PETALING JAYA: The proposal to introduce a capital gains tax (CGT) on the disposal of unlisted shares has been welcomed as a move in the right direction by economists but a tax expert has cautioned a more in-depth study is needed.
During the re-tabling of Budget 2023, Prime Minister Anwar Ibrahim, who is also finance minister, said the government plans to study the introduction of a low-rate CGT for unlisted companies from 2024.
Bait al-Amanah research director Benedict Weerasena said such a move is timely and wants it to be implemented as soon as possible as a means to raise much-needed revenue.
“Although there are concerns CGT may result in a possible outflow of foreign funds, it is important to note Malaysia is one of the few remaining countries in the region without one.
“CGT upholds tax progressiveness and addresses inequality, as the usual beneficiaries of capital gains are rich individuals or corporations who have the financial capacity to hold such assets, Weerasena told FMT Business.
Monash University Malaysia economics professor Niaz Asadullah concurs, adding introducing CGT in 2024 will be a move in the right direction because other Asean nations, such as Indonesia, Thailand, and Vietnam, all have CGT.
“Although Singapore does not, it has a wider tax base and a higher tax-to-GDP ratio of 15%. In Malaysia, the ratio is much lower at around 12%,” he told FMT Business.
Wrong time for capital gains tax
However, Center for Market Education (CME) CEO Carmelo Ferlito begs to differ. He does not think introducing CGT is the right move given the country is struggling to attract investments.
“Although it is good to see the government thinking about it, we are about to face an economic slowdown, and CGT will not be of help,” he told FMT Business.
“Instead of cutting expenses, the government aims to reduce its debt by introducing questionable taxes such as for luxury goods, or higher income tax for certain income brackets,” he said, adding the government lacks a holistic strategy for tax reform.
PricewaterhouseCoopers (PwC) Malaysia tax leader Jagdev Singh advised that the study on the potential of CGT should be done on “a measured basis”.
“This is to ensure that the benefits far outweigh the cost on impact to the investment ecosystem, and the administrative burden to tax authorities and taxpayers,” he said in a statement.
Detrimental impact on start-ups
Chartered Financial Analyst Society of Malaysia (CFA) president Chong Jin Yoong said although the proposed CGT is only for unlisted shares, it will set the stage for listed companies in the future.
Chong also said CGT can affect the expected returns of both private equity (PE) and venture capital (VC) firms and entrepreneurs as they could respond by reducing supply of capital and reducing engagement with and support to start-ups.
“As PE and VCs typically invest for the long term, which can stretch for years, CGT may discourage longer holding periods. This is because the longer they hold, the higher their investments become, leading to higher taxes to pay which could discourage longer-term investment horizons.
“It may reduce liquidity, as PE/VC firms hold on to their investments to avoid or delay paying CGT,” he told FMT Business.
Three options for implementation
Tricor Malaysia chairman Veerinderjeet Singh opines the government would have in theory three mechanism options for CGT implementation.
“Either a new legislation on CGT will be introduced, or the existing legislation on real property gains tax (RPGT) will be amended to include the sale of shares of unlisted companies, or it will be added within the Income Tax Act by defining it to include certain capital gains, which can be reported annually,” he said.
He says the latter would be the ideal mechanism as implementation and enforcement is more straightforward.
Veerinderjeet noted the proposal is a sign the government is kickstarting its move to impose taxes on more capital items in the future.