2007 Budget

Malaysia 1 Sept 2006

Executive Summary

Budget Allocation, 2003-2007 A llo c a t io n o f D e v e lo pm e nt E xpe ndit ure ,

2007
200 16 Internal Health Communicat i
RM bn Security 4% ons
14 Housing
5% 0%
%YOY Edu &
5%
150 12 General Training
10 Admin 18%

% YOY
RMbn

6%
100 8
Public Transport
6 Utilit ies 16%
50 4 7% Ot hers
8%
2
Trade &
0 0 Agri & Rural Industry
2003 2004 2005 2006e 2007e 9% Def ence 11%
11%

• An expansionary budget where the government is seen being “more generous” in its
spending compared to the previous two budgets. Total allocations for 2007 rose a
double-digit 11.6% to RM159.4bn (2006: +3.2%) of which development expenditure
2007 Budget

made up 29% of total allocation, increasing 31% to RM46.5bn.

• By broad use, the largest allocation in development expenditure is for the economic
sector (46.8%), followed by social services (31.9%), security (15.3%) and general
administration (5.9%).

• By sector, education & training received the largest allocation (17.8%) in line with
the government’s commitment to further develop skill sets and human capital. The
transport sector received 16.4% of total allocation followed by trade & industry (11.5%).

• Despite an 24.3% increase in gross development expenditure to RM44.5bn, budget

deficit is expected to narrow to 3.4% of GDP in 2007, helped by a 11.8% increase in
federal government revenue to RM134.8bn, thanks to petroleum-related revenue which
is estimated to amount RM53.7bn or 40% of total revenue.

• We believe this fiscal pump-priming is timely to cushion the impact of moderating

global growth. In addition, the budget has introduced incentives to stimulate the private
sector with some goodies for both the people and the business sector. Emphasis and
incentives are given to new areas with high growth potential namely ICT,
biotechnology, modern agriculture, halal industry, tourism and Islamic finance.

• The 1-2 months bonuses for civil servants payable in two equal instalments in October
and December is expected to spur domestic consumption in the short term especially
with the nearing of festive seasons. The increase in tax relief for the purchase of books
and computers are expected to encourage “investment” in self-development towards a
technology-driven and knowledge-based economy.

• What came as a pleasant surprise is the staggered reduction in corporate tax rate, the
first in 9 years, to 27% in YA2007 and further to 26% in YA2008. Although we believe
the positive impact on companies’ bottomline is marginal, it is expected to boost
investment and ease the burden of companies which have been squeezed by rising costs.

• However, we are disappointed by the lack of details on the implementation of

projects under 9MP, which is very much limited to the RM27.5bn allocated for
construction of roads, quarters & other infrastructure facilities.

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 2007 Budget

Key Budget Objectives

• The main objective of the 2007 Budget is to ensure that policy thrusts under the
National Mission running from 2006-2020 is translated into programmes and
projects which will be implemented expeditiously and effectively.

• The five major policy thrusts are:

1. To move the economy up the value chain.
2. To raise the capacity for knowledge and innovation and nurture “first class
mentality”.
3. To address persistent socio-economic inequalities constructively and
productively.
4. To improve the standard and sustainability of quality of life.
5. To strengthen the institutional and implementation capacity.

• Efforts to improve the public service delivery system will be further

strengthened.

• Incentives to accelerate the growth of the private sector via transformation

towards a technology and knowledge-intensive economy.

Budget Overview
• The private sector as the engine of economic development.
To move the economy
up the value chain • Generating new sources of wealth in technology and knowledge-intensive
sectors.
• Commercialising the agriculture sector.
• Promoting biotechnology.
• Promoting halal industry to the global level.
• Accelerating ICT development.
• Intensifying R&D.
• Promoting product branding.
• Promoting a more dynamic services sector.
• Accelerating the development of Islamic finance.
• Diversifying capital market products.
• Promoting investment abroad.
• Tapping tourism potential.
• Stimulating the construction sector.

