Malaysia's Budget 2025: MEMBUGAR EKONOMI, MENJANA PERUBAHAN, MENSEJAHTERA RAKYAT

Please find comments by Farah Rosley, Malaysia Tax Leader, Ernst & Young Tax Consultants Sdn Bhd about Malaysia’s Budget 2025.

Budget 2025 was the largest Budget allocation ever at RM421 billion, with the objective of revitalizing the economy, catalyzing transformative change and improving the overall well-being of the Rakyat. The Budget strikes a strategic balance, reinforcing the nation's commitment to fiscal resilience while navigating the challenges of the global and regional economic landscape and setting the foundation for long-term growth.

Riding the wave of robust growth from 2.9% in Q4 of 2023 to 5.9% in Q2 of 2024 and with a vision to further invigorate the economy to achieve a leading status in Asia, Budget 2025 has unveiled impactful and targeted measures, charting a course for sustainable prosperity and enhanced competitiveness.

Fiscal Sustainability, Economic Growth, and Debt Management

The Government has increasingly demonstrated its commitment to fiscal discipline, as evidenced by the enactment of the Public Finance and Fiscal Responsibility Act in December 2023 and the continued emphasis on reducing the fiscal deficit and national debt levels. 

Following the rationalization of the diesel subsidy, Budget 2025 provides additional clarity on the Government’s approach and timeline for addressing the RON95 petrol subsidy. The RON95 rationalization exercise will be implemented in mid-2025 in a manner similar to the targeted electricity subsidy program, such that 85% of the Rakyat will not be adversely impacted. The savings from this exercise will be channeled to public welfare.  Whilst rationalization is fraught with complexities, we commend the Government for its efforts in taking this necessary and urgent action. 

Broadening the tax base

In light of the decision not to reintroduce Goods and Services Tax (GST) at this stage, as expected, the Government will mobilize various other levers to bolster revenue collection. These include a 2% tax on dividend income exceeding RM100,000 received by individual shareholders (from the year of assessment 2025) and the expansion of the Sales Tax and Service Tax (SST) (effective May 2025) to encompass additional services and non-essential goods.

It is encouraging that the Government will involve stakeholders from the relevant industries to seek feedback before finalizing the SST scope expansion and tax rates, which will smoothen the implementation of the progressive SST system and avoid any unintended consequences.

In addition, there were other proposed tax measures such as carbon tax on iron and steel, and energy sectors (in 2026) and increase in the "sugar tax" starting from 1 January 2025. The revenue from such taxes will be earmarked for specific purposes (e.g. to finance research and green technology programs, cover public health expenditure).

Competitiveness in the Global Landscape

One of the key themes of the Budget is to attract more impactful investments, by introducing the New Investment Incentive Framework (NIIF) which focuses on high-value activities with positive economic spillover to the nation, moving away from existing incentives based on specific products. The NIIF is expected to be implemented in the third quarter of 2025.

Specific focus areas include the diversification of the Electrical and Electronics (E&E) sector through high-value-added activities, creating high-level income job opportunities in the field of artificial intelligence (AI), strengthening the local supply chain and primary sector ecosystems, state-specific economic clusters and ESG-driven investments. Through this more targeted approach, it is hoped that the implementation will attract the right kind of investments. We look forward to the details of the new framework.

The Government has noted that the introduction of Global Minimum Tax (GMT) rules in Malaysia will result in additional top-up taxes on low-taxed income of large multinational groups of companies, which may negatively impact the investment environment. To address this, the Government has committed to streamlining existing tax incentives, introducing non-tax incentives and studying the introduction of a “Strategic Investment Tax Credit”.  We expect this credit to be designed as a ‘Qualified Refundable Tax Credit’ (QRTC) that would be less affected by GMT rules, to give Malaysia a competitive edge in attracting foreign direct investments. 

In parallel, there is also continued focus on public service reforms and good governance, including the proposed public administration efficiency commitment Bill which will cover three critical areas i.e. reducing bureaucracy, expediting processes, and improving service delivery.

These initiatives are a continuation of measures from previous MADANI Budgets to enhance Malaysia’s competitiveness. The results of the efforts taken to-date are evident from the increase of foreign direct investment (FDI) numbers, with Malaysia’s ASEAN ranking improving from 6th to 4th between 2020 and 2022.

Redistributing income and reducing inequality

Malaysia is poised to enact a series of fiscal reforms to strengthen its economy and advance its vision for sustainable and inclusive growth. In response to the rising cost of living and to narrow the wage gap, the Government plans to increase the minimum wage to RM1,700 and further enhance various cash assistance programs, as well as maintaining the RON95 subsidy for 85% of the Rakyat.

To boost national productivity and encourage inclusiveness, the Government is introducing incentives to expand the workforce while supporting diverse family and work arrangements. Employers will benefit from a 50% additional tax deduction for hiring women returning to work, implementing flexible work arrangements, and providing additional paid caregiving leave for employees caring for children or ill or disabled family members. We are optimistic that these incentives will accelerate an upward trend in female labor force participation.

Special tax rates will be introduced in 21 economic sectors in states such as Perlis, Kedah, Kelantan, Terengganu, Sabah and Sarawak, aimed at reducing regional economic disparities and promoting equitable development throughout the country. Various financing facilities are available to support the women, youth and people with disabilities to venture into business. These measures reflect Malaysia's dedication to creating a robust economy that benefits all citizens.

Digital economy and Artificial Intelligence

Budget 2025 marks a significant step in Malaysia's journey towards a digital future, with a series of initiatives aimed at strengthening the digital economy and accelerating the adoption of AI. These targeted measures, together with the USD16.9 billion of digital investments already secured by the country, will help propel Malaysia to the forefront of the digital economy and AI, ensuring the nation's readiness for the opportunities and challenges of the digital age.

Recognizing the importance of digital skills, the proposed NIIF will include incentives to encourage development of qualifying new courses for AI, robotics, Internet of Things (IoT), data science, FinTech, and sustainable technology at Private Higher Education Institutions and private skills training institutions over the next 5 years.

To support digitalization of various industries, the Government has also announced tax incentives such as accelerated capital allowance to encourage use of drones and AI technology in plantation operations, thereby reducing dependence on foreign labor. Investors in Smart Logistics Complexes (SLCs) will be incentivized with a proposed 60% investment tax allowance for a period of 5 years, to be utilized against 70% of statutory income, aimed at stimulating growth and activity in this critical area. These initiatives underscore Malaysia's dedication to maintaining a competitive edge in the digital era and equipping its workforce for the future.

In conclusion, Budget 2025 is a testament to the Government's decisive policy making. This expansionary budget reflects a strong commitment to steering the nation towards a sustainable and thriving future by catalyzing growth in key sectors, revitalizing the economy and prospering the Rakyat. We look forward to the positive outcomes these initiatives will bring to the nation.

- Ends -

About EY 

EY exists to build a better working world, helping to create long-term value for clients, people and society and build trust in the capital markets. 

Enabled by data and technology, diverse EY teams in over 150 countries provide trust through assurance and help clients grow, transform and operate. 

Working across assurance, consulting, law, strategy, tax and transactions, EY teams ask better questions to find new answers for the complex issues facing our world today.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. EY member firms do not practice law where prohibited by local laws. For more information about our organization, please visit ey.com.

This news release has been issued by Ernst & Young Consulting Sdn Bhd, a member of the global EY organization.