Windfall tax likely considered in Malaysia Budget 2021, but unlikely to be sufficient: Citi Research

Discussion of a windfall profit tax for glove makers has come under the spotlight, as attention has shifted not just on the extent of further monetary easing, but also on fiscal revenue diversification in Malaysia's upcoming Budget 2021.

But given the heterogeneous nature of gloves, and thus lack of common benchmark such as CPO, a windfall tax framework similar to that with planters appears less likely, said Citi economists Kit Wei Zheng and Ang Kai Wei in a report.

"Our equity analyst estimates tax contributions for the four leading glove makers at RM1.8 billion for CY20 and RM3.3 billion for CY21. Assuming corporate tax rate for glove makers are raised by 10 percentage points to 34 percent, we suspect that revenue collections from (any) windfall tax is unlikely to exceed RM 2 billion - which represents a mere 0.1 per cent of GDP," said the economists.

But assuming their expectations for FY21 fiscal deficit reduction by 1.1 per cent of GDP are met, and evenly split between spending cuts and revenue enhancing measures, this implies that an additional RM8 billion to 10 billion needs to be generated.

But while windfall revenue collections are clearly neither large nor sustainable enough, this will likely be considered as part of Malaysia's revenue diversification strategy, since this is more politically palatable against a backdrop of impending elections.

Other plausible options include new sin and wealth taxes, and tweaks to personal and corporate tax structures, aimed at raising the effective tax rates, and number of companies subjected to tax, which is estimated at 7.8 per cent of companies as at end 2017, based on the Fiscal Outlook 2020 report.

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Calibrated expenditure cuts of around 0.5 percentage points to 0.6 percentage points of GDP could also help, pointed out the report - by scaling back some of the new measures announced this year, rather than withdrawing them completely.

"With some negative fiscal impulse difficult to avoid with fiscal consolidation in 2021, this would be an additional reason to keep monetary policy accommodative in 2021. We reiterate our earlier view that discussions of OPR hikes in 2021 are likely premature at this stage, given expectations of a still negative output gap. A larger windfall tax could arguably reduce the multipliers of that negative fiscal impulse at the margin, but likely insufficient to move the needle on monetary policy," said Mr Kit and Mr Ang.