Budget 2026: Balancing fiscal discipline with growth

Malaysia navigates economic uncertainties with strategic fiscal measures in Budget 2026, aiming for growth and enhanced competitiveness.

In brief

• The IMF forecasts global growth slowing, while Malaysia targets 4%-4.5% growth in 2026, emphasizing fiscal discipline and governance.
• Budget 2026 introduces tax measures to broaden the taxpayer base and strengthen compliance, boosting revenue while avoiding new taxes.
• Investment incentives and productivity-focused initiatives aim to enhance Malaysia’s competitiveness, supporting long-term economic growth and innovation.

The world is dealing with multiple uncertainties, with rapidly-evolving trade policy and tariffs adding a new economic dynamic which businesses and governments have not had to contend with in recent times. In October, the IMF predicted slowing growth globally at 3.2% for 2025 and 3.1% in 2026. In comparison, Malaysia expects to grow 4% to 4.5% in 2026, albeit with a smaller rate of trade growth at 3.9%. Interestingly, the rate of growth in the manufacturing sector is expected to taper down from 3.8% in 2025 to 3% in 2026, possibly due to challenges in trade flows and supply chains.

Trust, good governance, accountability and discipline are noble attributes that carry us far as a nation in times of uncertainty. These are the factors that attract private capital and upon which international respect grows. It was heartening to hear our Prime Minister call on fiscal discipline, institutional fortification, strengthening governance, and tackling leakages in the Budget 2026 speech. It was suggested that these have enhanced the government’s financial capacity to spend on infrastructure and social programs.

Budget 2026 addresses the needs of various communities and groups and has stayed away from introducing heavy tax/revenue generating measures, while keeping the goal to reduce the fiscal deficit to 3.5%. This is made possible by various tax and revenue generating measures introduced in recent years, coupled with a focus on better governance and enforcement. 

Over the last few years, the Government implemented measures to expand our tax scope, rationalize subsidies and strengthen tax administration:

• Increased tax on high-income individuals [Effective year of assessment 2020, highest tax bracket increased from 28% to 30%]
• Removal of foreign-sourced income exemption for Malaysian residents, with conditional exemptions for certain categories [Effective 2022]
• Tax on capital gains received in Malaysia by certain categories of taxpayers from the disposal of foreign assets [Effective 2024]
• Expansion of Sales Tax and Services Tax (SST) scope and rate [through 2024 and 2025]
• Global minimum tax [commencing 2025]
• Increase in excise duties on tobacco and alcohol [from 2025]
• Stamp duty scope expansion and self-assessment [phased implementation effective 2026] 
• e-Invoicing [commenced 1 August 2024, will complete in 2026]
• A 2% tax on dividend income of individuals [from 2025] and partnership distributions of individuals from limited liability partnerships [from 2026]
• Subsidy rationalization for power/electricity [1 July 2025], diesel [June 2024] and petrol [30 September 2025].

For 2026, the following is projected:

• Corporate income tax growth by 6.5% to RM103.4 billion.
• Individual income tax growth by 9.4% to RM49.1 billion. 
• SST growth by 11.6% to RM59.6 billion.
• Stamp duty growth by 1.6% or RM157 million.

Interestingly, there has been a broadening of the taxpayer base, reflecting perhaps improved enforcement with the adoption of e-Invoicing and a digitalized tax administration:

• A 15% increase in registered corporate taxpayers (to August 2025); and
• A 13% increase in registered individual taxpayers.

By far one of the most powerful tools available to tax authorities is the data that will be collected as e-Invoicing reaches maximum application. It will uncover more non-compliant or previously unregistered taxpayers and provide deeper insights into a taxpayer’s profile and business. More than 83,000 taxpayers, including companies, businesses and organizations are actively using the system.

The Inland Revenue Board of Malaysia (IRBM) has also significantly intensified its enforcement activities in recent years. From January 2024 to August 2025, IRBM conducted comprehensive tax risk analyses, leading to audits and investigations that identified additional tax liabilities of RM16.95 billion. This includes penalties and involves 1,033 companies and 321 individuals. IRBM is expected to continue with more tax audits in 2026, which will boost income tax collections. This includes stamp duty audits, following the release of the stamp duty audit framework this year.

Such measures, albeit supporting fiscal consolidation, have consequences. Businesses feel the pressure of greater compliance and increased cost of doing business, potentially undermining competitiveness and may risk dampening economic momentum. 

There is a need to introduce tax measures and incentives that support businesses operating in Malaysia, particularly to promote productivity, competitiveness and resilience. These drive long-term economic and income growth, ultimately raising the living standards of a country.

It is encouraging that Malaysia moved up 11 places to rank 23 out of the 69 countries, in the 2025 IMD World Competitiveness Ranking. Malaysia scored well on economic performance, government efficiency, including overall improvements in domestic economy, international trade, and international investment. However, we did not fare well in the areas of business efficiency and infrastructure. 

According to the Malaysia Productivity Corporation, Malaysia needs to strengthen its workforce efficiency through skills development and automation readiness; accelerate the speed by which technology is adopted (by boosting digitalization and AI capabilities): and boost privately led R&D investment to drive innovation and competitiveness.

Hence it is good that Budget 2026 introduces many productivity-focused measures to further enhance Malaysia competitiveness. They include RM7.9 billion for TVET expansion, RM5.9 billion for research, development, commercialization and innovation (RDCI), targeted tax incentives for automation and AI training, and strategic investments in high-impact sectors such as semiconductors and digital infrastructure.

Further the introduction of the:

• ASEAN Business Entity (ABE) status to facilitate skilled talent mobility for companies expanding across ASEAN.
• Investor Pass & Residence Pass–Talent Fast Track to ease entry and hiring processes for foreign investors and strategic talent

are much needed flexibilities required by businesses and investors to enhance capability and productivity.

Tax and other incentives continue to be relevant pull factors for. Budget 2026 reiterates our move towards a New Investment Incentive Framework, which is an “outcomes-based” approach where the package of incentives granted will be commensurate with the outcomes and goals of the nation. This new framework is currently undergoing a pilot phase and is planned to be fully implemented in 2026. 

The newly refreshed tax incentives for venture companies and venture capital companies will also attract more funds to Malaysia and allow better access to capital.

While these initiatives should improve Malaysia’s attractiveness for investors, there is still more work to do if the Competitiveness Index ranking is a fair benchmark. Malaysia can assert itself as a choice investment location and be well-positioned for supply chain changes.   

The following actions would help Malaysia win its share of investments:

• Accelerated release of the new investment incentives framework, so that investors can better assess the tax effect of their investment plans and finalize their investment decisions. Prolonged uncertainty may result in lost opportunities for Malaysia.
• Ensuring the investment framework supports the prioritized sectors under the New Industrial Master Plan 2030and provides the flexibility required by large multinationals impacted by the global minimum tax.
• Incentives and trade facilities granted should be administered in a way that is practical and facilitates its use by taxpayers. The authorities should intensify touchpoints with investors to identify and address concerns and ensure continuous policy improvement.
• The implementation of the various new tax compliance requirements should be done fairly and reasonably recognizing the many competing priorities for a business. The same approach should be taken for tax audits.
• Continued measures to upskill and boost productivity of Malaysians.    

These will also help improve Malaysia’s international standing, prominence and relevance in the global economy and achieve prosperity for Malaysians.