Budget 2025, unveiled by Prime Minister Datuk Seri Anwar Ibrahim last Friday, failed to spark enthusiasm among investors and the business community. The immediate market response reflected this sentiment, as Bursa Malaysia experienced a lack of buying interest on the first trading day following the budget announcement. The market moved within a tight range, closing 1,645.68 on Monday, down slightly from Friday's close of 1,645.99.
The budget is seen as aiming to tax the affluent to support those in need. However, this approach risks overlooking a critical balance: overburdening wealth creators could dampen entrepreneurial spirit and potentially prompt them to relocate their investments elsewhere.
Sustainable wealth creation is essential for effective wealth distribution. Excessive taxation that impedes the growth of wealth can hinder the very distribution it seeks to achieve.
The government's attempt to impose a 2% tax on dividends more than RM100,000 would mean smaller investors wouldn't be affected. High-net-worth individuals and large shareholders who are key stakeholders in the company would face additional levy. For businesses, this could make it slightly less appealing for major investors to hold.
In addition, the Malaysian corporate tax rate is less attractive compared to its neighbors. Malaysia has a corporate tax rate of 24% compared to Singapore's 17%, Indonesia's 22%, and Thailand's 20%. Added to this, the additional requirement of a 2% tax on dividends would make Malaysia an unattractive investment destination compared to our neighbours.
The budget also announced the expansion of sales and service tax (SST) on a wider range of services, such as commercial service transactions between businesses (B2B transactions). The list of taxable services would be exempted from May 1, 2025.
By increasing the scope of tax to a wide range of goods and services and creating a disincentive to businessmen through the imposition of a 2% dividend in excess of RM100,000 dividends, it has directly thrown a dampener on consumption and investment.
Business owners would be tempted to move their operations elsewhere as they would not be able to take their hefty dividends for fear of paying a huge amount of taxes and increased taxes on a number of items that would discourage consumption and divestment.
Why is the government reluctant to reintroduce the goods and services tax (GST) that has been implemented in more than 140 countries in the world, which has the potential of raking in more than RM40 billion into the country's coffers without having a negative outcome on consumption and investment?
In addition, the GST can address the problems associated with the shadow economy, which is estimated to be about RM300 billion and has sufficiently escaped the radar of tax collectors.
The imposition of new taxes, such as the expanded sales and service tax (SST) and the additional levy on dividends, can directly reduce disposable income for businesses and individuals. This reduction in disposable income may lead to lower spending power among consumers, resulting in decreased consumption levels across various sectors.
As businesses face increased costs due to higher taxes, they may be compelled to cut back on investments, reduce expansion plans, or even scale down operations. The combined effect of reduced consumer spending and lower investment could contribute to slower economic growth, leading to a stagnation or contraction of the economy.
In contrast, the reintroduction of the GST could provide a more balanced approach. Unlike the SST, the GST is a broader-based consumption tax that can capture a wider range of economic activities, including those in the informal sector. By creating a steady revenue stream without disproportionately affecting any single group, GST can generate significant government revenue while minimising the impact on consumption and investment.
This shift could encourage a more transparent tax system, reduce the shadow economy, and enable the government to support public services and infrastructure projects without placing undue pressure on wealth creators and businesses.
An integral component of the national budget outlines clear mechanisms for rationalising subsidies. It is estimated that the fuel subsidies are about RM10 to 12 billion of the total RM23.7 billion subsidies. Including social assistance, the figure rises to 52.6 billion.
While we recognise that subsidies are designed to reach those most in need, the success of this approach lies in the specifics. The recent budget announcement mentioned that targeted subsidies for RON 95 would commence in mid-2025, yet the details remain unclear, suggesting that the process is still underway. It is crucial for the government to establish and communicate the implementation mechanism clearly to prevent any confusion.
Another point of confusion lies in the health and education subsidies. While the intention is to ensure that assistance reaches those in need, the challenge is determining who qualifies for this support. What percentage of high-income earners currently utilise public universities and public healthcare services? Has a comprehensive mechanism been established to accurately differentiate between those who need assistance and those who do not?
To the government's credit, various initiatives have been outlined to support the rakyat. However, the true test of these measures lies in their ability to ensure that the benefits reach the intended groups and achieve the desired outcomes. If consumers continue to face rising prices and a declining quality of life, the government must reassess these measures and adjust its policies to better meet the needs of the people.
*The writer has an MBA from the University of Strathclyde in the UK, has worked in the financial markets, and has lectured extensively on management. He was also formerly attached to a leading think tank. The views expressed in this article are his own and do not necessarily reflect those of the Business Times.