To raise the capacity • Strengthening primary and secondary schools.

for knowledge and • Strengthening higher learning institutions.
innovation and nurture • Enhancing skills training.
“first class mentality” • Increasing employability of graduates.
• Empowering women.
• Resilience of youth.

To address persistent • Reducing regional disparity.

socio-economic • Rural development.
inequalities • Poverty eradication.
constructively and • Developing competitive bumiputera entrepreneurs.
productively

To improve the • Housing for low income group.

standard and • Efficient management of water assets.
sustainability of quality • Corporate social responsibility.
of life • Recognizing employee’s contribution.
• Fostering a caring society.

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 2007 Budget

• Access to health services.

• Environmental preservation.
• Ensuring public safety.
• Appreciating arts, culture and heritage.

• Enhancing public service delivery system.

To strengthen the
institutional and • Simplifying immigration procedures.
implementation • Improving the quality of public transportation.
capacity • Recognizing the contribution of civil service.
• Assistance for pensioners.

Key Budget Highlights

• Company tax rate to be reduced in 2 stages by one percentage points each in
YA2007 and YA2008, from 28% currently. The proposal will apply to all
SMEs.

• Personal tax relief on study fees of up to RM5,000 per year to Islamic financial
study conducted in institutions of higher learning.

• 10-year tax exemption for biotechnology activities. Subsequent to this, the

company will be taxed at 20% for another 10 years.

• Income tax exemption for 10 years given to all Islamic banking and takaful
entities that conduct their business in foreign currencies. Same exemption will
be given to local and foreign fund managers who manage Islamic funds for
foreign investors.

• Property trust tax reduced to 20% from 28% for foreign investors. In the same
vein, the property trusts dividend tax imposed on local individual investors has
been cut to 15%. The government will also give tax breaks on undistributed
income provided REITs distribute at least 90% of their income.

• Income tax exemption for tour operators, providing tour packages with at least
500 inbound tourists per year or 1,200 local tourists per year for a period of 5
years to YA2011.

• Increase in excise duties for tobacco and breweries: (i) 7% to 9% increase for
cigarette and tobacco products and (ii) 20% hike for alcoholic beverages with
alcohol content of more than 40%.

• 1 month bonus for civil servants earning more than RM750 a month subject to a
minimum of RM1,500. 2 months bonus for civil servants earning up to RM750
a month. One-off payment of RM200-400 for pensioners to help ease the impact
of rising costs of living.

• RM33.4bn to be allocated to further strengthen the education and training

system. More schools and higher learning institutions will be built and equipped
with better facilities.

• Development allocation of RM2.3bn for the implementation of infrastructure

projects in the South Johor Economic Region (SJER). Measures will also be
undertaken to improve the investment climate in the state of Perlis.

• The Budget continues to focus on efforts to address persistent sosio-economic

inequalities. As such, a total of RM3.4bn and RM578m has been allocated for
rural development and eradication of hardcore poverty.

