Malaysia’s Budget 2026: Advancing Fiscal Reform and Economic Resilience

Please find comments by Farah Rosley, Malaysia Tax Managing Partner, Ernst & Young Tax Consultants Sdn. Bhd. about Malaysia’s Budget 2026.

Framed within the broader ambitions of the 13th Malaysian Plan, Malaysia’s Budget 2026, tabled by Prime Minister Dato’ Seri Anwar Ibrahim, continues the Government’s strategic pursuit of fiscal consolidation, inclusive and sustainable growth, and long-term competitiveness. With a record allocation of RM470 billion, the Budget reflects a focused stance to strengthen the nation’s economic fundamentals while navigating global uncertainties and regional competition. The Government’s commitment to fiscal discipline is evident in its target to reduce the fiscal deficit to 3.5% of GDP in 2026, while maintaining support for key sectors and vulnerable communities. 

Tax and Fiscal Measures: No new taxes, focus on enforcement and administration 

As widely anticipated, no new taxes were announced in Budget 2026 (apart from reiterating the introduction of carbon tax, which was announced in Budget 2025). In the past three years, the Malaysian tax landscape has seen significant developments such as the introduction of a capital gains tax on disposal of shares and foreign capital assets, removal of foreign-sourced income exemptions, the rollout of e-invoicing, a 2% dividend tax on individuals, the recent expansion of Sales Tax and Service Tax (SST) and the announcement of a self-assessment system for stamp duty from 1 January 2026. 

While no new taxes were introduced, there is a projected increase in the tax-to-GDP ratio, which is expected to be driven by improved compliance and enforcement, digitalization, and the impact of previously announced measures being fully felt in 2026. 

The focus now shifts to effective implementation, improved administration and stronger enforcement, including:

• Strengthened enforcement by agencies such as MACC, PDRM, JKDM and MyCC, which has already resulted in RM15.5 billion in recovered assets and penalties since 2023.
• Full implementation of e-Invoicing and transition to self-assessment stamp duty regime. 
• Introduction of digital tax stamps with enhanced security features, paired with the establishment of a Centralised Screening Complex (CSC) equipped with CCTV surveillance at key entry points, to tackle tax evasion, smuggling and illicit trade.

With the full rollout of e-Invoicing by mid-2026 and the introduction of digital tax stamps as well as a self-assessment system for stamp duty, Malaysia is equipping itself with real-time tools to enhance transparency, reduce evasion, and streamline enforcement. These initiatives reflect a shift toward greater administrative agility and taxpayer-centricity. 

Investment Incentives and Sectoral Focus 

Budget 2026 builds on the momentum of the New Industrial Master Plan (NIMP) 2030 and the New Investment Incentive Framework (NIIF), with targeted support for high-impact sectors such as semiconductors, artificial intelligence (AI), digital economy, and energy transition. Malaysia’s Budget 2026 outlines a strategic plan to attract high-value investments and enhance national competitiveness. Key measures include the ASEAN Business Entity (ABE) status to support regional expansion and talent mobility, the Investor Pass offering 12-month multiple-entry visas, and the continuation of the Residence Pass-Talent Fast Track scheme. The Single Family Office (SFO) Incentive Scheme, launched in the Forest City Special Financial Zone, has already attracted RM400 million in assets under management, with a target of RM2 billion by end-2026. 

These initiatives are complemented by the rollout of a new outcome-based incentive framework, which will be fully implemented in Q1 2026 for the manufacturing sector and Q2 2026 for services. The framework prioritizes high-value job creation, regional equity and investor alignment with national development goals. 

Malaysia’s recent 11-place improvement in the IMD World Competitiveness Ranking 2025 underscores the impact of enhanced governance, fiscal discipline and institutional strengthening, anchored by the Fiscal Responsibility Act and the Government Procurement Bill. Sectoral emphasis is evident in the RM550 million allocation for semiconductor ecosystem development, RM500 million in loans under the National Semiconductor Strategy (NSS), and RM180 million for industrial development in AI and digital sectors. The launch of SemiconStart, a global incubator for semiconductor startups, further reinforces Malaysia’s ambition to transition from “Made in Malaysia” to “Made by Malaysia”. 

