Khazanah Megatrends Forum 2014 presents 'Scaling the Efficiency Frontier - Institutions : Innovation : Inclusion'

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Focusng on the Asian frontier under the theme 'Scaling the Efficiency Frontier - Institutions : Innovation : Inclusion', Tan Sri Dato' Seri Utama Nor Mohamed Yaakop expressed a strong point on the severe  depleting status of economic resources. Malaysia cannot rely on its current resources forever. It (Malaysia) needs to adapt to changes necessary to survive the world economy

HAZANAH NASIONAL BERHAD ('Khazanah') has once again held a very informative session with its trade mark event, Khazanah Megatrends Forum 2014. The forum has taken a different approach from previous years when it focuses on the Asian frontier under the theme 'Scaling the Efficiency Frontier - Institutions : Innovation : Inclusion.' The opening speech was swiftly given by the Deputy Chairman of Khazanah, Tan Sri Dato' Seri Utama Nor Mohamed Yaakop, who is also the Chairman of Khazanah Research. Tan Sri Nor expressed a strong point on severe finite and depleting status of economic resources. Malaysia cannot rely on its current resources forever. It (Malaysia) needs to adopt to changes necessary to survive the world economy.

The event was also graced by His Royal Highness ('HRH') Sultan Nazrin Muizzuddin Shah Ibni Almarhum Sultan Azlan Muhibbuddin Shah Al-Maghfur-Lah, Sultan of Perak Darul Ridzwan. HRH declared that the world should look at Asia. It is now the Asian century. The Gross Domestic Product ('GDP') of emerging Asian economies has grown at 2 times the rate of the World GDP growth. Such rapid expansion requires innovation for the growth to sustain. The average income and the living standards of the Asian countries are still well below that of the developed countries. China and Malaysia, for example, only have GDP per capita of one fifth and one third, respectively, of the GDP per capita of the United States of America ('USA'). The widening inequalities in Asia is also higher than the developed countries. The rich are a few and the poor are widespread. If the disparity is not addressed, it will lead to an unhealthy polarisation.

HRH then presented his idea of an ideal 'World View' to address the so called disparity. These views should be appreciated from the heart and not from the brain alone. The salient points of those views are:

Paradigm of Production: Production alone cannot be the measurement of growth. An anti-myopic view is required to ensure that what has been utilised for production is also preserved to ensure a long term sustainability of the growth itself. One must not explore the best way to exploit but should also explore replenishment of what is exploited.

 

Paradigm of Maximisation: There has been too much focus on short term maximisation. Many corporates in the developed countries strive to ensure highest earnings possible with a view of a fat cheque as the remuneration to its executives. They buy back shares from the market and forces the earnings per share to shoot up. In the end, the Chief Executive Officers get paid handsome bonuses. A true business should reinvest the surplus to expand its investment horizon. In short, Optimisation is the key word, not Maximisation.

 

Paradigm of Resources Ownership: Resources are often deemed to have been owned. We, humans, are mere stewards on this Earth. We do not own the resources. Our right to derive profits from the resources is temporary and we owe the duty to ensure resources sustainability for future generations.

 

The event was also made complete by a heterodox economic expert and an institutional economist specialising in development economics. His name is Dr. Ha-Joon Chang, currently a Reader in the Political Economy of Development at the University of Cambridge. Dr. Chang echoed what HRH implied - Asia is in middle income trap and that inequality is still very high. Also, most Asian countries fail to produce national firms that compete at the top end of the world market save for a few like Korea and Japan. Asian countries must strive to achieve high income nation and develop a productive capability human resource. By the World Bank definition, a high income nation has to breach the USD12,746 income per capita. So, how do we develop 'productive capabilities'?

 

Dr. Chang pointed out his views of what could help Asian countries to embrace the culture of productive capabilities. His views are:

Do not develop what comes naturally: Being rich is not necessarily being economically developed. We cannot be blinded by the fact that we are rich with natural resources. Korea for example was rich with tungsten. Had it relied on that fact alone and be content with its strong economy that was solely backed on such resource, it would have probably be under developed now. Instead, they took a turn. Tungsten was there, yes, but a new frontier was warranted. They needed to go beyond what they naturally had. The result is magnificent. Who would have thought (back then) that Korea can be one of the leaders in World technology?

 

Do not develop by following comparative advantage: We must not capitalise on our strength alone. This will turn us blind to other opportunities that are not so apparent when compared to our identified strength. We must not think that we are good merely because we are good at it. We must decide to be good at it. For example, why is Swiss good at making chocolates when they had never produced cocoa agriculturally? The African nations thought that their strength is only producing cocoa agriculturally and they missed the opportunity to further develop other strength - which was obviously hijacked by the Swiss.

