Budget 2007

2007 Budget

Malaysia

1 Sept 2006 Executive Summary A llo c a t io n o f D e v e lo pm e nt E xpe ndit ure , 2007

16 14 12 10 8 6 4 2 0

RM bn %YOY

RMbn

150 100 50 0

2007 Budget

2003

2004

2005 2006e 2007e

% YOY

Budget Allocation, 2003-2007 200

Housing 5% General Admin 6% Public Utilit ies 7% Ot hers

Internal Health Security 4% 5%

Communicat i ons 0% Edu & Training 18%

Transport 16%

8% Agri & Rural 9%

Def ence 11%

Trade & Industry 11%

•

An expansionary budget where the government is seen being “more generous” in its spending compared to the previous two budgets. Total allocations for 2007 rose a double-digit 11.6% to RM159.4bn (2006: +3.2%) of which development expenditure made up 29% of total allocation, increasing 31% to RM46.5bn.

•

By broad use, the largest allocation in development expenditure is for the economic sector (46.8%), followed by social services (31.9%), security (15.3%) and general administration (5.9%).

•

By sector, education & training received the largest allocation (17.8%) in line with the government’s commitment to further develop skill sets and human capital. The transport sector received 16.4% of total allocation followed by trade & industry (11.5%).

•

Despite an 24.3% increase in gross development expenditure to RM44.5bn, budget deficit is expected to narrow to 3.4% of GDP in 2007, helped by a 11.8% increase in federal government revenue to RM134.8bn, thanks to petroleum-related revenue which is estimated to amount RM53.7bn or 40% of total revenue.

•

We believe this fiscal pump-priming is timely to cushion the impact of moderating global growth. In addition, the budget has introduced incentives to stimulate the private sector with some goodies for both the people and the business sector. Emphasis and incentives are given to new areas with high growth potential namely ICT, biotechnology, modern agriculture, halal industry, tourism and Islamic finance.

•

The 1-2 months bonuses for civil servants payable in two equal instalments in October and December is expected to spur domestic consumption in the short term especially with the nearing of festive seasons. The increase in tax relief for the purchase of books and computers are expected to encourage “investment” in self-development towards a technology-driven and knowledge-based economy.

•

What came as a pleasant surprise is the staggered reduction in corporate tax rate, the first in 9 years, to 27% in YA2007 and further to 26% in YA2008. Although we believe the positive impact on companies’ bottomline is marginal, it is expected to boost investment and ease the burden of companies which have been squeezed by rising costs.

•

However, we are disappointed by the lack of details on the implementation of projects under 9MP, which is very much limited to the RM27.5bn allocated for construction of roads, quarters & other infrastructure facilities.

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2007 Budget

Key Budget Objectives

•

The main objective of the 2007 Budget is to ensure that policy thrusts under the National Mission running from 2006-2020 is translated into programmes and projects which will be implemented expeditiously and effectively.

•

The five major policy thrusts are: 1. To move the economy up the value chain. 2. To raise the capacity for knowledge and innovation and nurture “first class mentality”. 3. To address persistent socio-economic inequalities constructively and productively. 4. To improve the standard and sustainability of quality of life. 5. To strengthen the institutional and implementation capacity.

•

Efforts to improve the public service delivery system will be further strengthened.

•

Incentives to accelerate the growth of the private sector via transformation towards a technology and knowledge-intensive economy.

• • • • • • • • • • • • • •

The private sector as the engine of economic development. Generating new sources of wealth in technology and knowledge-intensive sectors. Commercialising the agriculture sector. Promoting biotechnology. Promoting halal industry to the global level. Accelerating ICT development. Intensifying R&D. Promoting product branding. Promoting a more dynamic services sector. Accelerating the development of Islamic finance. Diversifying capital market products. Promoting investment abroad. Tapping tourism potential. Stimulating the construction sector.

To raise the capacity for knowledge and innovation and nurture “first class mentality”

• • • • • •

Strengthening primary and secondary schools. Strengthening higher learning institutions. Enhancing skills training. Increasing employability of graduates. Empowering women. Resilience of youth.

To address persistent socio-economic inequalities constructively and productively

• • • •

Reducing regional disparity. Rural development. Poverty eradication. Developing competitive bumiputera entrepreneurs.

To improve the standard and sustainability of quality of life

• • • • •

Housing for low income group. Efficient management of water assets. Corporate social responsibility. Recognizing employee’s contribution. Fostering a caring society.

To move the economy up the value chain

Budget Overview

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2007 Budget

To strengthen the institutional and implementation capacity

• • • •

Access to health services. Environmental preservation. Ensuring public safety. Appreciating arts, culture and heritage.

