Tax breaks to soothe the sting of GST

By Chan Quan Min

Prime Minister Najib Abdul Razak announced several tax breaks in his Budget 2014 speech, ostensibly to temper the increased tax burden brought on by the GST implementation. Tax practitioners welcome the rate cuts and tax deductions but from the numbers it is apparent these measures are a mere gesture for individuals but are a boon for businesses.

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During his Friday evening Budget 2014 speech, Prime Minister Najib Abdul Razak announced across-the-board tax breaks for individuals and corporations.

The tax breaks, according to Najib, were intended to alleviate cost pressures related to the unwinding of fuel and sugar subsidies this year, 2015 and beyond as well as compensate for the increased tax burden from the implementation of the GST.

The first tax break to kick in will be a tax relief of RM2,000 for individual taxpayers with a monthly income of up to RM8,000 for the year of assessment 2013.

According to Najib’s budget speech, the tax break was specifically targeted to “increase the disposable income of the middle-income group… earning a monthly income between RM4,000 to RM8,000 still burdened with tax liabilities and the increasing costs of living.”

The Prime Minister added that the middle-income group formed the largest number of taxpayers in the country.

Actual cash savings from the middle-income tax break do not exceed RM480, depending on the amount of tax payable after taking other deductions into consideration.

KPMG tax partner Pauline Tam said the relief for middle-class earners was timed to coincide with the 20 sen reduction in fuel subsidies and complete elimination of sugar subsidies this year.

But the tax break is believed to be more a gesture rather than a compensation for higher prices for fuel, sugar and other derivative goods.

Based on an Inland Revenue Board (IRB) reported number of just one million Malaysians eligible to pay tax, the expected loss in individual tax collections from the RM2,000 relief would not exceed half a million ringgit. In fact, it is likely to be far below that number, given our progressive personal income tax system.

In comparison, the expected savings to government expenditure from September’s reduction in fuel subsidies is far larger, some RM3 billion for the whole of 2014 for petrol subsidies alone, according to official sources.

Personal income tax rates cut from 2015

The other tax break announced during Budget 2014, more extensive than the first, will only come into force for the year of assessment 2015 as an assistance measure to soften the blow of the introduction of GST that same year.

In his budget speech, Najib declared: “Upon the implementation of GST, the government is committed to providing various forms of assistance to the rakyat during the transition period.”

Najib’s assistance comes in the form of a reduction in individual income tax rates. From 2015, individual income tax rates would be reduced by one to three percentage points for all taxpayers.

According to Najib, this serves to “increase disposable income” and as a result of this measure, “300,000 persons who currently pay income tax will no longer pay tax.

“Generally, families with monthly income of RM4,000 will no longer have tax liability,” he added.

The reported number of individuals with files at the IRB is four million with only one million eligible to pay taxes. Therefore the 2015 cut in tax rates would result in a drop in taxpayers of close to a third.

Chartered Tax Institute of Malaysia president SM Thanneermalai said of the tax review: “The biggest change is the widening of the bands. And tax kicks in at a higher salary.”

He said the new structure exceeded his expectations because he did not foresee the top bracket being widened that much.

Between the three chargeable income bands of RM5,001 to RM50,000, the tax rate has been reduced by one percentage point and between the two chargeable income bands of RM50,001 to RM100,000 the tax rate has been reduced by three percentage points.

Currently the highest tax rate of 26% applies to annual salaries more than RM100,001. From 2015 the highest tax rate would only kick in above RM400,000.

To fill the gap between RM100,001 and RM400,000 two new tax bands would be created. Between RM100,001 and RM250,000 the proposed tax rate has been set at 24% and between RM250,001 and RM400,000 a slightly higher rate of 24.5%

Thanneermalai believes the tax collection losses in 2015 from the tax rate cut might be recovered by improved enforcement by the IRB.

He also said the move to cut income tax rates was expected given the introduction of the GST above the revenue-neutral rate. Government officials had earlier hinted at rate cuts just weeks prior to last Friday’s budget announcement.

Tax savings from the rate cut, according to the Ministry of Finance calculations, would be larger in absolute terms the higher up the chargeable income scale. For instance, an individual with a chargeable annual income of RM35,000 will save RM300 off his/her total tax bill whereas an individual with a chargeable income of RM400,000 will save RM7,200 off his/her taxes.

But as a percentage of tax paid, the tax savings decrease the higher of chargeable income. The savings are highest for individuals with a chargeable income of between RM20,000 and RM35,000 where tax savings can reach up to 37.5% of tax paid. Those with chargeable income of RM400,000 may save more in absolute terms but it would only constitute 7.8% of tax paid.

Accurate numbers on the individual income tax collection losses resulting from the rate cut are unavailable but it is believed to be far below the amount the government can expect to net from the implementation of GST which is in the billions.

“After corporate tax (reduction), BR1M, refund of sales tax under GST, the next effect of the GST would be RM3.8 billion and RM9 billion to the government in 2015 and 2016 respectively,” said Treasury secretary-general Mohd Irwan Serigar Abdullah in a Bernama report Monday.

Corporate tax cut of one percentage point

Najib’s budget also includes a cut in corporate tax rates from 25% to 24% from the year of assessment 2016 “to ensure smooth implementation of GST by businesses.”

Some commentators found Najib’s justification for the rate cut odd. Among them, economist and avid blogger Hisham H wrote, “this one’s strange. It’s sold as part of the package of incentives to offset the introduction of GST. But companies will have no tax liability under GST.”

Indeed the GST system does not tax business-to-business transactions. GST is a multi-stage value-added tax with the full tax burden falling on the end consumer.

However, GST compliance falls squarely on businesses, as they will be expected to calculate and collect GST on behalf of the authorities.

Never mind the frivolous justification, virtually all tax practitioners welcomed the corporate tax rate cut as a boost to business activity in the country.

Tam of KPMG said the rate cut would bring Malaysia slightly closer but still a long way off to the corporate tax rates in Hong Kong and Singapore, which are well below the 20% mark.

Thanneermalai, who is attached to PwC said the corporate tax rate cut was a little mild and would have preferred if Najib were to reduce it even more.

“I wish he had said over the next five years we would go down to 20%,” he said. “A promise like that would have been good so that we can remain competitive.”

Alongside the rate cut, Najib gave business other goodies to help with GST implementation.

Budget 2014 introduced deductions for GST related training expenses in accounting and IT, as well as giving accelerated capital allowances for the purchase of IT equipment and software.

This move has been seen as a goldmine for providers of IT systems to handle GST such as MYEG Services and Censof Holdings.

Tax practitioners also have a reason to smile ear to ear. Tam pointed out a certain measure that may result in an increase in demand for professional services.

On the inclusion of business expense deductions for secretarial and tax filing fees not exceeding RM5,000 and RM10,000 respectively, Tam said “companies could be more willing now to get a third party service provider” deal with their tax matters.

Yesterday: GST and you

Tomorrow: Did the property sector lose out in Budget 2013?