Grade 56 and below, while RM1,000 will be given to all key public sector positions and pensioners.

The government is in the midst of reviewing the salary and fixed allowance scheme for civil servants through the study of the SSPA and it is expected to be finalised by the end of 2024. This means emoluments can only continue to rise in the years to come.    

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