Malaysia's government moved
to allay concerns over its fast-rising debt on Friday,
announcing a new consumption tax at a surprisingly high rate,
abolishing subsidies on sugar and hiking property taxes to
dampen a surge in home prices.
Prime Minister Najib Razak, in his annual budget speech to
parliament, announced his government would bring in a goods and
services tax (GST) in 2015 at a rate of 6 percent, above market
expectations of 4 or 5 percent.
The ringgit currency gained against the dollar in
late trade as investors welcomed the tax, which is aimed at
broadening the revenue base in a country where only about 10
percent of citizens pay income tax and most of the government's
money comes from oil and gas.
Otherwise, Najib announced few major steps to cut subsidies
that take up about a fifth of government spending, or deeper
reforms such as reducing a bloated, but politically influential,
civil service.
Once a high-flying "tiger" economy, Malaysia has become
heavily dependent on commodity exports and struggled with low
private investment since the 1997-98 Asian financial crisis,
despite a partial revival in recent years.
"The government has decided to implement a fair and
comprehensive tax system that benefits all Malaysians," Najib
said. "The government believes that this is the best time to
implement GST as the inflation rate is low and contained."
Najib was under pressure to take bold steps after Fitch
ratings agency in July cut its outlook on Malaysia's sovereign
debt to negative, citing poor prospects for reform following a
divisive May election.
Malaysian markets suffered a bout of turmoil over the summer
as the country's shrinking current account surplus left it
vulnerable to fund outflows driven by an expected tightening of
U.S. monetary policy.
Most economists said Najib's budget had gone some way to
restoring confidence in the government's political will to
improve its finances, which has been shaken by a rapid rise in
debt in recent years.
"The fact that they took the bold step to introduce 6
percent at the start shows a lot of commitment in reining in the
fiscal deficit," said Irvin Seah, DBS economist in Singapore.
"You won't see the full benefit of the GST on the fiscal
position at the outset... But in the longer term it will help
bolster the fiscal position."
Najib announced a raft of steps to offset the impact of the
GST, including exemptions on basic food items and transport and
one-off payments to poorer families. He also announced a cut in
corporate tax of 1 percent to take effect in 2016.
Ratings agency Standard & Poor's called the budget "a step
in the right direction" though it added that the budget
proposals did not fully address the weaknesses of high subsidies
and poor revenue structure.
"We would have preferred more clarity on say fuel subsidies
such as details and timelines," said Selena Ling, head of
treasury research at Overseas-Chinese Banking Corp in Singapore.
After securing his power base last weekend in ruling party
elections, Najib had appeared to have a freer hand to tackle a
high fiscal deficit with unpopular steps.
But having trimmed fuel subsidies by 3.3 billion ringgit ($1
billion) per year shortly the Fitch announcement, Najib only
pledged to gradually restructure the subsidy policy.
COOLING PROPERTY BOOM
The government's economic report, released just ahead of the
budget speech, said that spending on subsidies, including fuel,
would total 39.4 billion ringgit next year, down from 46.7
billion ringgit in 2013.
The abolition of the 0.34 ringgit per kg subsidy on sugar
was justified as needed to combat rising rate of diabetes.
In the report, the government maintained its commitment to
steadily cut the budget gap, from 4.5 percent in 2012 to 4.0
percent in 2013 and 3.5 percent in 2014.
"We believe that the government has paid heed to increasing
criticism by markets and rating agencies, and has followed
through after the aggressive fuel subsidy reduction in
September," Barclays Capital economists wrote in a note.
The economic report forecast a slight pick-up in GDP growth
to 5.0-5.5 percent in 2014 from 4.5-5.0 percent in 2013,
underpinned by strong domestic demand. The government expects to
narrowly stay within its self-imposed debt limit of 55 percent
of GDP next year, forecasting a ratio of 54.7 percent.
To cool a surging property market, Najib announced that the
country's property gains tax would be doubled to 30 percent for
real estate sold within three years. The minimum value of a
property for foreign buyers was doubled to 1 million ringgit.
Malaysian property prices have risen by about a third in the
past three years, with even bigger rises in hot spots such as
parts of southern Johor state.
The government forecast private investment would rise to
17.9 percent of GDP in 2014, with funds going into oil and gas,
textiles, transport equipment and real estate development.
Private investment remains well below levels seen in the
1990s, when it averaged 22.9 percent of GDP annually, but it is
recovering from an average of 11.8 percent between 2001-2011.
Following are highlights from Najib's ongoing speech to
parliament:
CIVIL SERVICE
* Pensioners will receive a special financial assistance of 250
ringgit to assist them meet the rising cost of living.
* Government to give a half-month bonus for 2013 with a minimum
payment of RM500 to be paid in early January 2014.
CASH HANDOUTS
* Cash handouts to households with a monthly income of below
3,000 ringgit will be increased to 650 ringgit from 500 ringgit.
* For individuals aged 21 and above and with a monthly income
not exceeding 2,000 ringgit, cash handouts will be increased to
300 ringgit from 250 ringgit.
* For the first time, cash assistance of 450 ringgit will be
extended to households with a monthly income of between
3,000-4,000 ringgit. rising cost of living borne by the lower
middle-income group.
* To implement all cash schemes, government will allocate 4.6
billion ringgit which is expected to benefit 7.9 million
recipients.
REAL PROPERTY GAINS TAX
* For gains on properties disposed within the holding period of
up to 3 years, RPGT rate is increased to 30 percent.
* For disposals within the holding period up to 4 and 5 years,
the rates are increased to 20 percent and 15 percent,
respectively. Malaysian property firms with exposure to this tax
change include UEM Sunrise, Mah Sing Group
and Tropicana Corp .
* Raise the minimum price of property that can be purchased by
foreigners to 1 million ringgit from 500,000 ringgit.