• • • • •

Enhancing public service delivery system. Simplifying immigration procedures. Improving the quality of public transportation. Recognizing the contribution of civil service. Assistance for pensioners.

•

Company tax rate to be reduced in 2 stages by one percentage points each in YA2007 and YA2008, from 28% currently. The proposal will apply to all SMEs.

•

Personal tax relief on study fees of up to RM5,000 per year to Islamic financial study conducted in institutions of higher learning.

•

10-year tax exemption for biotechnology activities. Subsequent to this, the company will be taxed at 20% for another 10 years.

•

Income tax exemption for 10 years given to all Islamic banking and takaful entities that conduct their business in foreign currencies. Same exemption will be given to local and foreign fund managers who manage Islamic funds for foreign investors.

•

Property trust tax reduced to 20% from 28% for foreign investors. In the same vein, the property trusts dividend tax imposed on local individual investors has been cut to 15%. The government will also give tax breaks on undistributed income provided REITs distribute at least 90% of their income.

•

Income tax exemption for tour operators, providing tour packages with at least 500 inbound tourists per year or 1,200 local tourists per year for a period of 5 years to YA2011.

•

Increase in excise duties for tobacco and breweries: (i) 7% to 9% increase for cigarette and tobacco products and (ii) 20% hike for alcoholic beverages with alcohol content of more than 40%.

•

1 month bonus for civil servants earning more than RM750 a month subject to a minimum of RM1,500. 2 months bonus for civil servants earning up to RM750 a month. One-off payment of RM200-400 for pensioners to help ease the impact of rising costs of living.

•

RM33.4bn to be allocated to further strengthen the education and training system. More schools and higher learning institutions will be built and equipped with better facilities.

•

Development allocation of RM2.3bn for the implementation of infrastructure projects in the South Johor Economic Region (SJER). Measures will also be undertaken to improve the investment climate in the state of Perlis.

•

The Budget continues to focus on efforts to address persistent sosio-economic inequalities. As such, a total of RM3.4bn and RM578m has been allocated for rural development and eradication of hardcore poverty.

Key Budget Highlights

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2007 Budget

Key Budget Proposals Key Areas Construction Sector

REITs

Major Policy Actions ¾

Total sum of RM27.5bn allocated for public sector expenditure with several PFI projects valued at RM4.0bn be implemented in 2007.

¾

Government will also provide an additional sum of RM1.0bn for the maintenance of buildings and public facilities.

¾

Development allocation of RM2.3bn for the implementation of infrastructure projects in the South Johor Economic Region (SJER). Measures will also be undertaken to improve the investment climate in the state of Perlis. Government to establish a strategic investment fund with an allocation of RM200m and use PFI approach to promote investments in the region.

¾

Special tax treatment for the property development and construction contract business (i) Expenses incurred by property developers within the defects liability or warranty period be allowed as deduction from the same project and not only as deduction from other projects. (ii) Losses incurred in the last year of a project be allowed as deduction from profits received from the previous years of that project (carry back of losses).

¾

Non-corporate investors especially resident and non-resident individuals and other local entities that receive dividends from REITs listed on the Bursa Malaysia be subject to a final withholding tax of 15% for 5 years.

¾

Foreign institutional investors especially pension funds and collective investment find that receive dividends from REITs listed on the Bursa Malaysia be subject to a final withholding tax of 20% for 5 years;

¾

Local and foreign corporate investors be subjected to existing tax treatment and tax rates.

¾

REITs be exempted from tax on all income provided that at least 90% of their total income is distributed to the investors.

¾

If the 90% distribution in not complied with, REITs will then be subjected to income tax while all their investors are eligible to claim tax credit.

Economic Impact/ Beneficiary ¾

To stimulate and revive the construction sector.

¾

To provide certainty in the tax treatment with respect to the computation of the gross income and adjusted income from the property development and construction contract business.

¾

Reduce disparity between the regions.

¾

To further enhance the development of REITS in Malaysia and attract investments, especially funds from West Asia as well as diversifying capital market products.

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2007 Budget

Islamic Finance

Promoting Investments Abroad

Tourism

¾

Income tax exemption for 10 years to be given to all Islamic Banking and Takaful entities that conduct their business in foreign currencies and licensed under the Islamic Banking Act 1983 and Takaful Act 1984

¾

Making Malaysia a leading international Islamic financial center.

¾

Accelerating the development of Islamic Finance and diversifying the capital markets will boost growth in the services sector, which is the largest contributor to GDP.

¾

Encourage local companies to invest overseas and create Malaysian-owned MNCs based in Malaysia with large global operations.