 

Encourage Entrepreneurship: An economy should be deregulated to support entrepreneurs so that they (the entrepreneurs) can take a leap of faith to face risks of unlimited liabilities. Entrepreneurs deserve a second chance. A failed entrepreneur should not be deemed a loser. On the contrary, they should be further supported as they have developed themselves further by virtue of learning through failure. The USA's Chapter 11 of the Bankrupcy Law embraces this restructuring and forgiving attitude. Some welfare states in Europe also have conducive environment for entrepreneurs. You can gauge this by looking at their (e.g. Finland and Sweden) income per capita growth of 2.7% that is higher than 2% registered for the USA.

Inclusive Development: Empowerment and affirmative actions for disadvantage groups (e.g. ethnic groups, women, poor families, etc) is also crucial in ensuring a more dynamically inclusive development that is both equitable and sustainable - intertwining economic platform with social platform. A powerful ingredient to achieve this is to institutionalise innovation that is inclusive of the society as a whole.

 

The forum was also blessed to have the Indonesian Finance Minister, Gita Wirjawan, to share some statistics on his country. indonesia has 25 million tax payers out of 250 million population. Its income per capital is at USD4,000 and the GDP grows at 5% per annum. 60% of the GDP is fuelled by consumption and 32% by capital expenditure. This clearly shows that its people are the main driver of the economy. They need the population to achieve higher income and more people to pay taxes. An ideal number is thought to be 120 million tax payers. This can ensure larger pool of funds to develop the country further. A good yardstick of how poor the development status is is the human capital development. Indonesia only allocates USD2.4 trillion out of the USD60 trillion GDP for the coming 20 years on education. This priority must have remedy.

 

Dr. Mohammed Abdul Khalid of Universiti Kebangsaan Malaysia joins the forum by rocking the boat when he questioned, "Is GDP the right tool to measure performance?" Dr. Khalid believes that GDP is too narrow minded. It does not take into account other important elements of life. What are those important elements that are missing? Well, to name a few, pollution levels, black market contribution, social stress and many more. He also illustrated the point on social stress whereby traffic jam is used as an example. The rows of cars in a traffic jam will burn more petrol. This is good for the economy as far as boosting the consumption of petrol is concern; but what about the health of those who inhale the pollution? What about the social life of those stuck in the traffic? Another really, really good indicator that is left out by GDP is the homeless statistics as well as disparity in income. When the top 40 rich people in Malaysia owns 23% of the economy, a mere total sum (i.e. GDP) is no longer a good representation of the entire population's wealth.

 

Shankkar Aiyar of India, the author of Accidental India: A History of the Nation's Passage through Crisis and Change and a noted journalist-analyst, further reinforces the disparity of income problem. In India, only 33 million out of 450 million population pays tax. The question arises on what is an ideal composition for equitable distribution of wealth. Shankkar believes that the top 4% should be the rich people and the bottom 4% should be the poor people. Everybody else should be the vast majority who earns moderate income. This way, the total of the wealth can be a good indicator of the country's economic status. But of course, the reality (in India) is far, far from this. One must remember that surplus does not necessarily mean success. Surplus (as well as deficits) must be redistributed. Gain and pain should be felt by all walks of life. Having said so, to merely redistribute wealth without making sure fair growth in the economy is not the way to go for it will only mean that we are redistributing poverty. To promote growth, catalysts such as education, technology and business opportunities must be created - and the Government should lead this. 

 

Chandran Nair, a Singaporean poet and retired Director and Mediator of UNESCO in Paris, rocks the boat even further by saying that the 21st Century is going to be bleak! Why? Because of divergences. What divergences? Well, firstly, we think we can have everything. We buy what we don't need with the money we don't have to impress people we don't like. Capitalism is exclusive in this sense, which is the total opposite of what everyone is preaching (i.e. Inclusivity). Secondly, technologies are thought to save the world when in fact, it will not. For example, internet is the most dangerous invention of all time. You have average kids today watching pornography at the age of 10. How is that safe? Thirdly, More is not Better. How much is enough? Maximising agriculture produce by applying chemicals is not necessarily good. Lastly but not least, we believe what we think is worth believing but it may not be consistent with the way of peace and harmony....... what a great quotation (by Chandran) to end this blog post :) - but wisely, we should remember Dr. Ha-Joon's wisdom in addressing our economy's needs (as follows):

  

"Natural resources do not equate to economy. We need to go beyond that and not rely solely on our strength that will blind us from opportunities. We must decide to be good at what we want and affirmative actions will help ensure a more inclusive, equitable and sustainable economy" - Dr. Ha-Joon Chang

* kopihangtuah




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The GST Saga in Malaysia

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The political intensity in Malaysia has reached its highest point now than ever especially when the ruling Government for the first time faces majority popular votes against them. Hence, certain political figures have irresponsibly used tax matter as a tool to gain political mileage against the ruling Government so as to capitalise on the current vulnerable political landscape

Is Tax Evil?

