What’s next for Malaysia’s tax policies — stability, productivity or new growth?

Amarjeet Singh explores how Malaysia can balance revenue growth with competitiveness through targeted tax incentives that drive productivity, innovation and sustainable economic resilience.

In brief

• Malaysia’s recent fiscal measures have broadened the tax base and strengthened public finances, so now, businesses need stability and clarity to remain competitive.
• Productivity-driven tax incentives, such as super deductions for training, accelerated capital allowances and support for digitalization, research and development (R&D) and green investments, can help offset rising costs.
• Policymakers should focus on sustainable growth and competitiveness, transforming fiscal reform into long-term prosperity for Malaysians.

Over the last few years, Malaysia has witnessed an array of significant fiscal announcements designed to support fiscal consolidation and facilitating sustainability of public finances.

Recent fiscal policy developments

Among the notable measures are:

• Implementation of e-Invoicing: The phased rollout of e-Invoicing is underway, with a view to full implementation by 1 July 2026. This is expected to improve compliance, transparency and efficiency in tax administration.

• Foreign-sourced income: The long-standing broad-based income tax exemption on foreign sourced income of Malaysian residents has been removed with effect from 1 January 2022, with conditional exemptions for individuals and for dividend income of certain other taxpayers.

• Income tax on capital gains (“CGT”): Since early 2024, CGT applies on the disposal of unlisted shares in Malaysian-incorporated companies by certain categories of taxpayers.  CGT would also apply on the disposal of shares in foreign-incorporated companies which directly or indirectly hold real property in Malaysia exceeding certain thresholds, and the disposal of other foreign capital assets where the gains are received in Malaysia. 

• Expansion of the Sales Tax and Service Tax (SST): Effective 1 July 2025 (with later implementation deadlines for certain items), SST has been broadened, aiming to capture a wider base of goods and services to enhance revenue collection.

• Imposition of 2% tax on local dividend income of individuals: The introduction of a tax on dividend income of individuals exceeding RM100,000 per annum represents a direct effort to increase the government’s revenue base.  This tax will generally apply on dividends received from Malaysian-resident companies.

• Self-assessment system for stamp duty: It is set to take effect from 1 January 2026 and this reform is expected to enhance compliance and increase audit activities from the Inland Revenue Board.

• Subsidy rationalization: The government has embarked on a systematic approach to subsidy rationalization, beginning with the electricity subsidy in 2023, followed by diesel in 2024 and most recently, the announcement of RON 95 petrol subsidy rationalization.

While these measures may be viewed as unpopular, they are considered necessary steps that are in alignment with the principles and objectives set out in the Public Finance and Fiscal Responsibility Act 2023. They collectively aim to secure Malaysia’s fiscal future and lay the groundwork for resilient and sustainable economic growth.

Regional context and global trends

Malaysia is not alone in pursuing fiscal reforms. Based on the Organisation for Economic Co-operation and Development’s (OECD) Tax Policy Reforms 2025 report, macroeconomic conditions have played a key role in shaping tax policy reforms. Rising public debt levels have emerged as a motivation for revenue-raising measures, particularly considering mounting fiscal pressures. 

In the regional context, Malaysia’s fiscal initiatives are not outliers, but rather part of a broader shift seen throughout ASEAN as governments respond to economic pressures and prioritize the sustainability of public finances.

The productivity–competitiveness challenge

The natural question arises — should Malaysia continue introducing new taxes or broadening the scope of existing taxes? The practical need to improve the nation’s fiscal position is clear, both through enhanced tax revenue and expenditure reductions — most notably via subsidy rationalization. However, it is critical to acknowledge that such measures carry consequences. They increase the cost of doing business, potentially undermine productivity and competitiveness, and may risk dampening economic momentum.

A parallel policy focus to counter the effects of rising costs is essential — one that supports businesses to be productive and competitive, despite rising operational costs. This approach is vital to boost profitability at the company level and achieving meaningful improvements in prosperity and living standards at the country level.

Research by the World Economic Forum (WEF) has shown a strong correlation between a country’s competitiveness and its living standards. 

As competition intensifies worldwide, it becomes imperative for Malaysia to prioritize productivity growth as a fundamental driver of long-term economic and income growth and a key factor to continue to attract both foreign and domestic direct investments.

Global Economic Futures: Competitiveness in 2030

The June 2025 WEF White Paper on Global Economic Futures: Competitiveness in 2030 highlights several trends that have returned competitiveness to the top of the policy agenda. These include the widening of geopolitical rifts, tightening fiscal space, and a structural slowdown in productivity growth. In response, countries are pushing for accelerated innovation, structural reforms, re-skilling of the workforce and increased investment to revive growth and enhance economic resilience.

Malaysia must heed these global signals as it formulates strategies not only to sustain its fiscal health but also to secure long-term competitiveness.

What effective measures can the government initiate or introduce to support an offset of the increase of cost of doing business through productivity improvements? For every resource, be it materials, human resources or commodities, how can the government support businesses to produce more value that offsets the higher cost of these resources? If we can answer these questions, this will lead to a true increase in income levels.  

Tax measures to support productivity growth and competitiveness

Outlined below are several key tax policy recommendations designed to drive productivity growth and support national competitiveness:

1. Human capital development: Improvements in the abilities and efficiency of workers are a cornerstone of labor productivity. The government is urged to incentivize companies to invest in upskilling and reskilling their workforces, which will enable each worker to produce more goods or services per hour. A specific recommendation is the introduction of super tax deductions for training expenditure, making workforce development a more attractive and affordable investment for businesses.  Training grants can also be evaluated.
2. Capital deployment: The increased deployment of capital assets — machinery, technology, and infrastructure — has a well-established link with productivity growth. To accelerate capital investment across the manufacturing and services sectors, the government could consider reintroducing accelerated capital allowances for a limited period, e.g., two years. This incentive would encourage businesses to acquire and deploy productivity-enhancing assets swiftly, boosting output and efficiency. 
3.  Digitalization and technology adoption: New technologies and artificial intelligence (AI) hold significant potential to enhance productivity. However, identifying the right use cases and establishing applicability to business process can be challenging.  Key recommendations including:

• Allowing a one-time double or triple tax deduction (potentially with a cap to help manage government commitments) for all spending on technology, whether tangible or intangible. 

• Providing tax incentives for e-commerce adoption, digital payments and cloud-based systems to drive digital transformation

4. Research and development (R&D): The relationship between R&D investment and productivity growth is well documented. Studies suggest that increases in R&D spending led to positive productivity impacts for up to 15 years or more. The government is encouraged to widen the definition of the types of R&D which qualify for R&D incentives, to include activities aimed at enhancing productivity and innovation.  The range and scale of R&D incentives can also be expanded. This approach would stimulate a broader range of innovative activity and encourage a culture of continuous improvement among Malaysian businesses.

5. Green transition and energy cost management: As businesses grapple with rising energy prices and sustainability requirements, supporting the green transition becomes both an economic and environmental priority. The provision of super tax deductions for energy-efficient upgrades and sustainable practices is recommended, to help companies manage energy costs while aligning with global trends toward carbon neutrality and responsible resource management. Businesses are becoming more aware that being environmentally responsible and being financially successful are not mutually exclusive concepts, and the right blend of tax supporting measures will further encourage them.