Thursday, October 11, 2018

Capital Gains Tax may just kill our competitiveness

Please! Do not shoot ourselves on the foot.

When we did away with GST, I thought the government really meant what it promises. It certainly did not promise introducing various new taxes, though - hence long story short, eliminating GST is a mistake. Capital gains tax (CGT) is not a new kind of tax but for Malaysia and this region it certainly is unusual. All our neighbors and sometimes competitors certainly do not have CGT in their playbook. In fact, we have already lose out to both Singapore and Thailand in terms of our corporate tax rate of 24% against Thailand (20%) and Singapore (17%).

Now, we want to introduce something which is really going to be against business - capital gains tax. Malaysia's economy is an open economy and we most of the times will be competing against other neighboring countries. As an example, to enter the capital market some companies can now decide which market they want to get listed. An IT business that operates regionally, can opt for Singapore rather than Malaysia. Airasia for example can go to Singapore or even Hong Kong if it wants to list its group's business. The decision to pick markets to list on depends on how attractive each market is for the issuer.

Introducing CGT will certainly destroy that. In the long run, these kind of decisions which is to address short term problem will just kill our country's competitiveness for existing investors as well as would be entrepreneurs.

In the field that I am in, there is already concern over weak capital flow for both investors and entrepreneurs to tap on. Having a strong capital market means more Malaysians or regional entrepreneurs willing to tap onto as well as invest into our market, and that means more foreign long term money into the market. Do we not want that?

As it is, we have already complained of why did the most successful startup in our history - one that is valued in excess of $10 billion i.e. Grab moved from Malaysia to Singapore despite both the founders started them in Malaysia and being Malaysians. Singapore is just more attractive for them in many aspects and one of them is their ability to raise funds. By my count, Grab has raised more than $5 billion so far. (For one's visualisation, Grab is easily more valuable than Genting today - and capital market plays a very big role in that)

Introducing CGT is an antithesis to that effort of reversing the drain. The government must understand that to reverse brain drain - it is not just about creating job opportunities but it is also about having a conducive business environment. A conducive business environment also means a having and creating a vibrant capital market. Having CGT is hence sheer short sightedness if it is really being introduced.

More often than not, the capital market is pointed as the playground for the rich. It is not that true. It is more of a place for opportunity creation. People or entrepreneurs that would want to tap onto funding, will depend on a strong, consistent and vibrant capital market. As it is, I am seeing a sign of that being reversed by this new government.

If one reads Billion Dollar Whale, i.e. the story on Jho Low, one of the basic message on that story is that rich people do not play by one country's rule. If Malaysia is not friendly to their investment money, their funds can be transferred anytime anyday in an instance. Hence, does our government think that CGT is to tax the rich?

Before we start taxing them, their invested money will no longer be in the country in a flash. That's how fast it is - and does anyone get it. The super rich that we want to gain more taxes do not need to play by Malaysian rules. It will not be long before the not so rich but rich enough to invest in the capital market will be able to do that as well. Fintech companies will enable that and as it is there are already such business startups.

Despite what we may think, one of the success of Trump's administration is to have a swiping change in its tax structure - corporate tax of 35% reducing to as low as 21%. That effort was mainly to bring back businesses that have been locating overseas back to America and it has been hugely successful.

It is time for this government which we have such high hopes to stop being populists.


reyes430 said...

well said !!

Anonymous said...

middle income group already suffered a lot, with CGT they not only do not help middle income group, they want to penalize middle income group more. Extra income from investment also tax, haiz...