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Budget 2022 & 12MP: Debt ceiling, windfall & capital gains taxes By Jason Loh

Publish date: Thu, 14 Oct 2021, 09:36 AM

PARLIAMENT has just passed the Windfall Profit Levy (Amendment) Bill 2021 on Oct 12.

While the Government has insisted that it has no plans to impose the tax, the Bill could be seen as a preparation for any eventuality.

For now, the priority is consultation with the relevant industry players before making any (final) decision.

Before that, the statutory debt ceiling was approved by Parliament – from 60% of the gross domestic product (GDP) to 65%.

This should allow for greater fiscal room for Budget 2022 as laying the momentum for the implementation of the 12th Malaysia Plan (12MP).

Notwithstanding, it’s true also that the Government cannot just rely on deficit financing derived from borrowings alone but must also ensure the “appropriate” balance from taxation.

Otherwise, wealth and income inequality or gap could widen on the back of unnecessary inflationary pressure.

Critically, it’s also to ensure that our tax-to-GDP ratio that has been on a steady decline over the years keeps pace with economic growth and development.

The ratio declined to 12% in 2019 from 16.1% in 2012, according to the Organisation of Economic Cooperation and Development (OECD).

This is below the Asia and Pacific average of 21% and also below the OECD average of 33.8%.

So, the Government is right to consider new sources of revenue under Budget 2022 and the 12MP.

However, in the call for introducing new taxes specific to and targeted at certain sectors and groups, this isn’t meant to allow the Government some breathing space to go about its fiscal consolidation exercise targeted down to -3.5 by 2025.

The taxes are meant to add to and are in parallel with the fiscal injection of the Government by way of borrowings.

And the fiscal strategy shouldn’t be to broaden the fiscal base.

The key point here is if private spending remains fragile or wobbly, then the deficit will still typically rise as tax revenue declines irrespective of whether new taxes are introduced.

Put simply, ringgit for ringgit, premature deficit reduction will result in less revenue collection.

On the windfall tax, the Government could follow the advice of that former technocratic Prime Minister to increase it from 3% to 6% of the excess profits (i.e. profits exceeding the profits) which are based on prices (of e.g., crude oil palm/CPO exceeding a certain threshold) and lasting for up to two years.

Windfall tax has been successfully implemented before and deployed as an anti-inflation tool by way of subsidisation of essential items such as cooking oil.

As suggested, it could also be used to subsidise chicken feed to keep prices of broiler chicken from hiking, among others.

Historically speaking, the imposition of windfall tax hasn’t neither deterred foreign direct investment (FDI) nor dis-incentivised reinvestment.

The implementation of windfall tax should be coordinated and synchronised with the implementation of capital gains tax (CGT).

Both are closely related or inter-linked, as the extraordinary profits from the gloves industry, for example, has been used for share buybacks which will further enhance the price and earning of the shares concerned.

But calls for CGT comes at a time when the price of Top Glove shares is on a downward trend in tandem with increasing vaccination rollout globally and rising competition from China.

So, how to justify CGT in this sense?

Introducing CGT – and windfall tax – will have minimal impact on the share prices of the glove industry in particular and the stock market in general.

First, CGT should be targeted and imposed on sales and dividends of shares (and also bonds) above a certain threshold (e.g., RM1 million and above). These would mainly affect the majority shareholders and owners of the companies concerned (including non-listed ones).

It means that CGT doesn’t affect intra-day trading volume and doesn’t discourage liquidity in terms of public subscription.

As CGT takes into account the time-period for holding on to the shares, it’s also a potential tool for stabilising outflow of funds as in pre-empting capital flight.

It would dampen the movement of “hot money” into and, by extension, its movement out of the capital markets.

Internally, CGT could serve to indirectly regulate short-selling (sell expensive, buy back cheap) in Bursa Malaysia now allowed under restrictive conditions.

In other words, the allowance for a limited form of short-selling that will enhance liquidity in the stock market is balanced with CGT.

Last but not least, CGT should be viewed as temporary and imposed for up to two years only.

As for inheritance tax, it doesn’t have to be a tax as such.

That is, it could be treated like an insurance premium and charged as a percentage of the current value of the property and/or assets.

And it should (at least, partially) pay for social care – as in old-age related care – as we’re fast heading towards becoming an ageing nation.

In the final analysis, the imposition of these selective and time-limited taxes is for the purposes of allocation for specific and targeted expenditure.

So, viewed in that sense, the windfall tax and CGT could be regarded as semi-hypothecated taxes. – Oct 13, 2021


Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.

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