¾

Additional 20% stamp duty exemption will be given to all instruments related to Islamic financing for a period of 3 years. This additional exemption is given after providing for tax neutrality between conventional and Islamic financing.

¾

Income tax exemption for 10 years be given to local and foreign fund managers, who manage Islamic funds for foreign investors.

¾

Personal tax relief on study fees, up to a maximum of RM5,000/year be extended to Islamic financial studies conducted in institutions of higher learning, including International center for Education in Islamic Finance or INCEIF.

¾

Tax deduction be given on expenses incurred in establishing an Islamic stockbroking firm.

¾

Tax deduction on expenses incurred in the issuance of Islamic products will be extended for year of assessment 2008 to 2010.

¾

Government to establish an Overseas Investment Fund (OIF) with an allocation of RM100m to provide soft loans to domestic companies to finance start-up cost of doing business overseas.

¾

Malaysian-owned banks to be given tax exemption for 5 years on income received from their new branches or remittances from subsidiaries overseas, operating within a 3-year period, from the year of assessment 2007.

¾

To further promote tourism, RM149m is allocated for the Visit Malaysia Year 2007 programme.

¾

Increase tourism activities are expected to boost other tourismrelated services sector.

¾

Income tax exemption for tour operators, providing tour packages with at least 500 inbound tourist/year or 1200 local tourist per year will be extended for another 5 years until 2011.

¾

Job opportunities for the tourism sector will help boost domestic demand.

¾

To enable tourist to explore challenging destinations, tour operators will be given 50% excise duty exemption on locally assembled 4WD vehicles.

¾

Income tax exemption to employees for

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2007 Budget

local leave passage provided by employers, which currently, is given only for fares, be extended to include expenses on accommodation and meals. Education

Taxes

¾

RM33.4bn is allocated for operational and development expenditure, accounting for 21% of overall 2007 budget, of which RM6.7bn for primary education, RM6.2bn for secondary education and RM10.4bn for higher education and RM10.1bn for training programmes.

¾

More schools and higher learning institutions will be built and equipped with better facilities.

¾

Company income tax rate to be reduced in stages by 2 percentage points. For 2007 assessment, the rate will be 27% including SMEs and 26% in YA2008.

¾

Venture capital companies investing at least 50% of its investment funds in VCs in the form of seed capital will be given income tax exemption for 10 years

¾

10% penalty on withholding tax will be imposed on the amount of unpaid tax and not on the total payment made on a non-resident

¾

Zakat on business income paid y cooperatives and trust bodies to Islamic religious authorities be allowed as a deduction under the Income Tax Act 1967 subject to a maximum of 2.5% of their aggregate income.

¾

Eligibility period to claim refund of sales tax and service tax related to bad debts be shortened from 12 months to 6 months from the date of tax paid.

¾

Increase in excise duties for tobacco and breweries: (i) 7% to 9% increase for cigarette and tobacco products and (ii) 20% hike for alcoholic beverages with alcohol content of more than 40%.

¾

Perlis to be declared as a promoted area. Designated projects in Perlis will be eligible for a higher level of income tax exemption.

¾

Tax exemption on service awards received by employees are to be given in cash or in kind not exceeding RM1,000 a year.

¾

Current limit on deduction given to companies on contributions for charitable activities is increased from 5% to 7% of the aggregate income. Such

¾

To improve access to quality education and training at all levels.

¾

To raise the capacity for knowledge and innovation and nurture ‘First class mentality”.

¾

Enhance the nation’s competitiveness.

¾

Increase funding in seed capital.

¾

Reduce the cost of doing business.

¾

To promote a healthy lifestyle, ‘sin taxes’ have been increased further to deter consumption.

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2007 Budget

deductions are also extended to contributions made towards sports activities approved by MOF and sports bodies. Total of the 2 types of contributions does not exceed 7% of company’s aggregate income.

Budget Allocations 2007 Operating Expenditure Development Expenditure Total Allocation

= = =

Selected Allocation by Sector Sector Agriculture

¾

RM112.9bn (70.8% share of total allocation) RM46.5bn (29.2% share of total allocation) RM159.4bn (2006: RM136.8bn)

