This article first appeared in Forum, The Edge Malaysia Weekly on November 11, 2024 - November 17, 2024

Budget 2025 was announced at a time when the Malaysian economy was performing better than expected, with the ringgit hovering at its strongest in two years relative to the US dollar. The fiscal deficit is expected to narrow to 4.3% in 2024, with the government mandatorily committed to reducing the budget deficit to 3% by 2026 under the Fiscal Responsibility Act. With this positive and encouraging backdrop, we have seen measures that would lift wages and put more money in the pockets of the low and middle-income groups to address grouses about the high cost of living.

At RM421 billion, it’s a huge budget that has been earmarked for 2025, which obviously needs to be funded accordingly. A number of measures to increase tax collection have been introduced in Budget 2025. These measures, coupled with others introduced in the previous two budgets, are seen as key in bringing about a higher tax collection.

Budget 2025 has seen an increase in the scope of the sales and service tax. Sales tax will be levied from May 2025 on imported premium goods while the exemption for essential items will be continued so as not to burden the rakyat.

As the reintroduction of the Goods and Services Tax has been put on hold until minimum wages are at the RM3,000–RM4,000 range, there appears to be an attempt to include as many services as possible within the scope of the service tax. For now, the scope has been extended to include commercial service transactions between businesses (B2B). For example, if a commercial bank brokers a deal and earns a commission for its efforts, then this fee will be subject to service tax. If a shopping mall owner rents out the mall to an operator, and the operator rents it out to a department store that in turn rents booths to apparel owners, service tax is meant to be charged at the last level and not at every level in the above business-to-business scenarios. In his budget speech, Prime Minister Datuk Seri Anwar Ibrahim highlighted that the industry experts, chambers of commerce and the professional bodies are welcome to provide their input on how best to implement service tax expediently and efficiently, having learnt a lesson from the issues that cropped up when service tax was levied on the logistics industry earlier this year.

The amount of service tax to be collected this year is estimated to be about RM41 billion; and with the increase in the service tax rate by 2% effective from March this year for most services, the expected service tax collection next year is about RM47 billion.

The implementation of e-invoicing is seen as key to the increase in tax collection. In Budget 2025, taxpayers are given the right to claim capital allowances within a two-year period instead of three, thereby encouraging taxpayers to invest in software and IT equipment to adopt e-invoicing. Micro, small and medium enterprises (MSMEs) are concerned about the implementation costs in adopting e-invoicing, which will apply to all transactions carried out (including donations received by temples). It is reassuring to note that there are industry giants — such as the Berjaya group, which has a subsidiary called MyInvoice2U Sdn Bhd — that are committed to developing and have developed affordable and easy-to-use gadgets and solutions that will enable seamless e-invoicing adoption for all categories of businesses, including the MSMEs.

It is important to ensure that every ringgit of spending by the government is meaningful, and that the government extracts the most out of every ringgit spent. Therefore, there is a determination to manage the subsidy-related spending more efficiently. In Budget 2024, a rationalisation of the diesel subsidy was announced and it was implemented in June 2024. In a similar vein, the amendment to the subsidy structure for RON95 was announced in Budget 2025 with the expected implementation to take place in mid-2025. It was important to reduce the diesel subsidy as it was found that the increase in the number of diesel vehicles was not in tandem with the huge increase in the usage of diesel over the years. There were leakages, unsavoury activities, smuggling and so on, that needed to be stopped. Moreover, the reduction in the diesel subsidy affected a small segment of society.

Dealing with RON95 is a different animal altogether, with the entire spectrum of the Malaysian population being affected. Therefore, the plan to limit the enjoyment of this subsidy to 85% of the rakyat and exclude the rich 15% of the population, while necessary, is a challenging one and requires careful planning.

Harvindar Singh is a tax partner at SCS Global Consulting (M) Sdn Bhd. He is a council member of the Chartered Tax Institute of Malaysia.

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