Tax is a concept often misunderstood by many. If you remember watching the TV series Robin Hood, taxes by the King of England is painted as an evil deed. Taxes by right should not be evil. The determination of whether tax is evil or not lies with the methods of its implementation. The Muslims have taken taxes as their 4^th pillar of Islam which is called Zakat. In simple terms, taxes means to carve out a portion of the wealth from the people for the sake of redistributing the wealth back to the general population. It is an act of wealth redistribution. Whether or not the redistribution results in giving back cash (such as BR1M) to the poor or building the nation (such as MRT projects), the basic point is that, the taxes should benefit the population as a whole.

Having said that, I must admit that certain political figures have irresponsibly used tax matter as a tool to gain political mileage against the ruling Government so as to capitalise on the current vulnerable political landscape. To the folks in the ‘Kampungs’, they have been brainwashed to view tax negatively. Do they not realise that the very notion of taxing for the sake of building the nation is indeed noble? Why is tax a hot issue now? Could it be because of politics? After all, the political intensity in Malaysia has reached its highest point now than ever especially when the ruling Government (‘Barisan Nasional a.k.a BN’) for the first time faces majority popular votes against them (in the 2013 General Election) although parliamentary seats majority fall within their control.

The biggest decisions made today by the BN Government from an economic perspective would be Goods and Services Tax (‘GST’), rationalisation of subsidies and disposable income boost to the poor via BR1M. I do not intend to discuss all but GST.

Why Malaysia Needs More Tax Income?

Based on my introduction above, readers must always remind themselves 2 basic points: 1. Taxes exist with noble purposes; and 2. the susceptibility of political propaganda being used to misrepresent taxes is very high at the moment. Therefore, one must put aside all political preferences, hatred and even ignorance in order to have an objective understanding of what GST is all about. Firstly, what is the state of the nation that warrants GST to be considered? Malaysia has in the past undergone many recessions. We had very high unemployment in 1986. We were badly dragged into the Asian Financial Crisis in 1997. We were also dragged again unnecessarily into a recession as a result of the American Subprime Crisis in 2008. It seems that we will, undeniably, face some form of recession every decade or so.

If we don’t have money (for Government spending), we will not be able to build all these (nation development). If we do not build all these (nation development), we will be backwards like some of the African nations that got independence well ahead of us. GST allows higher revenues to be collected to fund all these projects.

Every time this (recession) happens, we use significant portion of our coffers (I am not referring to the Bank Negara reserve) to return the economy back to normal. For example, the 1997 crisis resulted in Malaysia denying monetary aid from International Monetary Funds (‘IMF’) as Malaysia decided to use its own coffers to manage the failing banking industry via the formation of Pengurusan Danaharta Nasional Berhad. Many nations, like our neighbours in ASEAN, fell under the trap of being plunged into modern day slavery once they are indebted to global economic hitmen such as the World Bank and IMF. Their national policies are controlled by foreign forces and their economic trade is restricted to rules and regulations otherwise not imposed onto them. Some nations even went into bankruptcy as evident in South America.

Do we want Malaysia to suffer the same fate as these unfortunate nations? Of course not. Then why is GST relevant for this? Well, GST allows broader tax base that can accumulate such necessary reserves of funds to manage the country when we face recessions. To be prepared is necessary because once we are plunged into modern day slavery with the economic hitmen, there is little chance of redemption. As the Malay proverb says, “Sediakan payung sebelum hujan” (Prepare the umbrella before it rains).

I mentioned GST allows broader tax base. What does that mean and how does it work? I will save this for later paragraphs. For now, let us further examine what other reasons that warrant us to accept GST. Malaysia is a developing nation. A developing nation requires significant amount of investments as capital. Whether or not we will get the investments from foreign entities is besides the point. We must first be comfortable that we have invested enough to the nation in order for it to grow. In fact, if we ourselves have not invested enough, foreign investors will not come in. Huge amount of funds is required to build the nation from all angles.

We still need to abolish poverty. There are many areas not yet facilitated with proper electricity, water, schools, transportation and other basic needs. There are many infrastructure developments required to ensure that the country continuously upgrade itself in order to achieve the ‘developed nation’ status in 2020. Building expressways needs money. Building Medium Rail Transport (‘MRT’) needs money. Building High Speed Broad Band (‘HSBB’) needs money. Building economic regions such as East Coast Economic Corridor and Iskandar Region needs money. If we don’t have money (for Government spending), we will not be able to build all these (nation development). If we do not build all these (nation development), we will be backwards like some of the African nations that got independence well ahead of us (Malaysia). GST allows higher revenues to be collected to fund all these projects.

