Tax Incentives in Malaysia’s Budget Aim to Boost Investment

Malaysia's budget aims to move toward a more progressive tax structure, prioritising fair revenue distribution and lower- and middle-income groups. While there are no immediate plans to reintroduce the goods and services tax given ongoing economic pressures, the government has proposed other measures to widen the tax base and incentivise high-impact and emerging sectors. At time of publication, these measures had not yet been passed into law.

Luxury goods tax

A proposed luxury goods tax, effective this year, would apply value thresholds by category — including luxury watches and fashion items — though key details like the exact price thresholds, rates, and covered goods remain unclear. While taxing luxury goods looks like an easy way to raise revenue from higher earners, its real effectiveness depends heavily on consumer behaviour: buyers may simply spend less on luxury goods, or purchase them overseas instead where no such tax applies, denting local sales and revenue. There's also a real risk that a rate set too high, or a threshold set too low, pushes activity into the black market, eroding the tax base further — alongside practical questions about who is responsible for collecting and registering the tax. Getting this right will require real consultation with stakeholders and enough transition time for smooth implementation.

Key tax incentives

The budget's incentives are concentrated in green technology, electric vehicles, and the aerospace and electrical/electronics sectors.

Carbon capture and storage (CCS)

Companies undertaking CCS in-house, providing CCS services, or using CCS services can access investment tax allowances, import duty and sales tax exemptions on CCS equipment, and income tax exemptions and deductions on CCS-related expenses. Applications go through the Ministry of Finance from 25 February 2023 to 31 December 2027, with eligible companies able to claim deductions from year of assessment 2023 through 2027.

Electric vehicles

Full import duty exemption on components for locally assembled EVs is extended to 31 December 2027, along with full excise duty and sales tax exemption on completely-knocked-down EVs (also to end-2027) and full import/excise duty exemption on imported completely-built-up EVs until 31 December 2025. EV charging equipment manufacturers get a 100% income tax exemption from YA 2023 to YA 2032, plus a 100% investment tax allowance offsettable against 100% of statutory income for five years. Companies renting out non-commercial EVs can claim tax deductions of up to RM300,000 (US$66,700) on rental income from YA 2023 to YA 2025.

Other sectors

To attract further investment, the budget extends the special tax rate and investment tax allowance for relocating manufacturers, and the 15% C-suite executive tax rate, until 2024 — covering the electrical/electronics and aerospace sectors too.

For aerospace specifically, incentives are extended three years to end-2025: new companies can claim a 70-100% income tax exemption for five to ten years, or a 60-100% investment tax allowance for five years (offsettable against 70-100% of statutory income each year); existing companies can claim a 60% investment tax allowance for five years, offsettable against 70% of statutory income annually. Applications go through the Malaysian Investment Development Authority from 1 January 2023 to 31 December 2025.

Separately, the existing tax deduction of up to RM1.5 million on listing costs for the ACE and LEAP markets is extended three more years (YA 2023-2025), now also covering technology-based companies listing on the Bursa Malaysia Main Market — intended to support tech firms and SMEs looking to expand.

Concluding thoughts

As Malaysia's economy continues recovering, this measured, targeted, and inclusive approach offers a reasonable balance for businesses navigating continued uncertainty. Incentives aimed at automation, digitalisation and environmental outcomes are a sensible step, consistent with the broader global shift toward sustainable development.

Source: Bloomberg Tax