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 2007 Budget

Key Budget Proposals

Key Areas Major Policy Actions Economic Impact/ Beneficiary
Construction Sector ¾ Total sum of RM27.5bn allocated for ¾ To stimulate and revive the
public sector expenditure with several construction sector.
PFI projects valued at RM4.0bn be
¾ To provide certainty in the tax
implemented in 2007.
treatment with respect to the
¾ Government will also provide an computation of the gross
additional sum of RM1.0bn for the income and adjusted income
maintenance of buildings and public from the property development
facilities. and construction contract
business.
¾ Development allocation of RM2.3bn for
the implementation of infrastructure ¾ Reduce disparity between the
projects in the South Johor Economic regions.
Region (SJER). Measures will also be
undertaken to improve the investment
climate in the state of Perlis.
Government to establish a strategic
investment fund with an allocation of
RM200m and use PFI approach to
promote investments in the region.
¾ Special tax treatment for the property
development and construction contract
business (i) Expenses incurred by
property developers within the defects
liability or warranty period be allowed as
deduction from the same project and not
only as deduction from other projects.
(ii) Losses incurred in the last year of a
project be allowed as deduction from
profits received from the previous years
of that project (carry back of losses).
REITs ¾ Non-corporate investors especially ¾ To further enhance the
resident and non-resident individuals development of REITS in
and other local entities that receive Malaysia and attract
dividends from REITs listed on the investments, especially funds
Bursa Malaysia be subject to a final from West Asia as well as
withholding tax of 15% for 5 years. diversifying capital market
products.
¾ Foreign institutional investors
especially pension funds and collective
investment find that receive dividends
from REITs listed on the Bursa Malaysia
be subject to a final withholding tax of
20% for 5 years;
¾ Local and foreign corporate investors be
subjected to existing tax treatment and
tax rates.
¾ REITs be exempted from tax on all
income provided that at least 90% of
their total income is distributed to the
investors.
¾ If the 90% distribution in not complied
with, REITs will then be subjected to
income tax while all their investors are
eligible to claim tax credit.

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 2007 Budget

Islamic Finance ¾ Income tax exemption for 10 years to be ¾ Making Malaysia a leading
given to all Islamic Banking and Takaful international Islamic financial
entities that conduct their business in center.
foreign currencies and licensed under the
¾ Accelerating the development
Islamic Banking Act 1983 and Takaful
of Islamic Finance and
Act 1984
diversifying the capital markets
¾ Additional 20% stamp duty exemption will boost growth in the
will be given to all instruments related to services sector, which is the
Islamic financing for a period of 3 years. largest contributor to GDP.
This additional exemption is given after
providing for tax neutrality between
conventional and Islamic financing.
¾ Income tax exemption for 10 years be
given to local and foreign fund
managers, who manage Islamic funds for
foreign investors.
¾ Personal tax relief on study fees, up to a
maximum of RM5,000/year be extended
to Islamic financial studies conducted in
institutions of higher learning, including
International center for Education in
Islamic Finance or INCEIF.
¾ Tax deduction be given on expenses
incurred in establishing an Islamic stock-
broking firm.
¾ Tax deduction on expenses incurred in
the issuance of Islamic products will be
extended for year of assessment 2008 to
2010.
Promoting ¾ Government to establish an Overseas ¾ Encourage local companies to
Investments Abroad Investment Fund (OIF) with an invest overseas and create
allocation of RM100m to provide soft Malaysian-owned MNCs based
loans to domestic companies to finance in Malaysia with large global
start-up cost of doing business overseas. operations.
¾ Malaysian-owned banks to be given
tax exemption for 5 years on income
received from their new branches or
remittances from subsidiaries
overseas, operating within a 3-year
period, from the year of assessment
2007.
Tourism ¾ To further promote tourism, RM149m is ¾ Increase tourism activities are
allocated for the Visit Malaysia Year expected to boost other tourism-
2007 programme. related services sector.
¾ Income tax exemption for tour operators, ¾ Job opportunities for the
providing tour packages with at least 500 tourism sector will help boost
inbound tourist/year or 1200 local tourist domestic demand.
per year will be extended for another 5
years until 2011.
¾ To enable tourist to explore challenging
destinations, tour operators will be given
50% excise duty exemption on locally
assembled 4WD vehicles.
¾ Income tax exemption to employees for

