How Budget 2024 is set towards realizing a national ambition

Budget 2024 is set to reshape the economy, emphasize fiscal changes such as a gradual reduction of subsidies and a long-term goal of reducing the fiscal deficit.

In brief

• It will be interesting to read the final language of the Capital gains tax' legislation, as there are still many questions that need to be answered regarding the proposed new rate.
• E-invoicing will boost tax compliance, curb leaks, and empower precise policy-making through data collection for targeted benefits.
• Despite the deferment of Global Minimum Tax, multinational companies should not delay implementation planning and continue to review current tax incentives.

It was inspiring to hear our Prime Minister and Finance Minister Dato’ Seri Anwar Ibrahim reinforce in his Budget 2024 speech, a clear and unapologetic ambition to “regain our lead as a regional economic champion” and “restore the nation’s status as an Asian powerhouse”, as a reiteration of the ambition set in the MADANI Economy framework.

This clear ambition steers all Malaysians, businesses, ministries and government agencies towards a common goal, and should help align policies, processes and procedures, and foster urgency and cohesiveness in the achievement of that goal.

The Government is committed to restructuring the economy with a focus on fiscal reforms, including phased subsidy rationalization and the gradual reduction of the fiscal deficit to 3% or lower of gross domestic product (GDP) in the medium term. For 2024, Malaysia’s fiscal deficit is projected to be 4.3%.

The Budget proposes a number of key tax measures:

• Broadening the tax base: a new capital gains tax (CGT), a new luxury goods tax, an expansion on the scope of the sales and service tax (SST), a two percentage point increase in the SST rate from 6 to 8% (excepting certain essentials), an expansion of the application of stamp duty, and the introduction of a global minimum tax.
• Strengthening tax enforcement: the introduction of e-invoicing as well as greater joint agency efforts to curb smuggling. 

Capital gains tax (CGT)

It is proposed that companies will be subject to CGT at a rate of 10% on net gains from the disposal of unlisted shares, from 1 March 2024.  If the shares were acquired before 1 March 2024, the taxpayer can instead elect to pay CGT on 2% of the gross sale value.  Exemptions will be available for disposals in connection with initial public offerings (IPO) or internal group restructuring.   Technically, the capital gains will likely be deemed as income, and taxed under the Income Tax Act 1967, and we understand capital losses can be carried forward for utilisation against future capital gains, albeit with a 10-year restriction.  Where CGT is imposed, Real Property Gains Tax (RPGT) will no longer apply. It will be interesting to read the final language of the legislation, in particular to see whether companies which are deemed to be trading in shares will still be subject to the higher 24% income tax rate.

It was also indicated that capital gains from the disposal of all foreign assets (not limited to shares) which are remitted into Malaysia will be subject to tax in Malaysia.  Exemptions will be available if the recipient can meet certain economic substance requirements. Singapore and Hong Kong are adopting similar approaches in respect of gains on disposal of foreign assets, following scrutiny by the European Union on foreign-sourced income exemption regimes.

There are still many questions that need to be answered with respect to the proposed CGT.  Businesses really need to stay abreast with the details, to ensure adequate preparations can be made and appropriate actions taken on a timely basis, for example, whether transactions should be accelerated or delayed.  A couple of immediate thoughts come to mind.

• It appears the new CGT will have retrospective impact, effectively taxing the accretion of value prior to the introduction of the CGT regime. Where unlisted shares have appreciated in value, a more equitable approach would be to allow the cost base to be re-based to “market value” as of 1 March 2024. This approach was taken when Real Property Gains Tax (RPGT) was introduced in 1975 and also more recently for RPGT purposes in the re-basing of the cost base to market values as at 1 January 2013, and also when CGT was introduced in a number of other countries including Australia. 
• Individuals are spared from the new CGT.  Individuals would however be tax-disadvantaged from using investment holding companies to hold unlisted shares, even though a corporate holding entity has other desired features such as continuity and governance.  Individuals may nevertheless continue to be subject to an income tax challenge by the Inland Revenue Board under the “badges of trade” principles, when selling shares.

Service tax

The proposed increase in service tax rate to 8% with effect from 1 March 2024, will not apply to food and beverages, telecommunication services, vehicle parking space services, and logistics services which are considered essential services.  We understand the additional 2% hike is expected to bring in additional revenue of RM3 billion in 2024. 

The service tax scope will also be expanded to include karaoke centre services, delivery services (except for the delivery of food and beverages), brokerage and underwriting services for non-financial services (such as brokerage for ship and aircraft space, commodities and real estate), and logistics services. 

Coupled with the luxury goods tax, these proposals may increase the cost of doing business, due to the absence of an “input tax credit” mechanism under the service tax regime.  Businesses affected should pay attention to the transitional provisions or rules, and take necessary actions to comply with requirements and manage adverse consequences.  

e-invoicing

Surprisingly, it was announced that the full implementation target date for e-invoicing will be brought forward by 18 months to 1 July 2025.  For taxpayers with annual turnover or revenue exceeding RM100 million, the implementation date will be extended from 1 June 2024 to 1 August 2024.  Businesses should take immediate action on implementation, as this is a ‘whole-of-organisation’ effort that would involve changes to processes, systems and data governance protocols.  

e-Invoicing will enhance tax compliance and reduce leakages, but more importantly, the vast amount of data it collects will enable the Government to craft targeted tax policies and more precisely direct the allocation of benefits such as subsidies and grants.  

Global Minimum Tax (GMT)

The implementation of the GMT will be deferred to 2025 instead of 2024 (similar to countries such as Hong Kong, Singapore and Thailand).  In April this year, Deputy Finance Minister 1 Datuk Seri Ahmad Maslan said that GMT could result in additional tax collections of RM1billion for a start.  GMT rules and calculations are complex, requiring up to 200 data points. Therefore, despite the deferment, multinational enterprise (MNE) groups should not delay implementation planning.  Impacted MNE groups that currently enjoy tax incentives in Malaysia and elsewhere may need to review the effectiveness of those incentives going forward and consider renegotiating incentives where relevant. 

The Budget 2024 fiscal and tax reforms proposals are steps in the right direction.  We look forward to effective implementation, in which the perspectives of impacted groups are taken into account.  Ultimately, we need to aggressively deliver on the 2024 budget proposals to achieve our national ambition.