Why GST Then?

A simple mind would ask, “We already have existing taxes. Why do we need a new tax?” GST is not an additional tax system. It is a tax system that will replace the existing one (Sales and Services Tax). It allows a more efficient way of collecting tax that will allow higher revenues for the Government to develop the nation. I would like to extract some paragraphs from my previous article so that a better comprehension of GST from the perspective of Y.A.B. Dato’ Seri Najib’s 2015 Budget can be digested (below):

In 2015, Malaysia is expected to collect RM235.2 billion revenues, that is RM10 billion higher than RM225 billion expected to be collected in 2014. Out of this, only RM23 billion is expected to be collected from Goods and Services Tax ('GST') that is only going to produce a net increase of approximately RM5.6 billion from the previous consumption based taxes collection of RM17 billion under the Sales and Services Tax (and other consumption taxes, if any). RM4.9 billion out of the net increase of RM5.6 billion shall be channelled back to the people via BR1M programme to help boost the disposable income of the low income earners.

As a response to the opinions collated from the general public, the Government is declaring more goods and services to be at zero rated GST. Amongst them are fruits, bread, coffee, tea, noodles, reading materials, some 2,900 different brands of medication for 30 critical illnesses and, the much awaited decision, RON95 petrol, diesel and Liquid Petroleum Gas ('LPG'). 944 of the goods and services that are in the Consumer Price Index ('CPI') basket are affected by the GST but the question is, 'Are they negatively or positively affected?' 56% of the goods and services will experience an average price reduction of 4.1%. This includes food, medication, electrical items, textile, polymer goods, diapers and many more. On the flip side, 43% of goods and services will experience a price increase at an average of 5.8%. The Government will soon release a list of items that will have their prices increased.

In many precedent cases of GST implementation in other countries, the logical balancer for an increased or broadening of consumer taxes is a reduction in personal income taxes. For the Year of Assessment 2015 onwards, the personal income tax of 26% will be reduced to 24%. In addition, to attract more investments, corporation tax will be reduced from 25% to 24% and SME's will enjoy a tax reduction from 20% to 19%. This will simultaneously allow expansion of consumer spending from the improved disposable income and the increase in economic activity via influx of entrepreneurship movement. Both shall contribute to an expansionary economic projection. To facilitate the implementation of GST, RM100 million will be allocated for GST training sessions, RM150 million worth of accounting software grants will be given to the SMEs and a tax relief for all expenses relating to the accounting system and ICT developed for GST purposes.

What can we gathered from the extraction above? First, GST replaces old tax regime. Second, GST will allow higher revenue being collected by the Government. In the case of 2015, an additional RM5.6 billion collection. Third, GST should only result in majority of goods and services experiencing fall in prices (instead of otherwise). Fourth, the surplus collection can be used to develop the nation although for 2015, the Prime Minister chose to help low income earners to enhance their disposable income via BR1M. In a nutshell, it is for the people. Because the subject matter of tax itself is very negative, I believe certain political figures have used it to their advantage to paint a very bleak outlook for the ‘rakyat’ (people). A lay man would also ask, “Isn’t taking more tax resulting in more burden to the ‘rakyat’"? A very good question indeed. Answering this question will simultaneously answer the question, “Why GST then?”

GST is a consumption tax, which means, you only pay taxes when you use products and services. Generally, poor people consume less products and services than rich people. If GST is implemented, rich people will be paying more taxes than poor people.

GST is a consumption tax, which means, you only pay taxes when you use products and services. Generally, poor people consume less products and services than rich people. If GST is implemented, rich people will be paying more taxes than poor people. Furthermore, many of those products and services consumed by poor people will carry zero GST as mentioned in the extract above. It sounds unfair that the rich gets taxed more but it is equitable as it allows redistribution of wealth from the rich to the poor. This concept is undeniably in contradiction to the capitalist world of democratic nations. However, one must carefully think whether or not a pure capitalist concept is appropriate for one’s nation?

A nation like Malaysia where we still face huge economic disparity between its people, a pure capitalist approach will make things worse. At the same time, applying a full socialist approach is also not good as it does not allow for continuous improvement in our quest to achieve economic prosperity. A moderate hybrid approach is necessary. Hence GST. Some Scandinavian nations apply a more socialist approach whereby huge income taxes are applied in order to collect revenues to develop the nation. In that case, the burden will be too much for the rich even when they do not consume much. Australia for example is a democratic country that applies the hybrid approach. Malaysia will be reducing its income tax rates as well as corporation tax rates to balance the introduction of GST.

