AS Prime Minister Datuk Seri Najib Tun Razak gets ready to present the annual budget for the forthcoming fiscal year, he will be faced with a daunting task at hand – responding to the downturn in the economy, arresting job losses, reviving demand in the various industries, give special focus to social welfare and much more.

He will be doing all this against a backdrop of weak global economic conditions, not knowing how quick the turnaround is likely to be.

Even though the declining growth led by a slump in exports and domestic demand warrants some sentiment booster, one should be aware that the Government is sitting on a high fiscal deficit, which is likely to be around 7.6% of gross domestic product (GDP) for 2009. This is on the back of two fiscal stimulus packages introduced over the past nine months. While the prognosis is that a third stimulus package will not be required, it is still too early for this to be altogether discounted.

The Government’s budget strategy must clearly be to support the economy now but, at the same time, keep an eye on the fiscal deficit to make sure that it comes back to an acceptable level in the not too distant future. The emphasis of the budget will likely be on social infrastructure (education and health), rural development and agricultural growth and perhaps further measures to aid sectors such as small and medium-scale enterprises (SMEs) and exports.

The measures announced to liberalise the services sector, including the removal of the Foreign Investment Committee (FIC) guidelines on equity conditions, must be complemented by longer term initiatives to lift productivity, improve competitiveness and the broad economic performance.

It seems clear that with tax collections declining, significant direct tax cuts are not expected although the Second Finance Minister indicated recently that something might be on the cards.

However, there would seem to be a case for sector specific or goods specific indirect tax cuts. This may help alleviate the plight of consumers in the lower income group who have been caught in the economic downturn spiral. The removal of sales tax for the motor industry was bandied about and the case remains valid particularly for commercial vehicles, as this should help businesses.

Businesses in general will continue to welcome measures to enhance competitiveness and reduce business costs. Some of the tax measures called for include:

● Active review of the existing tax system. The key challenge is to ensure that the tax system grows in tandem with the aspiration towards achieving developed nation status. Thus, a progressive tax system is one which is responsive, fair and transparent;

● Revamping the current withholding tax system, which is cumbersome and adds to the cost of doing business. A simpler system should be considered to allow businesses to comply in a more cost-efficient manner;

● Deferment of implementation of onerous contemporaneous transfer pricing documentation requirements and thin capitalisation rules. These rules are inappropriate at this point in time when business conditions do not permit added costs;

● Adopt a more broad-based approach to help employers retain Malaysian workers. Thus, cash grants can be given to employers as an alternative to granting double deduction for the cost of employing retrenched Malaysian workers. This will help dissuade employers from retrenching Malaysian workers;

● Allow companies up to 12 instalments to settle their final tax liability. This will help the cashflow of businesses;

● Liberalise the tax deduction and tax incentive rules. Remove the archaic treatment of tax filing fees, secretarial fees, and etc;

● Allow group relief (tax losses) at 100% rather than 70%. Extend this measure to small and medium companies;

● Increase the amount of business losses which can be carried back to enable loss-making firms significant relief;

● Review the restrictions on reinvestment incentive allowance as this discourages capital reinvestment for expansion and modernisation; and

● Expedite the conclusion of bilateral free trade agreements, particularly with those countries seen as Malaysia’s future trading partners.

The longer term strategy must extend beyond addressing current shortcomings and plugging leakages. There must be further widening of the tax base as soon as economic conditions permit. Rationalising taxes is an ongoing process which should ultimately lead to the introduction of the goods and services tax. This should come in sooner rather than later in the light of the need to quickly reduce the high fiscal deficit position.

● Kang Beng Hoe is an executive director of Taxand Malaysia Sdn Bhd. Readers’ feedback to this article is welcome. Please
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