Budget 2010 should build resilience (Pt 2)
Mustafa MansurPublished: Jun 16, 2009 6:30 PM | Updated: Jun 16, 2009 6:38 PM
All things being equal, Malaysian exporters are facing an uphill task when it comes to giving our products a competitive edge.
Over 80 percent of local producers are currently exporting Free On Board (FOB) due to the high freight rates and various ancillary charges imposed by shipping lines.
All things being equal, Malaysian exporters are facing an uphill task when it comes to giving our products a competitive edge.
Over 80 percent of local producers are currently exporting Free On Board (FOB) due to the high freight rates and various ancillary charges imposed by shipping lines.
However, foreign buyers prefer to be quoted in Cost, Insurance and Freight (CIF) as an all inclusive price.
Exporting on FOB reduces the competitiveness of Malaysian manufactured products and restricts access into the global markets.
Currently, a double tax deduction on freight charges is given to only the following sectors:
a. All manufacturers who ship their goods from Sabah and Sarawak to Peninsular Malaysia provided they use the ports in Peninsular Malaysia; and
b. Manufacturers who export rattan and wood-based products (excluding sawn timber and veneer) qualify for double deduction on freight charges.
Ship freight charges for all other sectors are allowed single tax deduction.
The Federation of Malaysian Manufacturers (FMM) therefore urges the government to adopt the following recommendations in the 2010 budget to alleviate some of the problems associated with exporting Malaysian goods.
Double tax deduction
To increase market and trading potentials and encourage exports via CIF, double tax deduction on freight charges should be extended to all manufacturers who ship their goods from Malaysian ports to international markets.
Temporary suspension of Sales and Service Tax
In 2007, sales and service tax contributed over 7.3 percent of total government revenue compared to 10.8 percent in 2003.
This reduction in collection was due to the increase in the number of products and services exempted from sales and service tax.
Many companies have approached the FMM to ask for the removal of sales and service tax (SST) on their products and services.
SST increases production costs and reduces the competitiveness of domestic goods and services compared to imports.
Furthermore during the current economic uncertainty, the SST has also lowered spending by consumers.
To promote domestic spending, the government should consider a one year suspension of the 5 percent service tax for all taxable services and one year suspension of the 10 percent sales tax for all licensed manufacturers.
Suspending SST would lower prices and consequently, provide a more direct and effective strategy to increase domestic consumption and further stimulate economic growth and expedite recovery.
The government is the single largest purchaser in the domestic market.
Its purchasing policy has significant impact on businesses. In 2009, the federal government's supplies and services sector were estimated at RM26.4 billion (2008: RM25.9 billion).
Cut costs, up efficiency
It is timely and necessary for the government to promote competition, efficiency, reduce costs and obtain best value for money through:
a. Open tender for all projects;
b. Margins of preference in tenders to assist Bumiputeras on the principle of declining
margins based on the size of tender and declining margin over time
c. Phase out panel suppliers system for tenders (eg. street lightings case)
d. Expedite GP revamp for more effective implementation of stimulus programme.
Good open practices together with Margin of Preference would help to expedite on-going Free Trade Agreements like the Malaysia US FTA.
GP could be offered with the necessary 'carve outs' to assist Bumiputeras.
The US, for instance, carves out 26 percent of GP to US small businesses.
Review the KPIs for GLCs
Key performance indicators (KPIs) which were set under favourable economic conditions would not be appropriate during a slowdown like the current global economic crisis.
A case in point is electricity tariffs. The priority of GLCs in the power sector should be seen as a public utility and not a commercial enterprise.
The FMM feels that a review of GLCs' KPIs to allow them to achieve economic efficiency for the overall good of the nation.
The correct KPIs would help to set correct directions for GLCs to fulfil and emphasise their social responsibilities, particularly during an economic downturn.
More flexible income payment
Currently, monthly tax payments are remitted to the Inland Revenue Board on the 10th of the following month.
A 10 percent penalty is automatically imposed on any unpaid amount.
Section 107C(3) of the Income Tax Act 1967 provides that an estimation of tax payable for a year of assessment must not be less than 85 percent of the revised tax payable.
This estimate of tax is payable if is no revised estimate is furnished in the preceding year.
Flexibility in tax payment
a. FMM welcomes the Inland Revenue Board's move to allow taxpayers having difficulties to comply with provision of Section 107C(3) to apply in writing for a waiver.
The FMM is of the view that flexibility should be given to taxpayers without having to apply to the IRB Processing Centre, especially for 2009 income because of uncertainties in the global economy and in company sales.
b. Allow deferment or reduction in scheduled payment of company taxes and waive penalty
for late payment of corporate taxes.
