The Malaysian Insight

WITH Budget 2018 deemed an election budget, the 2% tax cut for middle-income earners is clearly geared towards a group of voters who shunned Barisan Nasional in the last general election in 2013. 

But instead of a cut, a special tax relief would have been more helpful, said taxation expert Dr Veerinderjeet Singh.

A relief will also be more targeted that a tax cut, as higher-income earners will benefit from the cut, yet not need it as much, the Axcelasia Taxand Sdn Bhd chairman said. 

“All of us who pay taxes will benefit because we all have the scale rate. 

“It would have been better to give a special relief to those who have taxable income within the RM20,000 to RM70,000 income band. It’s similar to a lifestyle relief. 

“(The relief) will only benefit them (the RM20,000-RM70,000 income band). Then for the high-income earners, you can still use the same tax table, so they won’t get the personal relief,” he told The Malaysian Insight. 

Prime Minister Najib Razak announced a 2% reduction in the tax rate for those earning between RM20,001 and RM70,000.

The move by the government to reach out to the M40 group (household incomes between RM3,860 and RM8,319) is no surprise ahead of the 14th general election that must be called before next August.

During GE13, the bulk of M40 voters, who reside in urban and semi-urban areas, supported the opposition. 

Out of the 165 seats in the peninsula, Barisan Nasional took 85 seats while the opposition won 80. But out the 85 federal seats BN won, 66 were rural seats while 14 were semi-urban and five were urban seats.

Veerinderjeet said the government could do what it did few years ago, by giving a one-off personal relief to the middle-income group. 

“If you change the rates it will benefit everyone. So, for the rich, they will also get the legal advantage although it’s small to them. Since you want to target the M40 group, why give to those who are in the top tier?

“If the objective is only to help the M40, then the special relief is the best way.”

In Budget 2014 and the revised Budget 2016, the government announced a special tax relief of RM2,000 for those earning RM8,000 and below per month.

According to the Inland Revenue Board 2014 annual report, there were around 2.33 million individual taxpayers out of 14 million employees in Malaysia. However, IRB does not provide information about the distribution of taxpayers according to the respective tax bands.

Will it really help?

Muhammad Hanafi Idris, 35, whose chargeable income is RM60,000, said although he would have RM800 extra next year following the tax rate cut, he was still uncertain how the money would really help reduce his family’s monthly expenses. 

“The extra money still can’t cover much although I will get an extra RM66 every month but milk for my newborn baby costs me around RM80 monthly. So, I don’t know how it can really help me in terms of cost of living. 

“What really helps is if the government can increase the maximum amount for child relief,” the father of four said. 

The civil engineer, who works part-time as an insurance agent, said he spends around RM900 monthly for his children’s day care, as both he and his wife are working full-time. 

“If they were to increase the amount of relief for children below six, it would be better because the cost of raising a child aged six and below is getting more expensive. Day-care centres are charging more for babies. The standard price is around RM300 per baby in Shah Alam.”

For the assessment year 2017, the tax relief limit for childcare fees (childcare centre or kindergarten) is RM1,000 and ordinary child relief limit is RM2,000 annually. 

Hafizi Muhammad from Klang said he would only get RM300 extra as his chargeable income was RM35,000. 

“I don’t think the difference will be felt. Maybe I can use the extra money on daily things because the most I can do with the money is to have a special dinner out with my family or a day out in the city with my children.”

He said he would probably spend the extra money as he already had savings from his monthly salary set aside.

AmBank Group chief economist Anthony Dass said the extra money would help M40 group to sustain their standard of living.

“This kind of deduction will free up some money for them although there will be a small percentage of them who will put the extra money into savings. But most of them will spend because the marginal propensity to consume is quite high, 75 sen for one ringgit earned will be on spending. 

“I think we will see a pick-up in private consumption, and it will help the economy,” he said. 

Economist Lee Heng Guie said the lower rate will help those who will no longer have to pay income tax to have some savings. 

It is estimated that more than 261,000 people will be exempted from paying income tax following the 2% cut. 

“These people will have some savings because of the adjustment, so it matters to them. 

“It’s a good thing for our economy, because if the government can afford it, they should put the money back into the pocket of the rakyat, instead of giving big allocations to the ministries where we don’t know whether the money will flow to the people,” the Socio-Economic Research Centre (SERC) executive director said. – November 6, 2017.