Deloitte's comments on Budget 2023

HERE's Deloitte Malaysia tax leader Sim Kwang Gek's reaction to the Budget 2023 presented by Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz in Parliament yesterday.

1) How would you categorise this budget?

Recovery, reforms, sustainability and well-being of Keluarga Malaysia are the four broad themes surrounding Budget 2023 this year. Budget 2023 focuses on measures to continue driving recovery, introduce reforms and care for Keluarga Malaysia.

2) Do you think that it lacks reforms?

In my view, Budget 2023 has introduced some reforms around subsidy rationalization and driving efficiencies in tax administration through e-invoicing and tax identification number implementation.

E-invoicing & Tax Identification Number (TIN)

The announcement of the implementation of e-invoicing by stages effective from year 2023 for selected tax payers and the automatic issuance of TIN for Malaysian citizens and permanent residents aged 18 and above as well as mandatory use of TIN for all stamping of documents is in line with international developments and paves the way for a more efficient tax administration. Having an e-invoicing management system that integrates with the government’s system can be a powerful tool to tackle tax evasion, reduce tax leakages and promote greater tax transparency. This demonstrates the government’s efforts in driving efficiency and curbing tax evasion through digitalization of the tax administration and business transactions.

3) It feels like the rakyat are the main benefiters of the budget, especially the youth. Is that an accurate depiction?

There are some goodies for individuals and businesses. Some highlights and comments are as follows:

Reduction in personal income tax rates for M40 group

Budget 2023 proposes a 2% reduction in the personal income tax rates for individuals earning annual chargeable income between RM50,001 to RM100,000. This is a welcome proposal and provides higher disposable income for these groups. The 2% reduction in tax rate results in tax savings of RM400 for those earning between RM50,001 to RM70,000 and RM1,000 for those earning between RM70,001 to RM100,000. Although the 2% cut results in lower tax collection, the impact should be minimal since the money saved would be contributed back to the economy in the form of higher consumption.

Voluntary EPF contribution

Budget 2023 proposed to increase voluntary EPF contribution from RM60,000 to RM100,000 a year. This would encourage Malaysians to build their retirement nest especially for those who have made early withdrawals during the pandemic. To encourage voluntary EPF contribution, the scope for tax relief of RM3,000 for takaful or life insurance premiums will be expanded to include voluntary EPF contribution. In my view, this does not provide much incentive for Malaysians to go for voluntary EPF contribution as the RM3,000 tax relief is not adequate to cover payments for takaful or life insurance premiums and voluntary EPF contribution.

Based on the Household Income and Basic Amenities Survey 2019, the M40 in Malaysia earn between RM4,851 to RM10,970 per month and represent 37.2% of the total household income in 2019. Taking the lowest income level for M40 group at around RM58,000 per year, an 11% EPF contribution would come up to RM6,380. The median income for M40 group is around RM7,093 per month and a 11% EPF contribution would come up to RM9,363 per year. Hence, increasing the current tax relief for contributions to approved provident funds (including EPF contribution) from RM4,000 to RM10,000 would be more meaningful.

Corporate income tax reduction for small and medium enterprises (SMEs)

Reduction of 2% from 17% to 15% on annual chargeable income of up to RM100,000 for SMEs should bring some cheer to these groups. This is effective from year of assessment 2023 and it appears that SMEs would be subject to 3 progressive tax rates depending on the level of annual chargeable income. Annual chargeable income of RM100,001 to RM600,000 would be subject to a corporate income tax rate of 17% while the amount in excess of RM600,000 would be subject to 24%. While the rate cut provides some relief to SMEs, the tax savings of RM2,000 may not be significant in view of current challenges faced by SMEs. A 2% cut on annual chargeable income up to RM600,000 would be more meaningful. Having a 2-tier tax rate is also simpler for SMEs to administer.

4) How will this biggest ever budget be funded? Do we have the money?

Tax collection continues to be the largest contributor to the government’s revenue representing 75.4% of total revenue. This is an increase of 3.7% compared to year 2022 and shows that the government relies heavily on taxes as an important source of revenue. The government expects an increase in corporate income tax collection by 4.8% despite global headwinds and uncertainties in 2023. New measures such as the implementation of e-invoicing and TIN should provide more room for the tax authorities to shore up tax revenue. However, in the longer term, Malaysia needs to consider a broader based tax system such as the GST to have a more sustainable source of revenue.