Middle-income tax band review a welcome move in Budget 2025 - PwC Malaysia

KUALA LUMPUR - With the rising cost of living a major concern for Malaysians, PwC Malaysia believes a review of personal income tax bands for the middle-income group in Budget 2025 would be a welcome move.

Its tax leader, Steve Chia, said the government has committed to reducing the budget deficit to 3.2 per cent of gross domestic product (GDP) by 2025, but Malaysia’s tax base remains narrow and heavily reliant on corporate income tax, which is susceptible to fluctuations in corporate profits.

"A review of personal income tax bands for the middle-income group (with annual chargeable income between RM35,001 and RM100,000) would be welcomed to alleviate the living costs for these taxpayers, which can potentially boost spending in the economy, which in turn increases revenue from corporate income taxes,” he told Bernama in an email interview about the company’s budget wish list recently.

On the corporate front, Chia said Malaysia’s corporate tax rate of 24 per cent is relatively high compared to regional rates of around 20 per cent.

"A clearer outlook may emerge if there is a roadmap to broaden the overall tax base,” he said.

Consumption taxes

On the return of goods and services tax (GST), which has been dismissed by Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim, Chia said that the government is likely to hold back the introduction of a broad-based consumption tax in the upcoming budget.

He said this is because the government is still in the process of implementing other structural economic adjustments, such as subsidy rationalisation, as announced in the previous budget.

"It may not be surprising that the government could be looking at further expanding the existing taxable sales and service tax (SST) scope instead,” he said.

The PWC tax leader explained that the move could scale up the revenue base, as the room to manoeuvre is increasingly limited, coupled with the need to prevent cascading effects resulting from tax on tax from any new goods and services added to the taxable scope.

Nonetheless, Chia opined that a broad-based consumption tax is inevitable in the long run if the government seeks a sustainable reduction of the fiscal deficit.

"The overall impact on the cost of living of the Rakyat would need to be considered, and, if implemented, there should be an offset mechanism, potentially involving targeted cash transfers to cushion the cost impact on the lower income group,” he said.

High‑value goods tax (HVGT)

Regarding the HVGT, Chia said without a broad-based consumption tax, the pressure to introduce progressive taxes like the HVGT remains on the table.

"The government needs to balance this with other revenue options, such as corporate tax and SST, bolstered by a positive economic outlook and enhanced compliance from e-invoicing,” he said.

He noted that since the Budget 2024 announcement, the government has been engaging stakeholders to assess the impact of the luxury tax.

In Budget 2024, the government planned to impose a 5-10 per cent tax on luxury items on May 1, 2024, but was postponed until further notice.

Carbon tax

Given Malaysia’s commitment to achieving net-zero emissions by 2050 and reducing carbon dioxide intensity against GDP by 45 per cent by 2030, as pledged in the 26th United Nations Climate Change Conference (COP26) and reaffirmed in COP27, Chia said introducing a carbon tax in Budget 2025 is a plausible consideration.

He said the government could incentivise investments in carbon abatement technologies and adopt internal carbon pricing through tax deductions for these initiatives.

"A clear roadmap, including measurement methodologies (which require upskilling around calculation and analysis of carbon tax, for instance) and indicative tax rates, would help prepare stakeholders and mitigate economic shocks.

"Clear government signals can stimulate investment, particularly in the green economy,” he added. - BERNAMA