Tax government chose to give incentives to those

Tax incentive
is one of the strategy that government implemented in their fiscal policies in
order to encourage a particular economic activity. Tax incentives are actually one
of government ways to fund their programs. By giving tax incentives, they are
directing or encouraging companies to invest in a particular sector, produces a
particular product, building infrastructure in a particular area or setting up
in a particular region to help boost that region’s economy or condition.

 One of the tax incentive that are offered in
Malaysia is the pioneer status. This incentive are available for companies
involved in the hotel and tourism, manufacturing and agriculture industry. Others
which are also being offered this tax incentive are companies involved in research
and development and technical and vocational training. The government chose to
give incentives to those sector because those sector are the main income
sources in the Malaysia’s economy. With that, it can greatly enhance and boost
those industry in Malaysia which will give rise to the nation’s economy.

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status is a status where a firm can obtain a partial exemption on tax payment
for a certain period which is normally up to five years. However, extension of
time may be given for those activity that are related to the treatment of water
or projects that are strategically important to Malaysia. According to the
Malaysia’s 2018 budget report, pioneer status in Malaysia has the benefits of
tax exemption for up to 70% of statutory income, which is the income after
deducting allowable expenses and capital allowances, for a period of 5 years
for those states in peninsular Malaysia. However, for the state of Sabah and
Sarawak, they have the benefits of 100% exemption of statutory income for a
period of five years.

In order for
a company to obtain a pioneer status, they have to participate in a promoted
activity or by producing a promoted product. Only the Malaysian Investment
Development Authority (MIDA) has the right to determine those products and
activities which are eligible for that status. The list of those promoted
products are always updated from time to time but currently, the list for those
promoted products and activities are promoted products or activities for small
scale companies and for high-technology companies.

for firms that currently has a pioneer status which faces loss during that
period, may carry forward those losses to the post pioneer period to be set off
against future business income of the company (MIA NA). In addition to that,
those exempted income are directed to the exempt account where those exempt
dividends are distributed to the firm’s shareholders. Those shareholders that
are paid by those dividends are also tax exempted in the hands of those
shareholders (LHDN NA). This encourages those existing and newly incorporated
shareholders to perform better and invest more within Malaysia by producing
promoted products and carry out promoted activities.

Another form
of tax incentive given by the government are given in the form of Investment Tax
Allowance (ITA). This allowance are available for companies involved in
manufacturing, agriculture, hotel and tourism industry. This allowance are
given as an alternative for pioneer status as a way to reduce taxable profits. A
company that has been granted with ITA are given an allowance of 60% to 100%,
rates are different for each industry and activities, on their qualifying
capital expenditure within five years from the date that the first qualifying
expenditure are incurred by the company. However, if the qualified assets are
disposed within a period of two years from the date of acquisition, ITA will be

Company are
allowed to set off the ITA against 70% of their statutory income in each year
of assessment. Any allowance that are unutilised are allowed to be carried
forward to subsequent year of assessment until fully utilised. Furthermore, company
can also transfer the allowance given into an exempt income account in which it
will be exempted from corporate income tax. Dividend paid out of this income
will also be free from tax upon distribution.

These tax
incentives along with other forms of tax incentives given by the government
will eventually help in encouraging investment activity within Malaysia
especially in those industry that are critical to the development of the
country. This is because, existing companies will be attracted to the benefits
given under this incentives and tries to participate more in promoted
activities or products. In the other hands, tax incentives will also encourage
new companies to be form for the purpose of participating in promoted
activities or producing promoted products. Tax incentives allow the government
to reduce the cost of capital and expenses that will be incurred by companies
involved in those selected industries and thus encouraging investment. For
example, in order to encourage the development of technology, the government
give incentives for high technology company in which they can apply for pioneer
status and will be given a 100% exemption of their statutory income. The same
will also be given for automotive company developing hybrid and electric
vehicles in order to encourage investment towards a better and cleaner
environment. In short, tax incentives is an effective way in boosting up the
nation’s economy and overall growth, it helps in directing investment towards
where it is most needed in the economy.