As mentioned earlier, GST will result in a bigger collection of revenues as compared to the outgoing Sales and Services Tax. This is because GST is a broad base tax given that it is applied to a broader pool of goods and services. GST is also an efficient tax regime. There have been many cases of people avoiding taxes. There is only a handful of people paying income taxes and corporates have so many ways of devising tax avoidance schemes. Sales and Services Tax only targets selected items and are not broad enough to ensure sufficient collection. Custom Duties and Import Taxes are negatively impacted by corruption and black market activities such as smuggling activities as well as official briberies (as evident in the case of Port Klang Free Zone Customs scandal).

Of course these are reasons that any nation or any tax regime can conveniently use to justify any inefficiencies. However, GST has the mechanism and structure to avoid most of these inefficiencies. All transactions in any trading of goods and services will be required to apply GST. When taxes are imposed at each transaction level, which is the case with GST, it provides a more refined net/filter to capture taxes as opposed to other tax regimes that use summation or pooling/batching of transactions. A more transparent and rigid approach is necessary to ensure that the system is efficient. When the approach and system is efficient, all we need to do is ensure the implementation is also done efficiently – this we shall only comment maybe a year from now?

Why Not Capital Gains Tax (‘CGT’)?

Some parties suggested that CGT would be a better option to increase the Government’s revenue instead of GST. Well, I fail to comprehend why. Perhaps if a proper calculation is done hypothetically using the currently available data, you can determine whether it can indeed result in more revenues. Here are my thoughts on why CGT should not be the replacement source of revenue for GST:

1. Broad Base Tax Argument: CGT only applies to a few selected items such as properties and shares whereas GST is a broad base consumption tax with some exempted items like financial products, insurance, transportation and education. The magnitude of tax collection will be lower under CGT given the less product and services coverage. The Government has already quantified that implementing GST will only result in a net increase in collection of RM5.6 billion when compared to the old Sales and Services Tax. I doubt that CGT is able to produce a higher net increase.

2. Revenue Stability Argument: The stability of the collection under CGT is less than GST as CGT is based on non-frequent transactions relative to the transactions under GST. How often do people buy clothes compared to buying a house? Catch my drift? You will have to wait until the purchaser of a house to sell their property in, say, year 3, before you are able to tax him/her. This will mean that the Malaysian Budget will be crippled for 3 years, hypothetically.

3. Economic Growth Argument: The items that CGT is applied on are capital in nature whereas GST is applied on consumed items. Capital items are items that can generate further income and thus, boost the economy further. Why would you want to penalise such item unnecessarily well above whatever CGT that we already have now? Properties can earn rental income and shares can earn dividend income. Share trading is also a crucial activity that helps boost the economy as it allows monetary capital inflow into the country or within the country to areas that can further grow the economy. Having CGT on capital markets will only increase the cost of capital or the cost of financing – in other words, increase the cost of doing business in Malaysia - an economic contraction - very bad. GST on the other hand allows income taxes and corporation taxes to be reduced. This will attract more investments and will encourage consumer spending – both are good ingredients of a growing economy. Any university student who are studying Macroeconomics 101 will say that that is supportable by the Neo-Classical economic concepts by intellectuals such as Keynes.

4. Fair Distribution of Burden Argument: GST is also about redistributing the burden of tax to a fairer audience. We already know that only 6% of the Malaysian population pays tax that is benefited by the remaining 97%. GST will allow modernisation of the tax system to ensure that those who used to evade tax can no longer do so as they are taxed at the point of consumption rather than via subsequent declaration. CGT is the opposite of all these. As mentioned earlier, GST will allow lower income taxes as a means to redistribute that burden.

5. Value Chain Argument: Taxes under GST work on net basis. For example, a factory purchases raw materials for a price that includes 6% GST. The factory then sells the manufactured products to wholesalers at prices that cover the raw material costs as well as a profit margin. The prices to wholesalers will also include a 6% GST. When reporting to the Government (via the Royal Customs), the factory shall pay to the Government the net amount of 6% charged to wholesalers less the 6% already paid for the raw materials. This way, the factory can claim back taxes that have been paid for the raw materials. Likewise, the same will apply when the same product is sold by the wholesalers to the retailers. The retailers will pay to the Government a net of 6% charged to end consumers less the 6% already paid to the wholesalers. Mechanistically, since each 6% GST at each stop in the value chain is claimable, the final impact to the final consumer should only be a one time tax of 6%. For CGT, taxes are charged to the property owners when the properties are sold. The buyer of the property cannot claim the tax as a deduction; hence he/she will ensure that the cost of the property will be fully passed down in the next selling price to the next buyer in the value chain when the property is resold. So mathematically in a simplistic manner, assuming that there are 3 levels in the value chain, CGT works on Cost x 106% X 106% X 106% whereas GST works on Cost x 100% x 100% x 106%.