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 2007 Budget

local leave passage provided by

employers, which currently, is given
only for fares, be extended to include
expenses on accommodation and meals.
Education ¾ RM33.4bn is allocated for operational ¾ To improve access to quality
and development expenditure, education and training at all
accounting for 21% of overall 2007 levels.
budget, of which RM6.7bn for primary
¾ To raise the capacity for
education, RM6.2bn for secondary
knowledge and innovation and
education and RM10.4bn for higher
nurture ‘First class mentality”.
education and RM10.1bn for training
programmes.
¾ More schools and higher learning
institutions will be built and equipped
with better facilities.
Taxes ¾ Company income tax rate to be reduced ¾ Enhance the nation’s
in stages by 2 percentage points. For competitiveness.
2007 assessment, the rate will be 27%
¾ Increase funding in seed capital.
including SMEs and 26% in YA2008.
¾ Reduce the cost of doing
¾ Venture capital companies investing at
business.
least 50% of its investment funds in VCs
in the form of seed capital will be given ¾ To promote a healthy lifestyle,
income tax exemption for 10 years ‘sin taxes’ have been increased
further to deter consumption.
¾ 10% penalty on withholding tax will be
imposed on the amount of unpaid tax
and not on the total payment made on a
non-resident
¾ Zakat on business income paid y
cooperatives and trust bodies to Islamic
religious authorities be allowed as a
deduction under the Income Tax Act
1967 subject to a maximum of 2.5% of
their aggregate income.
¾ Eligibility period to claim refund of sales
tax and service tax related to bad debts
be shortened from 12 months to 6
months from the date of tax paid.
¾ Increase in excise duties for tobacco and
breweries: (i) 7% to 9% increase for
cigarette and tobacco products and (ii)
20% hike for alcoholic beverages with
alcohol content of more than 40%.
¾ Perlis to be declared as a promoted area.
Designated projects in Perlis will be
eligible for a higher level of income tax
exemption.
¾ Tax exemption on service awards
received by employees are to be given in
cash or in kind not exceeding RM1,000 a
year.
¾ Current limit on deduction given to
companies on contributions for
charitable activities is increased from 5%
to 7% of the aggregate income. Such

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 2007 Budget

deductions are also extended to

contributions made towards sports
activities approved by MOF and sports
bodies. Total of the 2 types of
contributions does not exceed 7% of
company’s aggregate income.

Budget Allocations 2007

Operating Expenditure = RM112.9bn (70.8% share of total allocation)
Development Expenditure = RM46.5bn (29.2% share of total allocation)
Total Allocation = RM159.4bn (2006: RM136.8bn)

Selected Allocation by Sector

Sector Allocation Remarks
Agriculture ¾ RM3.6bn ¾ RM300m increase in the Fund for Food
¾ RM20m for establishment of a Non-Food
Agriculture Credit Scheme
¾ Implement livestock projects through the
Veterinary Dept, LPP, MADA and KADA
with an allocation of RM111m
¾ RM40m allocated for the implementation of
the Beef Valley project
¾ RM92m allocated for development of the
aquaculture industry and Freshwater Fishery
Research Centre
¾ RM200m ¾ Agriculture fund jointly financed by the
government, Khazanah Nasional and the
private sector
Biotechnology ¾ RM210m ¾ Technology acquisition through Biotech
Acquisition Programme with a matching
grant of RM60m
¾ RM59m allocated for R&D
¾ RM30m allocated for Biotechnology
Commercialisation Funds (BCF)
Halal Industry ¾ RM50m ¾ Allocated to set up halal parks in Pasir
Mas, Kelantan; Gambang, Pahang;
Chendering, Terengganu and Padang
Besar, Perlis
¾ RM20m ¾ Allocated to SME Bank to finance
entrepreneurs to further develop halal
products
¾ RM25m ¾ Establish Halal Industry Development
Corporation
ICT Development ¾ RM154m ¾ Allocated to Mdec to undertake ICT
various activities
¾ RM25m ¾ Establish Content Industry Development
Fund to finance ICT applications
¾ RM162m ¾ Allocated to MIMOS to conduct various
programs, including Mobile Broadband
Engines, e-learning application & R&D.

