BUDGET
STRATEGY 2002
In the light of the increasingly more difficult global economic
outlook and greater challenges encountered as well as the need to
address domestic issues, 2002 Budget will focus on the following
strategies:
i. strengthening the nation's economic growth through increased
domestic expenditure, enhancing the role of the private sector and
increasing competitiveness;
ii. diversifying sources of growth through trade and domestic
industrial activities without reducing the role of foreign direct
investment as well as ensuring the continued expansion of the
nation's exports; and
iii. ensuring equitable distribution of wealth between urban and
rural areas, between high and low income groups and between the more
developed and less developed states.
First
Strategy: Strengthening the Nation's Economic Growth
Increasing Domestic Expenditure
The more conventional way to
revitalise the economy is through increasing public expenditure. For
2001, we had used this approach with a fiscal stimulus of 3 billion
ringgit in March. With the worsening of the global and US economies,
following the September 11 attacks, an additional expenditure of 4.3
billion ringgit was approved.
Money will only generate wealth if it changes hands. Suppliers of
goods and services will earn profits from each transaction, while
consumers will through the value of goods, realise the value of
their money. The higher the frequency with which money changes
hands, the greater is its contribution to the nation's growth and
wealth creation.
Expenditure is essential in stimulating and increasing economic
activities. The additional expenditure by the Government in March
and after the September 11 incident will enhance the velocity of
transactions of goods and services. Higher Government expenditure
will enable the implementation of more projects, increase the sales
of building materials while contractors and sub- contractors will
receive payments and workers, wages. These payments will spur
consumption of goods and services. It is clear that the stimulus
package will benefit all, in terms of additional income. The
Government will then benefit in terms of higher collection of tax
revenue from greater business activities.
The Government will adopt this strategy of fiscal expansion in 2002
Budget, through higher Operating Expenditure and Development
Expenditure. The fiscal stimulus will be implemented as follows:
Continuing the Fiscal Stimulus
I propose an amount of 100.52
billion ringgit to be allocated for the 2002 Budget, an increase of
10.4 per cent compared to the original 2001 allocation. Of this, an
amount of 66.98 billion ringgit is for Operating Expenditure and
33.54 billion ringgit is for Development Expenditure. Taking into
account the revenue estimates of 73.4 billion ringgit, the overall
Federal Government account is estimated to record a deficit of 5 per
cent of GDP, amounting to 18.6 billion ringgit in 2002. The deficit
is lower than the 22.4 billion ringgit or 6.5 per cent in 2001.
An amount of 33.33 billion ringgit from the Operating Expenditure is
allocated for Grants and Fixed Payment obligations. This includes
debt-service charges, payment of pensions and gratuities and
contributions to statutory funds. An amount of 17.58 billion ringgit
is for Emoluments, 12.07 billion ringgit for Services and Supplies,
1.53 billion ringgit for purchase of office equipment and facilities
and 2.47 billion ringgit for other expenditure, including tax
refunds.
Of the proposed total Development Expenditure, an amount of 13.11
billion ringgit or 39.1 per cent is allocated to the economic
sector, including rural development, agriculture, infrastructure,
industrial, rural electricity and water supply projects. An amount
of 12.21 billion ringgit or 36.4 per cent is allocated to the social
sector, that is, for education and training, health, welfare and
community development as well as projects for youth and sports. In
addition, 3.31 billion ringgit or 9.9 per cent is allocated for the
security sector and 2.91 billion ringgit or 8.7 per cent allocated
for the general administration sector. The balance of 2 billion
ringgit or 5.9 per cent is for Contingencies Reserve.
Encouraging Consumption
The nation's income has been
affected following the global economic slowdown and the negative
wealth effect from the decline in share prices, thus affecting the
purchasing power of the rakyat. To increase the disposable income of
the rakyat, I propose that the individual income tax rate be reduced
between 1 and 2 percentage points for all income bands. The maximum
individual income tax rate which is currently at 29 per cent is now
reduced to 28 per cent, thus harmonising with the corporate tax
rate. In addition, with a view to rewarding work efforts, the
chargeable income subject to the maximum tax rate be increased from
more than 150 thousand ringgit to more than 250 thousand ringgit. In
line with this reduction, the income tax rate for cooperatives be
reduced by 1 percentage point across the board while the income tax
rate for non-residents be reduced from 29 per cent to 28 per cent.