Allocation RM3.6bn

Remarks ¾ ¾ ¾

¾ ¾

Biotechnology

¾

RM200m

¾

¾

RM210m

¾

¾ ¾

Halal Industry

ICT Development

¾

RM50m

¾

¾

RM20m

¾

¾

RM25m

¾

¾

RM154m

¾

¾

RM25m

¾

¾

RM162m

¾

RM300m increase in the Fund for Food RM20m for establishment of a Non-Food Agriculture Credit Scheme Implement livestock projects through the Veterinary Dept, LPP, MADA and KADA with an allocation of RM111m RM40m allocated for the implementation of the Beef Valley project RM92m allocated for development of the aquaculture industry and Freshwater Fishery Research Centre Agriculture fund jointly financed by the government, Khazanah Nasional and the private sector Technology acquisition through Biotech Acquisition Programme with a matching grant of RM60m RM59m allocated for R&D RM30m allocated for Biotechnology Commercialisation Funds (BCF) Allocated to set up halal parks in Pasir Mas, Kelantan; Gambang, Pahang; Chendering, Terengganu and Padang Besar, Perlis Allocated to SME Bank to finance entrepreneurs to further develop halal products Establish Halal Industry Development Corporation Allocated to Mdec to undertake ICT various activities Establish Content Industry Development Fund to finance ICT applications Allocated to MIMOS to conduct various programs, including Mobile Broadband Engines, e-learning application & R&D.

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2007 Budget

¾

RM194m

¾

¾

RM354m

¾

¾

RM20m

¾

¾

RM193m

¾

Promoting Investment Abroad

¾

RM100m

¾

Tourism

¾

RM147m

¾

Construction

¾

RM27.5bn

¾

¾ ¾

RM4bn RM1bn

¾ ¾

¾

RM1bn

¾

¾ ¾

RM90m RM101m

¾ ¾

¾

RM450m

¾

¾

RM148m

¾

¾

RM2.2bn

¾

¾

RM33.4bn

¾

R&D

Education & Training

¾ ¾ ¾ ¾

RM782m RM56m

¾ ¾

RM288m RM195m

¾

RM214m

¾

¾

¾ ¾ ¾

Woman

¾

RM30m

¾

Youth

¾

RM721m

¾

¾

RM91m

¾

¾ ¾

RM2.3bn RM200m

¾ ¾

Regional Developments

Science Fund for basic and applied science research projects Techno Fund for funding commercialization MSC Grant Scheme to finance ICT-based R&D R&D in agriculture allocated to research agencies including MARDI, MPOB, MRB & MCB Establishment of Overseas Investment Fund to provide soft loans Upgrade tourist facilities and develop new tourism products Rollout of projects under the 9MP such as construction of roads, quarters & other infrastructure facilities Implementation of several PFI projects Allocation for maintenance of buildings and public facilities. Allocated for the construction of 198 schools Construction of 2 new MRSM Construction of 67 housing projects for teachers Allocated for construction and upgrading of polytechnics and community colleges. Construction of 2 industrial training institutes & 4 advanced technology training centres Allocated to build 46,000 units of government quarters for PDRM RM6.7bn is allocated for primary education RM6.2bn for secondary education RM10.4bn for higher education and RM10.1bn for training programmes Allocated for training teachers including the Pre-Services Teacher Training & The In Services Teacher Training Programes Teachers training programmes in collaboration with foreign universities & OUM. Allocated for Bestari School Programme Allocation to upgrade and improve facilities in existing universities Allocated to conduct several training programmes under MARA Grant for NGOs to undertake woman, family & community programmes. Allocated to implement various youth & sport programmes Sport & training programes including Scholarships for athletes. Infrastructure projects in SJER Strategic investment fund to develop key industries in the region mainly private higher education and healthcare.

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2007 Budget

Rural Development

¾

RM3.4bn

Eradicating poverty

¾ ¾

RM615m RM578m

¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾

RM780m upgrading rural roads RM251m for water supply RM200m for electricity supply Several projects implemented by KEMAS RM156m allocated for Skim Pembangunan Kesejahteraan Rakyat for the poor RM144 allocated for Orang Asli Development Programme RM90m allocated for Program Pembangunan Ladang Rakyat by FELCRA RM13m allocated for opening up of 2000 hectares of rubber plantations in Pitas, Sabah Rubber Industry Board involving hardcore poor. Total school allowances for students from poor family For welfare programmes for the disabled, victims of natural disasters, hardcore poor & senior citizens. For provision of health facilities and equipments, services of specialist & training programes. 3 new hospital to be built namely in Shah Alam, Kedah & Johor. Implementation of environmental preservation projects. For irrigation & flood mitigation programmes For river management programmes For improving mini incinerators & upgrading existing solid waste disposal sites to ensure proper management of solid waste disposal.

¾

RM846m

¾

¾

RM302m

¾

¾

RM10bn

¾

¾

RM125m

¾

¾

RM1.0bn

¾

¾

RM716m

¾

¾

RM107m

¾ ¾

¾

RM179m

Security and defence

¾

RM4.9bn

¾

To enhance the efficiency of its operations.

Arts, Culture & Heritage

¾

RM100m

¾

Creative Industry Development Fund to promote creative arts.

Caring Society

Health

Environment

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