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 2007 Budget

R&D ¾ RM194m ¾ Science Fund for basic and applied science

research projects
¾ RM354m ¾ Techno Fund for funding
commercialization
¾ RM20m ¾ MSC Grant Scheme to finance ICT-based
R&D
¾ RM193m ¾ R&D in agriculture allocated to research
agencies including MARDI, MPOB, MRB
& MCB
Promoting Investment ¾ RM100m ¾ Establishment of Overseas Investment
Abroad Fund to provide soft loans
Tourism ¾ RM147m ¾ Upgrade tourist facilities and develop new
tourism products
Construction ¾ RM27.5bn ¾ Rollout of projects under the 9MP such as
construction of roads, quarters & other
infrastructure facilities
¾ RM4bn ¾ Implementation of several PFI projects
¾ RM1bn ¾ Allocation for maintenance of buildings
and public facilities.
¾ RM1bn ¾ Allocated for the construction of 198
schools
¾ RM90m ¾ Construction of 2 new MRSM
¾ RM101m ¾ Construction of 67 housing projects for
teachers
¾ RM450m ¾ Allocated for construction and upgrading
of polytechnics and community colleges.
¾ RM148m ¾ Construction of 2 industrial training
institutes & 4 advanced technology
training centres
¾ RM2.2bn ¾ Allocated to build 46,000 units of
government quarters for PDRM
Education & Training ¾ RM33.4bn ¾ RM6.7bn is allocated for primary
education
¾ RM6.2bn for secondary education
¾ RM10.4bn for higher education and
RM10.1bn for training programmes
¾ RM782m ¾ Allocated for training teachers including
¾ RM56m the Pre-Services Teacher Training & The
In Services Teacher Training Programes
¾ Teachers training programmes in
¾ RM288m collaboration with foreign universities &
¾ RM195m OUM.
¾ Allocated for Bestari School Programme
¾ RM214m ¾ Allocation to upgrade and improve
facilities in existing universities
¾ Allocated to conduct several training
programmes under MARA
Woman ¾ RM30m ¾ Grant for NGOs to undertake woman,
family & community programmes.
Youth ¾ RM721m ¾ Allocated to implement various youth &
sport programmes
¾ RM91m ¾ Sport & training programes including
Scholarships for athletes.
Regional ¾ RM2.3bn ¾ Infrastructure projects in SJER
Developments ¾ RM200m ¾ Strategic investment fund to develop key
industries in the region mainly private
higher education and healthcare.

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 2007 Budget

Rural Development ¾ RM3.4bn ¾ RM780m upgrading rural roads

¾ RM251m for water supply
¾ RM200m for electricity supply
¾ RM615m ¾ Several projects implemented by KEMAS
Eradicating poverty ¾ RM578m ¾ RM156m allocated for Skim Pembangunan
Kesejahteraan Rakyat for the poor
¾ RM144 allocated for Orang Asli
Development Programme
¾ RM90m allocated for Program
Pembangunan Ladang Rakyat by FELCRA
¾ RM13m allocated for opening up of 2000
hectares of rubber plantations in Pitas, Sabah
Rubber Industry Board involving hardcore
poor.
Caring Society ¾ RM846m ¾ Total school allowances for students from
poor family
¾ RM302m ¾ For welfare programmes for the disabled,
victims of natural disasters, hardcore poor &
senior citizens.
Health ¾ RM10bn ¾ For provision of health facilities and
equipments, services of specialist &
training programes.
¾ RM125m ¾ 3 new hospital to be built namely in Shah
Alam, Kedah & Johor.
Environment ¾ RM1.0bn ¾ Implementation of environmental
preservation projects.
¾ RM716m ¾ For irrigation & flood mitigation
programmes
¾ RM107m ¾ For river management programmes
¾ For improving mini incinerators &
¾ RM179m upgrading existing solid waste disposal
sites to ensure proper management of solid
waste disposal.

Security and defence ¾ RM4.9bn ¾ To enhance the efficiency of its operations.

Arts, Culture & ¾ RM100m ¾ Creative Industry Development Fund to

Heritage promote creative arts.

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