Malaysia Published Finance Act 2023
Malaysia published the Finance Act 2023 (Act No. 845) in the Official Gazette on 31 May 2023, which includes measures of the revised Budget for 2023 and others. The main income tax measures of the Act include:
- An increase in the personal deduction limits for certain medical expenses from MYR 8,000 to MYR 10,000, as well as the introduction of a personal deduction for diagnosis, early intervention, and treatment of learning disabilities in children subject to an MYR 4,000 limit and a deduction for voluntary contributions to the Employees Provident Fund;
- The introduction of electronic filing requirements for:
- tax returns filed by persons other than a company, limited liability partnership, trust body, or cooperative society (i.e., individuals);
- tax returns filed by trust bodies and cooperative societies, in addition to companies and limited liability partnerships, which are already required to file electronically;
- amended tax returns filed by companies, limited liability partnerships, trust bodies, and cooperative societies;
- employer returns filed by limited liability partnerships, trust bodies, and cooperative societies, in addition to companies, which are already required to file electronically; and
- partnership returns filed by responsible persons;
- The amendment of the requirement to withhold 2% tax on payments to agents, dealers, and distributors, including that tax withheld must be remitted by the end of the month following the month of the relevant payment instead of within 30 days of the relevant payment;
- The amendment of Schedule 1 of the Income Tax Act (ITA) to provide revised individual income tax brackets as follows:
- MYR 0 – 5,000 – 0%
- MYR 5,001 – 20,000 – 1%
- MYR 20,001 – 35,000 – 3%
- MYR 35,001 – 50,000 – 6%
- MYR 50,001 – 70,000 – 11%
- MYR 70,001 – 100,000 – 19%
- MYR 100,001 – 400,000 – 25%
- MYR 400,001 – 600,000 – 26%
- MYR 600,001 – 2,000,000 – 28%
- over MYR 2,000,000 – 30%
- The amendment of Schedule 1 of the ITA to provide a further reduced tax rate of 15% for qualifying SMEs and limited liability partnerships with paid-up capital not exceeding MYR 2.5 million and gross income not exceeding MYR 50 million:
- first MYR 150,000 in taxable income – 15% (new rate)
- taxable income of MYR 150,001 to 600,000 – 17% (prior reduced rate)
- taxable income exceeding MYR 600,000 – 24% (standard rate)
- The amendment of the capital ownership restrictions for the reduced rates for SMEs, providing that the reduced rates will not apply if more than:
- 50% of the paid-up capital of the company is directly or indirectly owned by a related company (existing restriction);
- 50% of the paid-up capital of the related company is directly or indirectly owned by the first-mentioned company (existing restriction);
- 50% of the paid-up capital of the first-mentioned company and the related company is directly or indirectly owned by another company (existing restriction); or
- 20% of the paid-up capital of the company at the beginning of the basis period for a year of assessment is directly or indirectly owned by one or more companies incorporated outside Malaysia or by one or more individuals who are not citizens of Malaysia (new restriction);
- The amendment of the capital contribution restrictions for the reduced rates for limited liability partnerships, which are similar to those for SMEs.
The measures generally apply from the year of assessment 2023, although the 2% withholding tax change is specifically effective from 1 January 2023 and the electronic return requirement changes and the additional restrictions for the preferential rate for SMEs and limited liability partnerships apply from the year of assessment 2024
Malaysia: Income and indirect tax provisions in Finance Act 2023
The Finance Act 2023 was published in the official gazette on 31 May 2023 and became effective 1 June 2023.
The Act includes no material differences from the Finance Bill 2023, which was based on the “re-tabled” 2023 budget and its various indirect and income tax proposals. Read TaxNewsFlash
The Minister of Finance on 24 February 2023 “re-tabled” the 2023 budget, which includes various indirect and income tax proposals. The budget was originally tabled in October 2022. Read TaxNewsFlash
One proposal would introduce a new tax in 2023 on luxury goods. It was also proposed that the voluntary disclosure and amnesty programme for indirect tax that ended on 30 September 2022 be re-introduced for the period 1 June 2023 to 31 May 2024.
In addition, there are a number of proposals in relation to duties and sales tax exemptions for electric vehicles, nicotine gum and nicotine patches, among others, as well as studio and filming production equipment.
Read a February 2023 report [PDF 1.3 MB] prepared by the KPMG member firm in Malaysia that examines the budget from an indirect tax perspective.
Corporate income tax measures concern:
- Reduction of income tax rate for micro, small, and medium enterprises
- Tax deduction for sustainable and responsible investment-linked Sukuk
- Tax deduction on listing cost
- Income tax exemption for charitable hospitals
- Special tax deduction for expenditure on Malaysian handicraft
Individual income and stamp duty tax measures concern:
- Capital gains tax
- Changes to income tax rates for resident individuals
- Stamp duty (tax) exemption for purchase of first residential home
- Stamp duty on transfer of property between parents and children
The budget also includes environmental, social, and corporate governance (ESG) and other tax incentives.