* Prohibit developers from implementing projects that have
features of Developer Interest Bearing Scheme (DIBS), to prevent
developers from incorporating interest rates on loans in house
prices during the construction period.
* Financial institutions are prohibited from providing final
funding for projects involved in the DIBS scheme. Malaysia's top
three banks are Maybank, CIMB and Public
Bank.
AFFORDABLE HOMES
* To further increase access to home ownership at affordable
prices, an estimated 223,000 units of new houses will be built
by the government and the private sector in 2014.
* Companies that specialise in affordable housing
development include Hua Yang Bhd.
* Government to allocate 578 million ringgit to the National
Housing Department (JPN) for low cost flats consisting of 16,473
housing units.
* Malaysian's government to provide 80,000 housing units with an
allocation of 1 billion ringgit under affordable housing scheme.
The sales price of the houses will be 20 percent lower than
market prices.
* Introduce the Private Affordable Ownership Housing Scheme
(MyHome) to encourage the private sector to build more low and
medium-cost houses. The scheme provides a subsidy of 30,000
ringgit to the private developers for each unit built.
* Preference will be given to developers who build low and
medium-cost houses in areas with high demand and limited to
10,000 units in 2014.
* The scheme is for housing projects approved effective from 1
January 2014 with an allocation of 300 million ringgit.
TAX RELIEF
* Government proposes a special tax relief of 2,000 ringgit be
given to tax payers with a monthly income up to 8,000 ringgit
received in 2013.
GOODS AND SALES TAX
* To implement goods and services tax (GST) on April 1, 2015 -
17 months from now.
* GST rate fixed at six percent, the lowest among ASEAN
countries.
* GST replaces current sales tax.
* Basic food items, transportation services, highway tolls,
water and first 200 units of electricity for domestic users per
month to be exempt from GST.
* Sale, purchase and rental of residential properties as well as
selected financial services are exempted from GST.
* PM Najib: "The reality is that inflation now is low at around
2 percent. The government is confident this will be the best
time to impose GST as inflation is minimal and under control."
* Training grant of 100 million ringgit will be provided to
businesses that send their employees for GST training in 2013
and 2014.
* Financial assistance amounting to 150 million ringgit will be
provided to small and medium enterprises for the purchase of
accounting software in 2014 and 2015.
CORPORATE TAX
* corporate income tax rate be reduced by 1 percentage from 25
percent to 24 percent.
* income tax rate for small and medium companies will be reduced
by 1 percentage point from 20 percent to 19 percent from the
year of assessment 2016.
INCOME TAX
* government to give one-off cash assistance of 300 ringgit to
low income households
* personal income tax rates be reduced by 1 to 3 percentage
points for all tax payers.
* individual income tax structure will be reviewed
* chargeable income subject to the maximum rate will be
increased from exceeding 100,000 ringgit to exceeding 400,000
ringgit.
* Current maximum tax rate at 26 percent to be reduced to 24
percent
* measures to be effective in 2015
SUBSIDIES
* Subsidy programme to be "gradually restructured"
* A portion of savings from restructuring to be distributed in
the form of direct cash assistance with the other half to
finance development projects.
* To abolish the sugar subsidy of 34 sen effective October 26
2013.
IMPROVING BUDGET MANAGEMENT
* committed to reducing the fiscal deficit gradually, with the
aim of achieving a balanced budget by 2020.
* to ensure federal debt level will remain low and not exceed 55
percent of GDP.
* government to conduct audits on projects valued at more than
100 million ringgit during its implementation.
ISLAMIC FINANCE
- Securities Commission to introduce the a framework for Social
Responsible Investment (SRI) Sukuk, or Islamic bonds, to finance
"sustainable and responsible" investment initiatives.
AGRICULTURE
- Government to allocate six billion ringgit allocated for
agriculture programmes.
* Says to 243 million ringgit allocated for rubber, palm oil
and cocoa replanting as well as forest plantation programmes.
Main plantation companies in Malaysia include Sime Darby
, IOI Corp and KL Kepong.
LOGISTICS
- Government to allocate 3 billion ringgit in soft loans under
the Maritime Development Fund through Bank Pembangunan Malaysia.
* The fund is to provide financing to encourage the development
of the shipping industry, shipyard construction, oil and gas as
well as maritime-related support activities.
AVIATION
- To replace existing air traffic control and management system
in Subang, a new air traffic management centre costing 700
million ringgit will be built at Kuala Lumpur International
Airport (KLIA).
* Kota Kinabalu, Sandakan, Miri, Sibu and Mukah airports in
Sabah and Sarawak to be upgraded with 312 million ringgit
allocation.
- Malaysia Airports manages and operates all airports
across the country except for one in Johor.
PUBLIC INVESTMENTS
* Public investments to reach 106 billion ringgit. Projects to
be implemented include:
- A 316-kilometre West Coast Expressway. Locally listed Kumpulan
Europlus Bhd owns 80 percent of the project, while IJM
Corp owns the balance 20 percent.
- Double-tracking rail project along west coast Malaysia. The
project is carried out by as a joint venture between MMC Corp
and Gamuda.
- Various projects from state oil firm Petronas under
its 300 billion ringgit capex programme, including a
petrochemicals plant in southern Johor state.
INTERNET ACCESS
- To carry out second phase of high-speed broadband project
with the private sector involving 1.8 billion ringgit
investment. State-linked telco Telekom Malaysia Bhd
is involved in the project.
- To increase Internet coverage in rural areas, 1,000
telecommunication transmission towers will be built in the next
three years, with an investment of 1.5 billion ringgit.
- To increase Internet access in Sabah and Sarawak, new
underwater cables will be laid within three years at a cost of
850 million ringgit.
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