By Stephanie Jacob
The federal budget (Budget 2015) is likely to focus on tax levels, in line with the goods and services tax which comes into effect in April 2015. This may include cuts to income and corporate tax rates.
Kenanga Research said that it expects the goods and services tax (GST) to remain in the limelight in Budget 2015 with the government expected to iron out the final details before its implementation in April 2015.
Impact from the GST is expected to result in moderate to sharply slower growth for at least two quarters after GST comes into effect. However there should be a gradual rebound by the end of 2015, as businesses and consumers adjust to the new system, said the research house.
The GST is expected to add around RM2.5 billion to government coffers in its first year, and this could help the government achieve its 2015 deficit target of 3% of gross domestic product (GDP – goods and services produced). But Kenanga added that hitting the target will also depend on prudent operating expenditure.
Overall the research house said it expects the fiscal deficit to fall to 3.3% of GDP and for GDP to come in at 5.1% higher next year.
The government is likely to implement measures aimed at increasing disposable income to boost private consumption, particularly in the wake of GST. One such way would be a reduction of the individual income tax rate.
The research house also expects tax relief levels under Budget 2015 to be raised. It said “the current individual self and dependent tax relief of RM9,000 is considered small and has not been adjusted since 2010. Taking into account inflation and rising cost of living the more realistic and fair amount would be at least RM12,000”
There may also be a corporate tax cut, with Kenanga suggesting that the government might reduce it by 1% for 2016, the rationale for this being that Malaysia is already behind the regional curve in terms of reducing the corporate tax rate.
A targeted subsidy scheme needed
With subsidy rationalisation expected to continue in 2015, Kenanga said it expected the government to introduce a new subsidy scheme. The new scheme would be a more targeted system to ensure that it helps those who need it the most and one that could not be easily exploited.
The research house said a well implemented system could lower the subsidy bill by as much as RM5 billion to RM7 billion.
The budget is also likely to allocate substantial funds to develop the east coast and northern parts of peninsular Malaysia, shifting away from the usual focus on the west coast and southern parts, said Kenanga.
Development expenditure will likely focus on expanding the PR1MA government affordable housing project and go towards the development of human capital. Such expenditure is expected to be increase to RM45 billion under Budget 2015.
Affordable housing and speculation to be addressed
To address affordable housing concerns, the government looks set to increase its allocation for affordable housing projects under PR1MA. The exemption from stamp duty on housing loans for first time buyers might also continue for several more years.
Meanwhile the Developer Interest Bearing Scheme (DIBS) may be reintroduced “as it takes away the need to service home loan interest during a property’s construction period, which frees up excess money (which would be used to service the interest) that can be utilised in other ways,” said Kenanga.
Measures to curb property speculation and to prevent the build up of a property bubble are also likely to be taken These might include a hike in real property gains tax (RPGT), an increase in stamp duties and tighter foreign ownership rules.
The government must set priorities
Kenanga said that 2015 will be a test of the government’s ability to balance it’s finances while remaining supportive of the economy. It added that the “government needs to tread carefully, to ensure that they are not blindsided by the need to please rating agencies by sacrificing the needs of the people.”
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