Malaysia plans for new taxes

Preparations in Malaysia are well under way for the rolling out of a new goods and services tax (GST) in April 2015, but opinions differ on how effective the levy will be in boosting revenue and critics have voiced concern that the tax could feed inflation.

Under the new plans, which were mapped out by Prime Minister Najib Razak on October 25 in his 2014 budget speech, a 6% tax will be levied on most purchases or transactions.

The GST forms a key part of a national drive to boost state income and reduce the fiscal deficit, which stands at 4% of GDP this year.

The government hopes that the new, broad-based consumption tax, which is set to replace a number of other tariffs, including the sales and services tax (SST), will streamline revenue gathering.

The state currently earns between $5bn and $5.3bn from the SST, which is applied to only some transactions. The Malaysian Customs Department said on November 21 that it expected to garner an additional $1.5bn in revenue each year as a minimum, once the GST replaces other tariffs, bringing the new tax’s expected total earnings annually to around $6.5bn.

Targets and exemptions

With GST exemptions not yet finalised, questions remain unanswered about which items and services will be taxed.

In mid-November, Deputy Finance Minister Ahmad Maslan told local media that exports would remain outside of the GST umbrella, in a move seen as offering support to Malaysia’s manufacturing industries. The Customs Department later issued a clarification, saying exporters would be able to recover GST paid on raw materials and components used in final export products.

The government has also said that health services will be exempt from the GST, although it remains unclear whether this will include all associated costs. In early November, the Ministry of Health said talks with the Ministry of Finance were ongoing to “minimise the effects of GST in increasing healthcare cost”, suggesting there could be ripple effects from the tax.

The final drafting of GST legislation will be completed by early 2014 at the latest, according to officials, while the infrastructure required for implementation, such as computer networks, is almost complete.

Persuading the public

This is not the first time that the government has tried to introduce a broad-based consumption tax. An initial plan, floated back in 2005, had targeted a 2007 GST roll-out, which failed to materialise. While the tax was put back on the agenda in 2009, strong opposition in parliament, which was mirrored across a significant part of the population, led to the government eventually shelving the draft legislation in 2010, a year before its planned launch.

Winning broad public support remains a challenge today, with widespread scepticism. Opponents are concerned the new tax could trigger price hikes, although the senior assistant director for GST at the Malaysian Customs Department, Mohd Sabri Saad, moved to allay such concerns at a media briefing on the tax.

“The implementation should not burden the people as it is not a new tax but a replacement of SST,” he said. “Only those goods and services which were not taxed before will have a one-off impact in terms of prices.”

Some analysts have suggested that the GST could spark a rise of up to 10% in real estate costs. The government has proposed an exemption for residential properties, but Jerry Chan, the chairman of the Penang Real Estate and Housing Developers Association, warned contractors will likely fail to set up systems to recover taxes paid on inputs, and instead pass the cost on to developers and customers.

Keen to soften the implementation of the tax, the government said the GST would be offset by a reduction in income tax of 1-3%, which will run alongside other support measures planned for low-income families. However, critics counter that only 1.34m of Malaysia’s 14m-strong workforce earn enough to be liable for income tax.

The government has given itself almost 18 months to work out the fine details of the GST and to sell its plan to the public. While the new levy could streamline tax procedures, too many exemptions and concessions risk limiting the GST’s effectiveness. The final drafting of the legislation for the GST will indicate the depth of the new tax regime and how committed the government is to standing firm against opposition to its policy and reducing the fiscal deficit.

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Malaysia plans for new taxes

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Malaysia: New year looks bright for construction industry

While 2013 will produce a number of challenges for Malaysia’s construction sector, including a degree of uncertainty surrounding the approaching election and a shortage of workers, the industry is still expected to post a decent performance this year.

Malaysia goes to the polls in June at the latest, with most pundits predicting a win for Prime Minister Najib Razik’s ruling Barisan Nasional and his coalition allies, although there have been suggestions that the race could be close.

Analysts remain divided, however, about whether nerves among investors prompted by the forthcoming election will produce knock-on effects of any significance across the construction industry.

In an advisory note to investors issued in mid-December, market analyst Nomura International said it remained bullish on construction, energy and banking. The firm’s confidence was shared by Alliance Research, which on December 17 gave a buy recommendation to construction shares.

JP Morgan Securities, however, was more cautious, placing a neutral buy advisory on Malaysia, due to what the firm’s executive director of equity research, Mak Hoy Kit, called election overhang. “Investors will be worried if the opposition wins. When there is uncertainty, investors typically act negatively,” Mak said on December 12. An opposition victory could leave question marks hanging over the current government’s infrastructure programmes, he said, which would likely go ahead as planned if the Barisan Nasional is returned to power.

A similar muted warning was also sounded by the government, when, at the end of November, Deputy Finance Minister Datuk Donald Lim said that although the construction sector’s contribution to the economy would remain significant, the new year would bring a slight reduction in activity.

Construction’s contribution to GDP is expected to fall to 13.5% in 2013 from 15% in 2012, with tourism and the services industry earmarked for a bigger role. “In 2013, we believe domestic demand will still be there but we expect the construction sector to slow down a little. Other industries would contribute to our growth,” Lim said.

The minister said that the slight drop in construction activity could be attributed to the completion of key, large-scale projects, which the government drove through to help the economy recover from a flat patch caused by the global financial crisis.

The industry is set to receive a further boost from a wave of new developments earmarked for 2013, including rail projects worth an estimated $52bn that should be launched in the coming year, prompting some analysts to suggest that while growth in other sectors will largely drive Malaysia’s economy, the construction sector’s contribution to GDP could still remain stable. Malaysia’s GDP is forecast to grow by at least 4.5% this year.

However, while the construction sector is expected to have a solid 2013, it remains hampered by a shortage of skilled labourers, with rapid growth in recent years triggering a drain on its workforce. In late November, the Master Builders Association Malaysia (MBAM) called on the government to do more to facilitate the training of building workers or run the risk of supply-side bottlenecks delaying new projects.

MBAM’s president, Matthew Tee, said that with over a third of the industry’s existing workforce approaching the age of 50, measures needed to be taken to replenish the ranks of the sector. Suggestions include the association’s proposal that the government set up vocational schools that would train construction workers. However, a programme will take time to produce results, and cooperation with the private sector would also be essential for providing work experience and training to students.

In the short term, the government is acting on a proposal floated by MBAM and other industry groups to bring in foreign workers to bolster the ranks of Malaysia’s construction sector workforce. At the beginning of December, the government announced the signing a memorandum of understanding (MOU) with Dhaka that set out the terms for Bangladeshi workers to be employed in Malaysia. The first wave of foreign labourers is due to arrive in February.

If, as is widely expected, Malaysia’s current government wins the forthcoming election, the country’s construction firms should benefit from a wave of new, state-backed infrastructure projects which, combined with rising demand for residential properties, suggests that predictions of a bright 2013 for the sector appear to be well founded.

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Malaysia: New year looks bright for construction industry

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