PETALING JAYA: The introduction of a capital gains tax on shares and a windfall tax for companies that have enjoyed strong profits during the pandemic will only scare investors, say two economists.
Geoffrey Williams of Malaysian University of Science and Technology (MUST) argued that investors and companies will be concerned about these issues because the business and investment environment is currently “very fragile” due to the Covid-19 pandemic.
“Tax reform, whether capital gains tax or GST, should be put off until the economy has recovered. There is no argument for new taxes now,” he said.
“The (windfall) tax yield would be of no material use in terms of increasing revenue. It is also one-off and far too small to make a difference. It’s more of an envy-tax than anything else.”
Calling the windfall tax a “delusion”, Williams said that apart from glove makers and companies that benefit from Covid-19-related activities, there are not many other targets for excess profit.
Williams also noted that the fact that Malaysia doesn’t have capital gains tax is one of the few advantages it has over regional competitors, and changing the policy will not help investor sentiment.
He added that the Malaysian stock market has been one of the worst performers in the region of late, falling by around 6% in the first half of this year compared with Vietnam and Taiwan, both of which rose by 20%, and South Korea and Australia, which grew by 10%.
“So extra taxes at this time are ill-advised,” he warned.
“A capital gains tax would not stop the outflows, and the prospects of such a tax might make investors, especially foreign investors, wary of the Malaysian market.”
Meanwhile, Goh Lim Thye, a senior economics lecturer at Universiti Malaya (UM), said that it will be an uphill battle convincing firms that have flourished during the pandemic to agree to a windfall tax.
Goh also pointed out that the government should not discount the fact that many investors would have a portfolio of shares and would have made profits off one share which might have been used to cover losses in other investments.
“How are we to make sure that this tax (capital gains tax on shares) is done in a fair manner? It will be difficult,” he said.
He also called for policymakers to first conduct trend analysis on companies’ performances before deciding on the windfall tax rate, stressing that it was just as crucial that firms need to be brought to the negotiating table to reach an agreement on an acceptable windfall tax rate before it is implemented.
“They need to talk to these companies, explain why this is done, and finalise the rate together,” he said.
“This can’t just be pushed with a top-down approach, which will scare investors away. They have to be fair to investors.”
The duo were commenting on reports that Putrajaya is studying the implementation of a capital gains tax on shares and a “one-off higher tax rate” on companies that have raked in “extraordinary profits” during the pandemic.
Speaking in the Dewan Rakyat yesterday, deputy finance minister Yamani Hafez Musa said the finance ministry welcomed proposals by several MPs to boost the government’s coffers by implementing the two policies.
He added that the government would need to take into account the feedback of relevant stakeholders to determine the effects of imposing these taxes so as not to damage Malaysia’s economic standing and competitiveness, especially in attracting foreign investments.
The proposal marks a shift in the finance ministry’s stance on windfall tax.
Last November, finance minister Tengku Zafrul Aziz said a windfall tax on companies that enjoyed extraordinary profits during the pandemic would send the “wrong signal” to investors.
He also described the windfall tax as an inconsistent policy that could make neighbouring countries such as Vietnam and Singapore, which do not impose such taxes, more attractive for investors.
“Name me one country in this region that has imposed a windfall tax,” he said. “You can (impose the windfall tax), but you might send the wrong signal, especially for an open economy like Malaysia’s.” -FMT