Malaysia's Budget 2024: A steadfast pursuit of fiscal consolidation

Please find comments by Farah Rosley, Malaysia Tax Leader, Ernst & Young Tax Consultants Sdn Bhd about Malaysia’s Budget 2024.

In testament to its unwavering commitment to economic growth, increasing foreign and domestic direct investment, and improving the welfare of the Rakyat, today Malaysia announced its largest budget allocation of RM393.8 billion. Notwithstanding this significant allocation, the nation remains resolute in forging its path towards fiscal consolidation. With a strategic focus on prudent financial management and structural reforms, the budget aims to strike a delicate balance between stimulating growth and fostering an inclusive and equitable society.

The Government has announced its plan for subsidy rationalization, replacing blanket subsidies with targeted cash aid to ensure such assistance goes to the lower income group. 

As widely expected, Goods and Service Tax was not reintroduced in Budget 2024. Instead, various measures will be introduced to expand the nation’s tax revenue base, such as:

• Service tax to be increased to 8%, except for certain essential services such as food and beverages, and telecommunications. Furthermore, the scope of taxable services will be expanded to include logistics, brokerage, underwriting and karaoke.
• From 1 March 2024, capital gains tax (CGT) will be imposed on disposal of unlisted shares by companies. For shares acquired before 1 March 2024, the disposer can choose to pay CGT of 2% on the gross disposal value or 10% on the net gain on disposal. For shares acquired on or after 1 March 2024, the CGT rate will be 10% on the net gain. Exemptions may apply on disposals in certain circumstances, such as upon initial public offerings approved by Bursa Malaysia and internal group restructuring exercises.
• Luxury Goods Tax (LGT) with rates ranging from 5% to 10% will apply to specific types of luxury goods such as jewelry and watches, subject to value thresholds which are yet to be determined.

Since the announcement of the CGT proposal in February 2023, the Ministry of Finance has held consultations with various stakeholders, including professional bodies and various business groups, on the potential impact of the new tax. However, no details are available yet on the exact scope of the tax and its interplay with Real Property Gains Tax (RPGT) on disposal of shares in real property companies. Currently, capital gains on disposal of shares are not taxable unless the shares are shares in a real property company for RPGT purposes. With the new CGT proposed, mechanisms should be put in place to prevent double taxation. Similarly, no specific details on the LGT regime have been made available. It is hoped that further details will be shared as soon as possible to allow businesses to understand the impact and make the necessary preparations.

It is encouraging to note that various measures have already been implemented since the first Madani Budget.  Per the 2023 Mid-Year Expenditure Performance Report, 21 of the proposed 47 tax measures announced in the retabled Budget 2023 have been fully implemented, including the Voluntary Disclosure Program by the tax authorities and reduction of personal income tax rates. Two tax measures are currently in the implementation phase, namely the e-Invoicing initiative and the rollout of Tax Identification Numbers. 

Spurring economic growth

The Government has reiterated its commitment to providing targeted support to key industries and creating new job opportunities for the Rakyat. The New Industrial Master Plan (NIMP) 2023 was launched with a targeted total investment of up to RM95 billion with the goal of driving industrialization and establishing Malaysia as a regional economic leader.  An initial fund of RM200 million will be allocated in 2024 as a catalyst to kickstart the NIMP mission. The priority sectors covered in the NIMP 2030 include aerospace, chemical, electrical and electronics, pharmaceutical, and medical devices. Additionally, four new growth areas—advanced materials, electric vehicles, renewable energy, and Carbon Capture, Utilisation, and Storage (CCUS)—have been identified.

Budget 2024 seeks to make Malaysia an attractive destination for foreign direct investments (FDI) while also encouraging domestic direct investments (DDI). These initiatives complement each other, stimulating economic diversification and growth.

The introduction of outcome-based and tiered tax incentives is commendable. By linking tax incentives to specific outcome-based conditions, the Government incentivizes businesses to focus on long-term value creation. This innovative approach not only attracts targeted investments but also ensures that economic growth is aligned with the country's broader goals of social inclusivity and environmental stewardship. Malaysia's adoption of outcome-based tax incentives marks a significant step towards a more resilient and sustainable economy for the benefit of all stakeholders. To boost Malaysia’s competitiveness as a leader in the global services sector, a new Global Services Hub incentive has been introduced, with such hubs qualifying for preferential tax rates of 5% or 10% for up to ten years.