In addition, the special voluntary disclosure program 2.0, which was supposed to commence on 1 June 2023, was postponed to a date that will be announced later.
Read a June 2023 report prepared by the KPMG member firm in Malaysia
The Finance Act 2023 (“the Act”) has been gazetted on 31 May 2023 with no material difference from the Finance Bill 2023. The Act comes into operation on 1 June 2023.
1. Finance Act 2023 gazetted (Source: https://www.ey.com/en_my/tax-alerts/finance-act-2023-gazetted)
The Finance Act 2023, incorporating the changes proposed in Budget 2023 (see Take 5: Malaysia Budget 2023 and Tax Alert No. 6/2023), was gazetted on 31 May 2023.
The retabled Budget 2023 was inspired by the Honourable Prime Minister Datuk Seri Anwar Ibrahim’s “Malaysia MADANI” vision and is framed around the core values of Sustainability, Compassion, Respect, Innovation, Prosperity and Trust.
The proposals comprise measures included in the previous tabling of Budget 2023 as well as new measures that reflect the Government’s ambitious and progressive approach to accelerating economic recovery, spearheading sustainable growth and fostering an inclusive society, to ensure no one is left behind. The Government has introduced rakyat-centric proposals aimed at protecting and addressing the short and long-term needs of the more vulnerable segments of society, covering targeted groups such as children, youth, women, gig workers and the unemployed.
Malaysia’s retabled Budget 2023 takes a responsible and balanced approach towards the well-being of Malaysians, supporting micro, small and medium enterprises (MSMEs), building the resilience of Malaysian businesses and attracting foreign investments.
Dato’ Abdul Rauf Rashid
Malaysia Managing Partner, Ernst & Young PLT
Budget 2023 aims to strike a balance between responsible fiscal management and spurring growth. It was unveiled against the backdrop of projected economic growth of 4.5% in 2023 and with an expected fiscal deficit of 5% in 2023, down from 5.6% in 2022. Government spending for 2023 is expected to be 16.3% higher than Budget 2022’s allocation, increasing from RM332.1b (not taking into account the Covid-19 fund) to RM386.1b (excluding contingency reserves) and focused on:
- Encouraging digitalisation and connectivity;
- Sustainability and food security;
- Enhancing healthcare;
- Improving education; and
- Strengthening social safety nets
Dewan Rakyat passes the Finance Bill 2023
On 3 April 2023, the Dewan Rakyat passed the Finance Bill 2023. The Bill incorporates certain proposals from Budget 2023 (see Take 5: Malaysia Budget 2023) and was initially released after its first reading on 14 March 2023. Please refer to the Appendix to this alert for the key provisions set out in the Finance Bill 2023.
There were certain amendments made to the Bill before it was passed by the Dewan Rakyat. The key amendments are discussed below.
Please note that the amended Finance Bill 2023 has not yet been gazetted and hence, the legislative changes are not yet effective.
- Extension of personal income tax relief for deposits into the National Education Savings Scheme (SSPN) account
On 29 March 2023, the Honourable Prime Minister Dato’ Seri Anwar Ibrahim announced that the individual income tax relief of up to RM8,000 for deposits into the SSPN account will be extended for another two years, until the year of assessment (YA) 2024.
This has now been included in the Finance Bill 2023.
- Additional condition for micro, small and medium enterprises (MSMEs) to enjoy preferential tax rates – change in effective date
For MSMEsNote 1 to qualify for preferential tax ratesNote 2, an additional condition has been proposed such that with effect from YA 2024, not more than 20% of the paid-up capital with respect to ordinary shares or total capital contribution (as the case may be) of the MSME at the beginning of the basis period for a YA can be directly or indirectly owned or contributed by:
(a) Companies incorporated outside Malaysia, or
(b) Individuals who are not Malaysian citizens.
The effective date of the amendments to Paragraph 2F of Schedule 1 of the Income Tax Act 1967 (ITA) provided via the Finance Bill 2023 have been amended to YA 2024 (instead of YA 2023) to be in line with the effective date of the introduction of the additional condition above.
Note 1:
An MSME is:
- A resident company incorporated in Malaysia which has a paid-up capital with respect to ordinary shares of RM2.5 million or less at the beginning of the basis period and that satisfies other specified conditions, or
- A limited liability partnership (LLP) with a total capital contribution of RM2.5 million or less at the beginning of the basis period and that satisfies other specified conditions
which has gross income from a source or sources consisting of a business of not more than RM50 million for the relevant YA.
Note 2:
With effect from YA 2023, it has been proposed that the preferential tax rate for MSMEs for the first RM150,000 of chargeable income be reduced by two percentage points, as follows:
The Act adopts all the changes proposed in the Finance Bill, including the additional amendments made when the Finance Bill 2023 was passed by the Dewan Rakyat (see Tax Alert No. 6/2023).
