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PETALING JAYA: The government’s proposal to implement capital gains tax and one-off higher tax rate on windfall profit will be negative for the Malaysian equity market as it will make Malaysia less competitive, according to CGS-CIMB.

It noted that imposing a capital gains tax on the trading of shares in the Malaysian stock exchange by retail and institutional investors will make the country less competitive due to the additional taxes, which could lead to further outflow of foreign funds.

“We gather that Indonesia, Singapore and Thailand currently do not impose capital gains taxes on the trading of shares on their stock exchanges. There is also the possibility of a capital gains tax being introduced in Malaysia, but exemption will be given for the gain from sale of shares listed on the stock exchange as practiced by other countries to stay competitive,“ CGS-CIMB said in a report today.

It is unclear what potential mechanism the government will apply to identify companies or sectors that have achieved extraordinary profit to apply the one-off windfall tax potentially. Some companies could be achieving high earnings growth in financial year 2021 due to a low earnings base.

“If this one-off tax is implemented, investors are likely to identify gloves, petrochemicals, and commodity sectors as potential sectors that could be affected by the windfall tax. We estimate roughly that every 1%-pt increase in the tax rate for companies in the KLCI could shave around 1% off our earnings estimate for KLCI for financial year 2022 and 15 points from our end-2021 KLCI target of 1,629 points.

“These concerns could dampen near-term sentiment on the market till Budget 2022 is announced on Oct 29. The KLCI has retreated 72 points or 4.4% from its recent peak of 1,601 on Aug 30 to 1,529 points today. We attribute the decline to weaker global markets and concerns over the potential implementation of additional taxes,“ CGS-CIMB said.

The government is looking at a few ways to increase its revenue including implementing the taxing of capital gains on shares and also imposing a one-off higher tax rate on companies that have obtained extraordinary profits during the pandemic. The extra revenue accrued by the taxes would be channelled towards recovery programmes and activities for selected target groups.

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