TURNING to the stock market to plug the country’s revenue gaps or narrow its fiscal deficit as per objective of the one-off cukai makmur a.k.a prosperity tax has dealt a cruel blow to the local bourse which is still in the midst of getting its footing right.
Evidently, the FBM KLCI edged down almost 33 points or 2.11% to 1,529.35 points at the close of today’s mid-day trading in a knee-jerk reaction.
In a nutshell, the cukai makmur will raise the corporate tax for companies earning above RM100 mil in pre-tax profit to 33% from the current 24%. This only applies to Malaysia sourced income and is applicable for the year of assessment 2022.
The Government has projected that the prosperity tax would raise up to RM4.9 bil.
However, Affin Hwang Capital Asset Management senior director (equities) Gan Eng Peng expects wealth destruction via the capital markets to be greater than the potential income raised.
“This 37% spike in tax rate effectively wipes out most of the already modest 5%-10% earnings growth of 2022,” he opined in the company’s Budget 2022 Fundamental Flash.
“Markets are priced-off future growth, the lack of which leads to potential de-rating as well as immediate knee-jerk sell-down to account for this impact. We think the broader market might correct 1%-3% in the near-term, potentially wiping off RM20 bil-RM50 bil in value.”
More broadly, Gan expects the prosperity tax to also potentially mute the growth outlook for 2022, leading to a flat market if there is no de-rating.
“We think investors won’t look into 2023 prospects yet. It also introduces future policy risk for corporate Malaysia, i.e. that it is okay to socialise profits in times of need. Corporates might also be incentivised to report lower profits in 2022 to minimise the tax burden.”
Other stock market-related revelations in Budget 2022 include removal of the stamp duty cap on share transaction of RM200 as well as an increase of stamp duty from 10 basis points (bps) to 15 bps. This makes large share transactions less efficient and could result in reduced velocity of trading.
Gan further expects the hardest hit sectors to be banks, telcos, utilities, large oil & gas (O&G) players, gloves and plantation companies.
“The least affected sectors are small-caps and the technology sector. However, the secondary effect of a large-cap sell-down might affect all constituents,” he suggested.
A point to note is that the prosperity tax does not apply for offshore income as well as those companies that have special tax incentives like pioneer status. The tax is also imposed at the individual subsidiary level, so entities with multiple subsidiary profit centres will have a lesser tax impact. – Nov 1, 2021
Photo credit: Bernama
