Budget 2023 - Special Legal Insights

• Published date: 09 March 2023
• Subject Matter: Government, Public Sector, Tax, Income Tax, Capital Gains Tax, Sales Taxes: VAT, GST, Fiscal & Monetary Policy
• Law Firm: Lee Hishammuddin Allen & Gledhill
• Author: Mr Dato Nadkarni, Jason Tan Jia Xin, Chris Toh Pei Roo, Ng Jack Ming, Ivy Ling Yieng Ping, Ng Miao Ling and Tan Henry

On 24.2.2023, the Unity Government re-tabled the long-awaited Budget 2023 ('Budget'). Beneficiaries include the EV and agriculture industries, MSMEs,¹ and M40s, who stand to receive various tax reductions and incentives. Apart from changes in tax rates for individuals and MSMEs, the newly proposed luxury tax and capital gains tax is also noteworthy.

In this Special Alert, we summarise the key tax measures and share our thoughts on the potential legal implications.

A. New Tax 1- Luxury Tax

The Government plans to tax luxury goods which exceeds a certain value, a concept introduced by the French more than a century ago in 1918. Being widely regarded as the birthplace of luxury, the French adopted a 3-fold classification of 'luxury'² :

1. Articles of obvious luxury such as jewellery, antiques perfumes, sculptures, watches and yachts;
2. General articles which are considered luxury only when they exceed a certain price such as $20 for suits, $2 on imitation jewellery, $50 on women's costumes, $100 on horses, $500 on safes and motor-cycles, $8 on pleasure dogs, etc; and
3. Spending in luxury establishments such as hotels and restaurants. ³

Naturally, what was considered luxurious a century ago may not necessarily be perceived as such now. However, the test is largely similar: non-essential, luxurious or extravagant items.

Introducing Luxury Tax rather than GST may be seen as politically prudent, a tax on luxury goods consumed only by the wealthy would certainly be more acceptable to the public compared to a broad-based consumption tax like GST. The following are some of the possible methods for the implementation of Luxury Tax:

1. Increasing the existing sales tax rates for luxury goods ('Option 1');
2. Imposing excise duty on luxury goods (as seen with the sugar tax implemented in July 2019) ('Option 2'); or
3. Enacting new legislation specifically targeting luxury goods ('Option 3'). See Select Luxury Items Tax Act in Canada which imposes luxury tax on aircraft, yachts, and certain motor vehicles that meet specific criteria with effect from 1st September 2022.⁴

Imposing Luxury Tax on goods through the existing Sales Tax Act 2018 or Excise Act 1976 (Options 1 and 2) present several challenges:

1. Importantly, the HS (Harmonised System) Codes used under both Acts do not differentiate between luxury or non-luxury goods. For example, a women's handbag which falls under HS Code 4202 does not differentiate between a RM 500 handbag with a RM 50,000 one Without a clear criterion...