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Malaysian Budgetary Efforts Stunted By Economic Slowdown

Thursday, February 16, 2012

The International Monetary Fund (IMF) has said Malaysia surpassed fiscal consolidation targets in 2011 as a result of better-than-budgeted revenue performance and efforts to broaden the tax base. The IMF has warned, however, that the government may be required to rein in austerity measures at the cost of consolidation as the economy slows in 2012.

The government reported that tax revenue growth rate is expected to be 11% higher than envisaged in the budget, due to higher petroleum prices and stronger tax revenues. The deficit is expected to amount to 5.4% of GDP in 2011, with the government targeting a reduction to 4.7% of GDP in 2012. Government fiscal policy for the coming year is aimed at continuing fiscal consolidation whilst supporting economic growth.

However, the IMF has warned that the government is likely to achieve a shortfall on budgetary targets set in the 2012 budget as growth slows. A deficit of 5.1% of GDP is more feasible due to slowing in the economy, the Fund believes, and it has warned against further measures that could negatively impact the already fragile economy.

The IMF reported that: “In the event of a severe downturn, there is only limited room for fiscal stimulus. Given Malaysia’s still high fiscal deficit and federal government debt, any limited discretionary measures would need to be accompanied by credible medium-term fiscal consolidation plans to ensure debt can return to a declining path over the medium term.”

“Structural measures need to be accompanied by fiscal reforms," the IMF continued. "Efforts should concentrate on increasing fiscal space to allow room for countercyclical fiscal policies, putting federal government debt on a declining trajectory, and removing distortions in the tax and subsidy system. Broadening the tax base through the proposed goods and services tax would help reduce reliance on pro-cyclical oil-related revenues. Resource allocation would be improved by the streamlining of subsidies and wasteful tax incentives, and replacing them with targeted assistance to the needy."

In response, the Malaysian government said that work is ongoing to streamline subsidies and other public expenditures, and that it is continuing to push forward the work program for the long-awaited goods and services tax, which would amalgamate two existing levies under a simpler system with a rate as low as 4%.

In the most recent budget, announced last October, the government amended the rates applicable on the sale of real estate. Since January 1, 2012, for properties bought and sold within two years, the tax rate is 10%; for properties bought and sold within a period from two years and up to five years, the rate is 5%; and properties bought and sold after five years will not be subject to RPGT. Previously a flat 5% rate had been in place.

The government also extended the 10% tax rate on dividends of non-corporate institutional and individual investors in real estate investment trusts (REITs), for a further five years to December 31, 2016.

In addition, the government committed to tax holidays for multinationals looking to establish their treasury management services in Malaysia. A 70% income tax exemption under the scheme applies for five years, alongside a withholding tax exemption on interest payments and a stamp duty exemption on loan and service agreements.

The government also accelerated the Kuala Lumpur International Financial District (KLIFD) scheme, which would provide considerable benefits for companies establishing operations, including a 100% income tax exemption for a period of 10 years and a stamp duty exemption on loan and service agreements, and a 70% income tax exemption for five years for property developers.