 

So What is Next?

Well, just embrace GST I guess? There is no point for everybody trying to be professors in Applied Science majoring in Taxation and minoring in Political Science. The Government has plenty of experts working at the Economic Planning Unit ('EPU') and the Ministry of Finance. Let them do their work. God willing, our country will be able to achieve high income nation and a ‘Developed Country’ status by 2020. Amin.

* kopihangtuah




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Najib and his 'Ekonomi Keperluan Rakyat'

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The Prime Minister (Y.A.B. Dato' Seri Najib Razak) started his 2015 Malaysian Budget with an overview of the Malaysian economic landscape that is thought to be conducive for a bright future: GDP growth of 6.3%, KLCI record achievement of 1,892 points, USD10,000 per capita, budget deficits of 3.5% and record breaking foreign investment level of RM38.7 billion.

AJIB (Y.A.B. Dato' Seri Najib Razak, the Prime Minister of Malaysia) had, yesterday, revealed Malaysia's 2015 Budget with the theme 'Ekonomi Keperluan Rakyat' (Citizen's Needs Economy) (the 'Budget'). I am not quite sure what that really means because at the back of my mind, shouldn't all national budgets address citizen's needs? I suppose you do have budgets not for the people such as those of the American's where significant portion of their (Americans) budgets are/were indeed channelled to wars outside America. Let's digest Najib's 2015 Budget with a positive and open mind, shall we?

The Prime Minister started his budget with an overview of the Malaysian economic landscape that is thought to be conducive for a bright future that is coming ahead. With Gross Domestic Product ('GDP') growth of 6.3% estimated for 2014, Malaysia is believed to be amongst the highest economic growth countries in ASEAN. Its stock market measured by the Bursa Kuala Lumpur Composite Index ('KLCI') has grown from 864 in 2009, when the country last got hit by a recession, to a staggering 1,892 points in July 2014 making it the highest point ever in the history of Malaysian stock market. In its (Malaysia) quest for higher income nation, the country now reports a USD10,000 per capita. This, coupled with a reduced budget deficits of 3.5% (estimate for 2014 vs 6.7% in 2009) indicate an optimal recipe for an encouraged propensity for consumer spending and a fair level of Government expenditure. The result is undeniably shown in empirical development particularly when Malaysia had recently achieved its highest ever foreign investment level of RM38.7 billion.

I do not intend to spell out the entire Budget as you can easily get it from newspapers and other publications. I will just touch base on 4 critical areas that I perceive to be of importance and as the essence of what the Budget entails. These 4 areas are: 1. Strengthening the Economic Growth, 2. Taxes, 3. Human Resources Investment; and 4. Bumiputra Agenda.

Strengthening the Economic Growth

The are 13 touch points where Y.A.B. Najib and his administration are planning to tackle in order to boost the economic growth further. They are as follows:

1. Services Sector: This sector contributes 55.2% of the country's GDP. Such contribution is targeted to increase to 60% by 2020 as stipulated by the country's Service Industry Blueprint. How does the Government plan to do so? The Budget has allocated RM5 billion for the Government to implement a guarantee scheme that will back companies venturing into this sector. These companies will also benefit from researches and commercialisation efforts fuelled by RM10 million funds allocated for researches, RM300 million funds allocated for export activities and RM27 million funds for franchise development.

2. Islamic Market: The Islamic banking products have so far contributed 25% to the country's banking sector. With Malaysia leading the World in sukuk issuance (60% of the World sukuk), it is only natural to nurture this further. The Budget has allocated some RM190 million for further promotion of such emerging offerings.

3. Shipping Sector: The shipping industry plays an important role for inter-economies trade and at the same time, is also exposed to threads that are inherent in the international arena especially in the international water ways. Those threads need to be protected and shipping insurance is the best protection financially. The Budget aims to tackle this via incentives to promote or to ease the use of shipping insurance. A more detailed mechanism of this effort shall be revealed in due course. 

4. Rural Areas: It is undeniable that a developing nation like Malaysia still has pockets of under served population particularly from economic perspective. The rural areas need to be vitalised with the hope of growing their economic activities. For this, the Government will be intensifying its efforts currently rolled out via the various economic corridor projects. To name a few, the East Coast Economic Corridor and the Iskandar Region down South.

5. Industrial Parks: Malaysia has shown significant transformation from an agriculture nation into a neo-industrialised country in the 1980's as well as 1990's. We now have industrial parks that contribute significantly to the economy particularly in electronics and electrical products. To further boost this area, the Government will be giving tax exemptions to companies within this sector up to 70% of their business income for the next 5 years.

