IDEAS says windfall tax bad, but an economist disagrees

Ali Salman, the CEO of the Institute for Democracy and Economic Affairs, says tax should not be used as a tool to punish high profits. (Facebook pic)

PETALING JAYA: A think tank has cautioned against introducing a “windfall” tax, saying putting such a tax on profits could be bad for the business environment.

Economist Ali Salman, the CEO of the Institute for Democracy and Economic Affairs (IDEAS), told FMT tax should not be used as a tool to punish high profits.

He was commenting on reports that Finance Minister Lim Guan Eng had hinted at a windfall tax if banks were not flexible in their lending as the government had received many complaints.

Lim, who was speaking at the recent Invest Malaysia 2019 capital market forum, however, noted that Prime Minister Dr Mahathir Mohamad had announced that the government had no intention of introducing new taxes on top of what was announced in Budget 2019.

Ali said a windfall tax would set a precedent for other well-performing sectors and send the wrong signals on the stability of the business environment.

“In any case, small and medium enterprises (SMEs) in Malaysia receive a proportionately bigger chunk of commercial financing than large companies.

“According to Bank Negara, the commercial financing for SMEs has registered substantial growth from 38% in 2010 to 49% as a share of total financing in 2017.

“This indicates that banks have done well in diversifying the lending, challenging the message that the finance minister is giving.”

If Putrajaya wants to encourage more lending to the private sector, Ali said it should consider the overall business environment and minimise regulatory compliance costs.

SMEs, he added, should invest in their systems and prepare documentation properly as these could be barriers to obtaining loans.

“The government should also consider giving more freedom to the banks in determining their own interest rates, and allow competition to set the direction of future commercial lending instead of being directed from a central policy perspective.”

‘Reduce income disparity’

But former banker and economist Ramon Navaratnam disagreed, saying the windfall tax was a good idea, especially if the government wanted to ensure better wealth distribution and reduce income disparity.

Ramon Navaratnam.

Navaratnam, who once represented Malaysia as the country’s alternate executive director in the World Bank in the US, said banks could develop a flexible loan arrangement, especially for entrepreneurs, as this could have a multiplier effect on the economy.

“Banks must make the effort to do more homework on prospective borrowers and look at their future potential. Sometimes, a borrower may seem like a risk at first but their business might have good potential for growth.”

He added that banks should not take the “easy way out” and only aim to lend to the rich but take a chance on small businessmen as well, citing the example of Bangladesh’s Grameen Bank which gives small loans without requiring collateral.

At the same time, he said Putrajaya could consider giving incentives to banks which dared to take a chance on smaller businesses.

“The incentives can be in the form of permits or licences, more administrative rather than financial incentives. This will send a message that the government rewards those who care more for the poor.”

Meanwhile, the FBM KLCI slid by 20.5 points today to close at 1,663 points. All banks registered declines and Pong Teng Siew, head of research at Inter-Pacific Securities Sdn Bhd told FMT, it might be a knee jerk reaction to Guan Eng’s statement on windfall tax.

“The market might have taken an adverse stand after Guan Eng’s comment on the possibility of imposing windfall tax on banks which made super profits last year,” said Pong.

Maybank declined by 8 sen to RM9.40, CIMB lost 6 sen to RM5.33, Hong Leong Bank shed 40 sen to RM20.34 while Public Bank dropped by 60 sen to RM23.86 and Ambank lost 14 sen to be at RM4.47.