As part of the initiative to spur FDI and DDI, the responsibilities of the Ministry of Investment, Trade and Industry (MITI) and Malaysian Investment Development Authority (MIDA) will be expanded to include providing enhanced support to foreign and local investors from application to investment realization.

Global Minimum Tax (GMT)

Many countries will begin implementing Pillar Two of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 project, also known as the GMT project, in 2024.  Other countries such as Singapore, Hong Kong and Thailand, have announced that they will implement GMT in 2025. The Budget speech reiterates the earlier update from the Ministry of Finance that Malaysia will also implement GMT in 2025.

Once Pillar Two is implemented, multinational enterprise (MNE) groups with group turnover of over EUR750 million (around RM3.7 billion) will have to pay a top-up tax if they are not subject to an effective tax rate (ETR) of at least 15% in each country in which they operate.  MNE groups will need to undertake a Pillar Two impact assessment, including a data gap assessment, to estimate the potential impact of Pillar Two on the group, and determine next steps.  Next steps may include updates to processes, IT systems and governance protocols.  Groups with tax incentives should carefully evaluate the impact which the incentive will have on the Group ETR and consider whether the incentives should be re-negotiated to ensure that they continue to provide the intended benefits.

Sustainability agenda and net zero carbon emissions

In line with the objectives under the National Energy Transition Roadmap (NETR), and together with a RM2 billion seed fund allocated for the National Energy Transition Facility (NETF) announced recently, various measures were also announced to spur growth in the electric vehicle (EV) sector and encourage use of EVs. This includes the four-year extension of individual income tax exemption of up to RM2,500 for EV charging facilities and expenses, extension of the tax deduction for EV rental costs for another two years, extension of Net Energy Metering (NEM) until 31 December 2024 and related measures to encourage solar panel installations. New incentives were announced for carbon capture and storage (CCS) and hydrogen sulfide projects, whilst tax exemption for fund management companies which manage Sustainable and Responsible Investment (SRI) funds and tax deduction for issuance of SRI sukuk were extended until 2027.

To encourage companies to participate in voluntary carbon markets, the Government proposes an additional tax deduction for expenses incurred on measurement, reporting and verification (MRV) relating to carbon credit projects (capped at RM300,000), which is deductible against income from the sale of carbon credits traded on the Bursa Carbon Exchange (BCX). 

The extension of various Green Investment Tax Allowance (GITA) and Green Income Tax Exemption (GITE) incentives for applications submitted up to 31 December 2026 is a positive measure. The proposal to allow tax deduction for ESG-related expenses for years of assessment 2024 to 2027, such as those relating to sustainability reporting framework, climate risk management and scenario analysis, tax corporate governance framework program under the purview of the Inland Revenue Board of Malaysia and ESG compliance reporting requirements is also welcomed. However, it is noted that the proposed deduction is capped at RM50,000 per year of assessment. Given the range of expenses covered, it is hoped that the cap can be increased or removed, to provide more meaningful relief to taxpayers.

Upskilling local talent

Recognising the need for a talent pool that is highly skilled and adaptable to industry needs, Budget 2024 proposes various measures aimed at upskilling and training. This includes an overall allocation of RM6.8 billion for technical and vocational education and training (TVET), retraining and skill improvement programs for micro, small and medium enterprise (MSME) entrepreneurs and vulnerable groups, RM100 million allocation for certification to TVET graduates and the MyFutureJobs initiative which offers job opportunities in public sector, government-linked companies (GLCs) and government-linked investment companies (GLICs). By facilitating ongoing skills development and learning opportunities, Budget 2024 will upskill the Rakyat and strengthen the nation's long-term competitiveness in a rapidly changing and increasingly digitalized global economy.

Overall, the second Madani Budget introduces tough and bold fiscal reform measures while enhancing Malaysia’s appeal to investors through targeted incentives. The Budget also prioritizes the welfare of the Rakyat, especially lower-income groups and vulnerable segments of society, by providing necessary support to counter the escalating cost of living.