6. Industrial Capital Expenditure: As a complementary effort to the tax exemption on business income, the need to assist companies in the industrial sector for their capitalisation movements especially on equipment and machineries arises. The Government will be allowing double tax deduction on RM2 million worth of capital expenditure in 2015.

7. Automation Capital Expenditure: Similar to the double tax deduction given for the first RM2 million of industrial capital expenditure in 2015, the same will be given to companies that invest in technologies that allow automation in their production line. This will allow efficiency and transfer of technology into the country for better production improvement.

8. Infrastructure: Economic development in any country can only be made possible when the infrastructure that allows trade is in existence adequately to connect areas and people. As a comprehensive effort to ensure that the entire country is well equipped with the necessary infrastructure, the Government will be allocating these budgets for the respective infrastructure projects: RM5.3 billion for 59km Sg. Besi - Ulu Kelang Expressway, RM5.0 billion for 276km Pantai Timur Expressway, RM2 billion for 47km Shah Alam - Damansara Expressway and RM150 million Gemas - Pahang Railway tracks. In addition, the existing Medium Rail Transport ('MRT') project will also extend to include 56km Selangor - Putrajaya route.

9. Hub Principle: Not much was mentioned on this in the tabling of the Budget but the Government has expressed willingness to build more hubs for various sub-industries within the economy.

10. Creative Content: In 2012 the Government allocated RM200 million to MyCreative Ventures to serve the gap in the creative industry ecosystem when it comes to financing. A further RM100 million will be injected into the creative industry but this time via Malaysian Communication and Multimedia Commission ('MCMC') to be given as grants to entrepreneurs who produce creative content.

11. Digital Infrastructure: In the past, so much effort has been put in the High Speed Broadband project to ensure that the digital network in the country is upgraded. Further allocation shall be made to continue this effort but via other aspects of digital infrastructure.

12. Tourism: 29 million tourists arrive Malaysia every year contributing RM89 billion to the GDP. To further ensure that this healthy arrivals are maintained and improved, RM316 million will be used to create tourism programmes.

13. Small and Medium Enterprises ('SME'): This group of businesses contributes 33% to the GDP and is expected to grow to 41% in 2020. RM375 million will be channelled to s special SME Investment Partnership funding arrangements where SME Bank shall manage RM250 million and the remaining RM125 million to be managed by the private investment houses. SME Corporation will also be allocated RM10 million for facilities to create conducive environment for this effort. A specialised fund under the existing TEKUN amounting to RM500 million shall be broken into many smaller funds to serve the entrepreneurs' needs in the sub-groups Bumiputra, Indian, Chinese, Women and the Army. Meanwhile RM1.3 billion will be allocated for science and technology companies to produce at least 300 high impact product commercialisation in 5 years. RM120 million shall be allocated for Research, Development and Commercialisation efforts. RM100 million will also be split between Malaysian Technology Development Corporation ('MTDC') and Agensi Inovasi Malaysia ('AIM') to be given out as grants to technology entrepreneurs.

Taxes

944 of the goods and services that are in the Consumer Price Index ('CPI') basket are affected by the GST but the question is, 'Are they negatively or positively affected?' 56% of the goods and services will experience an average price reduction of 4.1%.

In 2015, Malaysia is expected to collect RM235.2 billion revenues, that is RM10 billion higher than RM225 billion expected to be collected in 2014. Out of this, only RM23 billion is expected to be collected from Goods and Services Tax ('GST') that is only going to produce a net increase of approximately RM5.6 billion from the previous consumption based taxes collection of RM17 billion under the Sales and Services Tax (and other consumption taxes, if any). RM4.9 billion out of the net increase of RM5.6 billion shall be channelled back to the people via BR1M programme to help boost the disposable income of the low income earners.

As a response to the opinions collated from the general public, the Government is declaring more goods and services to be at zero rated GST. Amongst them are fruits, bread, coffee, tea, noodles, reading materials, some 2,900 different brands of medication for 30 critical illnesses and, the much awaited decision, RON95 petrol, diesel and Liquid Petroleum Gas ('LPG'). 944 of the goods and services that are in the Consumer Price Index ('CPI') basket are affected by the GST but the question is, 'Are they negatively or positively affected?' 56% of the goods and services will experience an average price reduction of 4.1%. This includes food, medication, electrical items, textile, polymer goods, diapers and many more. On the flip side, 43% of goods and services will experience a price increase at an average of 5.8%. The Government will soon release a list of items that will have their prices increased.