These measures will result in a revenue loss to the Government,
amounting to 873 million ringgit. However, this amount will be
available for consumers to spend, thereby stimulating economic
activities and contributing to GDP growth.
Further Stimulating the Role of the Private
Sector
The private sector has to resume
its role as the main catalyst of economic growth. In this regard,
the Government will continue to offer special incentive packages as
announced in the 2000 Budget to attract quality investments. To
date, the Government has approved 20 projects with investments
totalling 33 billion ringgit under the pre-package incentives,
mainly for petrochemicals and electronics. In addition to attracting
new investors, existing investors must also be encouraged to
continue to reinvest in expansion projects, modernisation,
automation and diversification. Therefore, I propose that the period
for Reinvestment Allowance be extended from 5 to 15 years.
Efforts to attract investments are increasingly becoming
challenging. In this respect, the Government has received many
proposals to reduce corporate tax. However, the Government does not
intend to reduce the corporate tax, since the rate is still
competitive compared to many ASEAN, Asian and other developed
countries. Malaysia does not impose tax on dividends, unlike several
other countries, including Thailand, Taiwan and Japan. Furthermore,
we have already provided various tax incentives to foreign and
domestic investors. If all these are taken into consideration, our
effective tax rate is lower.
Small and medium companies, which are resilient and competitive, are
the backbone for supporting growth of larger industries. In order to
compete in the international market, small and medium companies must
participate in the Global Supply Chain Management Network for
on-line and real-time procurement, production and logistics
management. To use this network, small and medium companies need to
utilise internet-based common order code such as RosettaNet, to
communicate directly with global suppliers. A grant of 5 million
ringgit is provided for the development of RosettaNet. In addition,
I propose that the expenditure incurred .by multinational companies
in pioneering this programme for the benefit of the small and
medium-scale companies be given deduction for purposes of income
tax.
To increase the participation of Bumiputera community in industrial
and commercial activities, particularly in the retail sector, the
Government had launched the projek Usahawan Bumiputera Dalam Bidang
Peruncitan or PROSPER. This scheme is aimed at assisting small
Bumiputera entreprenuers who lack capital, face difficulties in
securing suitable premises or locations and experience management
problems. Up to 8 October 2001, PROSPER has successfully trained
2,997 Bumiputera entrepreneurs in the retail sector. A total of 82
business proposals has been approved, of which 12 are from ex-army
personnel. For 2002, an additional 250 Bumiputera entrepreneurs are
expected to be trained. PROSPER is not a get-rich scheme but a
serious scheme for long-term business undertakings that will grow if
managed properly.
Increasing Competitiveness
In the light of greater
challenges of a borderless world and with our commitment towards the
implementation of AFTA, the nation needs to increase its
competitiveness and productivity to become a global player in the
international marketplace. As a measure to reduce the cost of doing
business and increase competitiveness, I propose that Industrial
Building Allowance granted to approved buildings including hotels be
reviewed as follows:
i. the annual allowance be increased from 2 per cent to 3 per cent.
As a result, companies can claim depreciation within a shorter time
frame, that is, from 45 years to 30 years;
ii. initial allowance of 10 per cent currently granted for capital
expenditure incurred in the construction of buildings be extended to
capital expenditure incurred in the acquisition of buildings; and
iii. Industrial Building Allowance be given to all hotels.
As a further measure to reduce cost and increase competitiveness, I
propose that import duties on 55 products which have been long
protected be reduced from between 20 per cent and 1 05 per cent to
between 10 per cent and 50 per cent. Among the products involved are
aerated beverages, woven fabric, lace and blankets. I further
propose that import duties on 171 products inclusive of intermediate
goods such as multimedia projectors, telephone answering machines,
furniture components and photographic papers be reduced from between
5 per cent and 35 per cent to between 0 per cent and 25 per cent. In
addition, as a measure to reduce the cost of doing business for
shipping companies in Malaysia, I propose that income received by
non-residents from renting containers to shipping companies in
Malaysia be exempted from income tax.
I further propose that the annual deduction on expenses incurred in
acquiring proprietary rights such as patents, industrial designs and
trade marks be increased from 10 per cent to 20 per cent for a
period of 5 years. It is hoped that this measure will accelerate the
acquisition of the state-of-the-art technology.