These targeted investments are expected to catalyze innovation, boost productivity, and increase Malaysia’s export competitiveness. By prioritizing strategic sectors such as semiconductors, AI, and advanced manufacturing, the government is not only capitalizing on Malaysia’s core strengths but also laying a resilient foundation for future-ready, innovation-led growth. 

Carbon Tax and Sustainability Measures 

Whilst it was reiterated that carbon tax will be introduced in 2026, focusing on the iron and steel and energy sectors, no further details were announced in Budget 2026. To ensure efficiency in implementation, the carbon tax mechanism will be aligned with the National Climate Change Bill and the National Carbon Market Policy. This approach allows Malaysia to align its carbon tax strategy with global developments, including the EU’s Carbon Border Adjustment Mechanism (CBAM) and emerging carbon pricing frameworks. For example, to mitigate “double” taxation and ensure creditability of the carbon tax against the EU CBAM, there would need to be an alignment of the Malaysian carbon tax framework with the EU framework, which would need to be considered in drafting the carbon pricing legislation. 

It is expected that carbon tax will initially be introduced at a low rate, to avoid inflationary impact and to allow monitoring and refinement of the implementation.  

In support of Malaysia’s broader climate ambitions, Budget 2026 also introduced a targeted suite of other sustainability-linked measures. These include the continuation of the Green Technology Financing Scheme (GTFS 5.0) with RM1 billion in financing, and government guarantees of up to 80% for waste sector projects and 60% for other green sectors such as energy, water, transport, and manufacturing. The Budget also reinforces the National Energy Transition Roadmap (NETR) through allocations for solar projects under the Large-Scale Solar (LSS 6) programme (nearly 2GW capacity), the Corporate Renewable Energy Scheme (CRESS) (expected to generate RM3.5 billion in investment), and an additional 300MW quota under the Feed-in Tariff programme for biogas, biomass, and small hydro. 

To promote sustainable consumption, the Government expanded the RM2,500 individual tax relief to include food waste shredders, and allocated RM250 million under the Ecological Fiscal Transfer (EFT) to support state-level conservation efforts. These measures reflect a strategic shift toward embedding sustainability into Malaysia’s fiscal and industrial frameworks as well as the day-to-day lives of Malaysians.  

Empowering the Rakyat: From Gig Workers to Grassroots Communities 

Budget 2026 continues to reflect the Government’s commitment to inclusive growth by extending support to underserved segments of the population. Notably, the Budget introduces a suite of measures aimed at improving social protection for gig workers and informal sector earners. Under the new i-Saraan Plus scheme, gig workers will receive matching annual KWSP contributions of up to RM600 or lifetime contributions of up to RM6,000. Further, the Government will subsidize 70% of Self-Employment Social Security Scheme contributions for first-time registrants. These efforts are complemented by the Gig Workers Bill 2025, which aims to formalize protection for this growing workforce. 

At the grassroots level, the Budget expands the Ikhtiar MADANI programme, which empowers local communities to initiate income-generating projects. From rural aquaculture to solar installations in remote villages, these initiatives are designed to improve livelihoods and foster self-reliance. The Government also continues to invest in mobile service delivery which includes banking, healthcare, and legal aid to ensure rural and remote communities are not left behind. 

Conclusion 

Consistent with previous MADANI Budgets, Budget 2026 focuses on laying the foundation for a more competitive, inclusive, and sustainable Malaysia. Beyond targeted tax reforms, the government is advancing a broader fiscal strategy that leverages digitalization, transformation, and enhanced governance to strengthen public finance and service delivery. This reflects a commitment to inclusive, technology-driven governance and marks a decisive move away from traditional fiscal management towards progressive and responsive policymaking, where resilience is built not by raising rates, but by raising standards. 

-ENDS- 

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