Speed up automation, mechanisation
The Soft Loan Scheme for Automation and Modernisation (SLSAM) was launched in February 2007 with a fund size of RM300 million with the following objectives:
a. Encourage industries to modernise and automate manufacturing processes;
b. Upgrade production capability and capacity
c. Assist companies in:
i. Minimising dependence on labour intensive activities and foreign labour;
ii. Diversifying into higher value added activities; and
iii. Rationalising and streamlining operations through mergers and acquisitions.
Eligible industries are the automotive, electrical and electronics, iron and steel, wood products and furniture, textile and apparel, plastics and chemical products.
To expedite automation and mechanisation, the SLSAM should be opened to all industries as long as there is a need for mechanisation and automation to increase productivity and move up the value chain.
There must also be a reduction on the dependency on foreign workers.
In this respect, allocations could be increased by channelling the levy collected from foreign workers into this fund.
Lower personal income tax rate and restructure bands
The 2007 National Budget announced a two-stage reduction in corporate tax rate from 28% to 27 percent in Year of Assessment (YA) 2007 to 26 percent in YA2008.
The 2008 national budget witnessed a significant change to the company tax system with the introduction of a single-tier tax system effective YA2008. The Government also announced a further reduction in corporate tax rate to 25 percent with effect from YA2009.
To ensure that individual income tax rates remain competitive and to increase disposable income, the 2009 budget reduced personal income tax rate for chargeable income exceeding RM35,000 to RM50,000
The tax rate was reduced from 13 percent to 12 percent and the rate for chargeable income group exceeding RM250,000 from 28 percent to 27 percent effective YA 2009.
The highest tax rate margin of 27 percent for resident individuals is still not at par with the corporate tax rate of 25 percent.
FMM feels that personal income tax bands should be restructured so that tax payers would not hit the higher bands and maximum rate too quickly.
Restructuring tax bands would also make employment in Malaysia more attractive for knowledge workers.
All the above will have the following positive impact:
i. Motivate individuals to work harder and to reward hard work/innovation/ creativity and reduce tax avoidance;
ii. Help retain existing workers, in particular knowledge workers and concurrently encourage the return of Malaysian experts;
iii. Cushion the impact of inflation; increase disposable income and to some extent, offset the loss borne by individual dividend owners following the implementation of a single tier tax system.
d. As a first step towards implementation, the Ministry of Finance should at least work out the loss in revenue based on the proposed rates, and to compare the size of this loss in relation to other elements of the stimulus package.
TAN SRI DATUK MUSTAFA MANSUR is president, Federation of Malaysian Manufacturers.
Over 80 percent of local producers are currently exporting Free On Board (FOB) due to the high freight rates and various ancillary charges imposed by shipping lines.
However, foreign buyers prefer to be quoted in Cost, Insurance and Freight (CIF) as an all inclusive price.
Exporting on FOB reduces the competitiveness of Malaysian manufactured products and restricts access into the global markets.
Currently, a double tax deduction on freight charges is given to only the following sectors:
a. All manufacturers who ship their goods from Sabah and Sarawak to Peninsular Malaysia provided they use the ports in Peninsular Malaysia; and
b. Manufacturers who export rattan and wood-based products (excluding sawn timber and veneer) qualify for double deduction on freight charges.
Ship freight charges for all other sectors are allowed single tax deduction.
The Federation of Malaysian Manufacturers (FMM) therefore urges the government to adopt the following recommendations in the 2010 budget to alleviate some of the problems associated with exporting Malaysian goods.
Double tax deduction
To increase market and trading potentials and encourage exports via CIF, double tax deduction on freight charges should be extended to all manufacturers who ship their goods from Malaysian ports to international markets.
Temporary suspension of Sales and Service Tax
In 2007, sales and service tax contributed over 7.3 percent of total government revenue compared to 10.8 percent in 2003.
This reduction in collection was due to the increase in the number of products and services exempted from sales and service tax.
Many companies have approached the FMM to ask for the removal of sales and service tax (SST) on their products and services.
SST increases production costs and reduces the competitiveness of domestic goods and services compared to imports.
Furthermore during the current economic uncertainty, the SST has also lowered spending by consumers.
To promote domestic spending, the government should consider a one year suspension of the 5 percent service tax for all taxable services and one year suspension of the 10 percent sales tax for all licensed manufacturers.
Suspending SST would lower prices and consequently, provide a more direct and effective strategy to increase domestic consumption and further stimulate economic growth and expedite recovery.
The government is the single largest purchaser in the domestic market.
Its purchasing policy has significant impact on businesses. In 2009, the federal government's supplies and services sector were estimated at RM26.4 billion (2008: RM25.9 billion).