To enhance productivity and competitiveness, employers must
undertake to train and upgrade the skills of their workers. In this
regard, the Government has set up the Human Resource Development
Fund as well as provided tax incentives for training in technical
and vocational fields. In addition, practical training schemes need
to be encouraged as one of the avenues to increase the supply of
skilled and trained manpower. Therefore, I propose that expenditure
incurred by any person in providing practical training to
individuals who are not their employees be given deduction for
purposes of income tax.
The payment of bonus is an incentive to workers to increase
productivity. Currently, tax deduction on bonus payments is limited
to two months salary. I propose that the restriction on bonus be
abolished. It is hoped that this measure will provide an opportunity
to employers to offer remuneration which is commensurate with the
their workers' productivity.
The Government hopes that trade associations will continue to play
an important role, taking pro-active measures to further develop
their members' activities. To assist these associations to
strengthen their financial position, I propose that statutory income
from subscription fee be exempted from income tax.
Development of ICT and Venture Capital
The national ICT agenda aims to
create a knowledgeable, informed and ICT -sawy society. The
Government has allocated an amount of 112.7 million ringgit to
implement the Electronic Government Flagship Project, 72.3 million
ringgit for Smart Schools, 20 million ringgit for Telemedicine, 86.3
million ringgit for Smart Card and 9.5 million ringgit for
Integrated Application. Apart from this, an amount of 487.67 million
ringgit is allocated to increase the computerisation programme in
ministries and departments and 205.5 million ringgit for
computerisation of schools.
To
enhance the usage of multi-purpose smart cards, financial
institutions need to provide the appropriate infrastructure
including related equipment, such as loading devices and card
readers. As its implementation would require large capital outlays,
I propose that smart cards and its related equipment be given sales
tax exemption.
To
further encourage the use of ICT in trade as well as establish
Malaysia as an attractive business location for international trade,
I propose that the tax on income derived from offshore trading
through websites in Malaysia be reduced from 28 per cent to 10 per
cent for a period of 5 years. I further propose that the cost
incurred in the development of websites for business be granted an
annual deduction of 20 per cent for a period of 5 years.
Following the announcement of the establishment of the 500 million
ringgit Venture Capital Fund, a Government-owned company, Malaysia
Venture Capital Management Berhad (MAVCAP) was set up. An amount of
100 million ringgit from the Fund will be outsourced to four local
venture capital companies, while the balance of 400 million ringgit
will be direct investments in venture capital companies. To date,
MAVCAP has received 104 business proposals from 10 countries,
including the United States, Korea, Hong Kong SAR and China, with
financing requirements of 1 billion ringgit. To further augment the
venture capital fund, the I Government of Japan has agreed in
principle to provide a loan to MA VCAP, amounting to 1.9 billion
ringgit, especially for the financing of debt ventures.
Another Government-owned company was established, namely Kumpulan
Modal Perdana Sdn. Bhd. to manage the Venture Capital Fund for
Technology Acquisition, amounting to 190 million ringgit. Of this,
114 million ringgit will be invested in the American Pacific Venture
Capital Fund in the Silicon Valley and Venture Capital Joint Venture
Investment in Malaysia, with the balance of 76 million ringgit for
the implementation of the Advanced Microchip Design and Training
Centre.
Capital Market
The Kuala Lumpur Stock Exchange (KLSE)
has experienced significant fluctuations arising from developments
in the global stock markets. As part of the efforts to ensure
stability in the stock market, as highlighted in the Capital Market
Masterplan, the Government has agreed to implement the circuit
breaker mechanism in the stock exchange, as practised in the
developed countries. This mechanism has the capacity to halt trading
activities temporarily when large declines are experienced during a
trading day. These halts are based on pre-determined trigger levels.
The mechanism will provide investors breathing space before resuming
stock market trading activities. It is also aimed at maintaining
investor and market confidence, especially in an uncertain
environment.
To facilitate corporate restructuring, the Securities Commission has
relaxed the conditions for restructuring distressed public listed
companies. These measures include enlarging the pool of assets by
allowing quality investment properties with stable income to be
injected into these companies. In addition, the establishment of
Real Estate Investment Trusts will facilitate restructuring efforts.
To improve the financial position of distressed companies, the
requirement of share buy-back is further relaxed. Meanvt/hile,
listed companies with unsatisfactory financial position or with
issued capital below the minimum threshold, are given an extension
up to December 2002 to comply with the listing requirements of the
KLSE.
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