In many precedent cases of GST implementation in other countries, the logical balancer for an increased or broadening of consumer taxes is a reduction in personal income taxes. For the Year of Assessment 2015 onwards, the personal income tax of 26% will be reduced to 24%. In addition, to attract more investments, corporation tax will be reduced from 25% to 24% and SME's will enjoy a tax reduction from 20% to 19%. This will simultaneously allow expansion of consumer spending from the improved disposable income and the increase in economic activity via influx of entrepreneurship movement. Both shall contribute to an expansionary economic projection. To facilitate the implementation of GST, RM100 million will be allocated for GST training sessions, RM150 million worth of accounting software grants will be given to the SMEs and a tax relief for all expenses relating to the accounting system and ICT developed for GST purposes.

Human Resources Investment

To recognise the multiracial society in Malaysia, apart from RM450 million allocation for the national schools (SRK), RM50 million each will be given to ethnic based schools (SRJK) for the Indian and Chinese communities.

The success of an economic quest for any nation is dependent on many aspects such as political stability, natural resources, infrastructure and, the one that is the closest to the people's heart, is the talent of the people. Skills need to be developed and sustained. Technologies need to be learnt, unlearnt and relearnt. After all, 34% of the GDP consists of people's salaries. This is expected to increase to 40% in 2020. For this, allocation from the Budget has been made to ensure that the people are prepared to drive the national economy.

Urban Transformation Centres ('UTC') will be opened across the nation starting with Terengganu, Negeri Sembilan and Perlis to house up to 5,000 trainers. RM5.6 billion will be allocated for building new schools and RM200 million for hiring specialists and consultants to enhance the education system. 46,000 jobs are still vacant to absorb vocational skilled workers and hence, the vocational student intake will be intensified into the various vocational institutions with the RM1.2 billion help from the Government. Double tax deductions are also given to scholarships for vocational, internships and trainings for professional courses. Tax incentives are also given for Skim Latihan 1Malaysia (SL1M).

To recognise the multiracial society in Malaysia, apart from RM450 million allocation for the national schools (SRK), RM50 million each will be given to ethnic based schools (SRJK) for the Indian and Chinese communities. RM50 million each will also be given to residential schools, Islamic schools and Maktab Rendah Sains Mara ('MRSM'). An additional RM20 million is also allocated to 'Sekolah Pondok' (Traditional Islamic schools). Under the MyBrain programme, 60,000 doctorate holders ('PhD') is targeted by 2023. This programme shall be enhanced. To help reduce the non-performing loan ('NPL') rate of the education loan agency, PTPTN, the Government is prepared to allow 10% rebate to students who repay their education loans continuously for 12 months and 20% rebate for full lump sum repayments.

Whilst the education institutions are given Budget allocation, the Government is also aware that the marketability of these students into the work force is crucial for an effective human resources movement. It is believed that 53,000 graduates cannot get jobs 6 months after graduating. To help prepare these graduates, Talent Corp is given RM30 million to run academia-corporations collaboration programmes to ensure that graduates do get work placements as soon as they leave their tertiary education institutions. This effort includes boosting the global recognition for industrial and certification of education under the 1Malaysia Dream programme. The Human Resources Department will also provide skills training for 176 professions with RM570 million Budget allocation. To those who seek facilitation in applying their skills towards entrepreneurship quests, Malaysian Global Innovation and Creativity Centre ('MaGIC') has been set up in Cyberjaya as a hub for entrepreneurs to capitalise on.

Bumiputra Agenda

Realising that economic disparity exists between the different ethnic groups particularly 70% of the country's population who are  Bumiputras that are at a disadvantaged position, more efforts have been put to address this. An additional RM30 million will be allocated to TERAJU to be disbursed as grants to Bumiputra entrepreneurs under the Skim Usahawan Permulaan Bumiputra ('SUPERB'). To assist Bumiputra companies push their products and services into the market, selected Bumiputra 'TERAS' companies as certified by TERAJU will undergo pre-export branding and market survey exercise.

A further RM600 million will be put under the private equity fund management of Ekuinas who has so far invested RM2.3 billion in equity investments that train Bumiputra business managers. From the debt venture side, RM200 million and RM1.8 billion shall be allocated to Lembaga Tabung Haji and Amanah Ikhtiar Malaysia respectively. Majlis Amanah Rakyat ('MARA') and Yayasan Teraju Bumiputra will also be allocated with RM2 billion and RM72 million respectively to further boost education scholarships for Bumiputras. And finally, realising that there is an acute shortage of professional accountants amongst the Bumiputras, the Malaysian Institute of Accountants ('MIA') is trusted to manage RM10 million to run professional training centres in collaboration with Universiti Institute Teknologi Mara ('UiTM').

The Budget has a lot more to offer but highlighting these 4 broad areas will suffice to give you a flavour of what Y.A.B. Najib Razak is up to (or will be up to) for 2015. Our only hope is that the Budget serves the people appropriately when it is being rolled out. God willing.

* kopihangtuah




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