Cut costs, up efficiency
It is timely and necessary for the government to promote competition, efficiency, reduce costs and obtain best value for money through:
a. Open tender for all projects;
b. Margins of preference in tenders to assist Bumiputeras on the principle of declining
margins based on the size of tender and declining margin over time
c. Phase out panel suppliers system for tenders (eg. street lightings case)
d. Expedite GP revamp for more effective implementation of stimulus programme.
Good open practices together with Margin of Preference would help to expedite on-going Free Trade Agreements like the Malaysia US FTA.
GP could be offered with the necessary 'carve outs' to assist Bumiputeras.
The US, for instance, carves out 26 percent of GP to US small businesses.
Review the KPIs for GLCs
Key performance indicators (KPIs) which were set under favourable economic conditions would not be appropriate during a slowdown like the current global economic crisis.
A case in point is electricity tariffs. The priority of GLCs in the power sector should be seen as a public utility and not a commercial enterprise.
The FMM feels that a review of GLCs' KPIs to allow them to achieve economic efficiency for the overall good of the nation.
The correct KPIs would help to set correct directions for GLCs to fulfil and emphasise their social responsibilities, particularly during an economic downturn.
More flexible income payment
Currently, monthly tax payments are remitted to the Inland Revenue Board on the 10th of the following month.
A 10 percent penalty is automatically imposed on any unpaid amount.
Section 107C(3) of the Income Tax Act 1967 provides that an estimation of tax payable for a year of assessment must not be less than 85 percent of the revised tax payable.
This estimate of tax is payable if is no revised estimate is furnished in the preceding year.
Flexibility in tax payment
a. FMM welcomes the Inland Revenue Board's move to allow taxpayers having difficulties to comply with provision of Section 107C(3) to apply in writing for a waiver.
The FMM is of the view that flexibility should be given to taxpayers without having to apply to the IRB Processing Centre, especially for 2009 income because of uncertainties in the global economy and in company sales.
b. Allow deferment or reduction in scheduled payment of company taxes and waive penalty
for late payment of corporate taxes.
Speed up automation, mechanisation
The Soft Loan Scheme for Automation and Modernisation (SLSAM) was launched in February 2007 with a fund size of RM300 million with the following objectives:
a. Encourage industries to modernise and automate manufacturing processes;
b. Upgrade production capability and capacity
c. Assist companies in:
i. Minimising dependence on labour intensive activities and foreign labour;
ii. Diversifying into higher value added activities; and
iii. Rationalising and streamlining operations through mergers and acquisitions.
Eligible industries are the automotive, electrical and electronics, iron and steel, wood products and furniture, textile and apparel, plastics and chemical products.
To expedite automation and mechanisation, the SLSAM should be opened to all industries as long as there is a need for mechanisation and automation to increase productivity and move up the value chain.
There must also be a reduction on the dependency on foreign workers.
In this respect, allocations could be increased by channelling the levy collected from foreign workers into this fund.
Lower personal income tax rate and restructure bands
The 2007 National Budget announced a two-stage reduction in corporate tax rate from 28% to 27 percent in Year of Assessment (YA) 2007 to 26 percent in YA2008.
The 2008 national budget witnessed a significant change to the company tax system with the introduction of a single-tier tax system effective YA2008. The Government also announced a further reduction in corporate tax rate to 25 percent with effect from YA2009.
To ensure that individual income tax rates remain competitive and to increase disposable income, the 2009 budget reduced personal income tax rate for chargeable income exceeding RM35,000 to RM50,000
The tax rate was reduced from 13 percent to 12 percent and the rate for chargeable income group exceeding RM250,000 from 28 percent to 27 percent effective YA 2009.
The highest tax rate margin of 27 percent for resident individuals is still not at par with the corporate tax rate of 25 percent.
FMM feels that personal income tax bands should be restructured so that tax payers would not hit the higher bands and maximum rate too quickly.
Restructuring tax bands would also make employment in Malaysia more attractive for knowledge workers.
All the above will have the following positive impact:
i. Motivate individuals to work harder and to reward hard work/innovation/ creativity and reduce tax avoidance;
ii. Help retain existing workers, in particular knowledge workers and concurrently encourage the return of Malaysian experts;
iii. Cushion the impact of inflation; increase disposable income and to some extent, offset the loss borne by individual dividend owners following the implementation of a single tier tax system.
d. As a first step towards implementation, the Ministry of Finance should at least work out the loss in revenue based on the proposed rates, and to compare the size of this loss in relation to other elements of the stimulus package.
TAN SRI DATUK MUSTAFA MANSUR is president, Federation of Malaysian Manufacturers.
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