Prosperity tax has negative wealth effect on investors as market falls

Last Friday’s announcement on the new tax led investors to sell-off major stocks yesterday


THE prosperity tax announced in Budget 2022 set a bearish mood on Bursa Malaysia as investors feared earnings of companies would be hit and translate into negative wealth effect as stock prices fell.

The “Cukai Makmur” or prosperity tax plan led investors to sell-off major stocks with the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) falling 31.39 point or 2% to 1530.9 points with losers led by companies in the financial, property and construction indices.

Analysts responding to The Malaysian Reserve estimated that Putrajaya potentially stands to gain between RM5 billion and RM8 billion to its coffers from the tax.

According to Bloomberg data, there were 125 listed companies that earned over RM100 million in their financial year 2020 (FY20).

Among the companies include Malayan Banking Bhd, Public Bank Bhd, Tenaga Nasional Bhd, Hong Leong Financial Group and RHB Bank Bhd.

The one-off special windfall tax will be imposed on companies where pretax profits above the RM100 million mark and will be taxed at a higher rate of 33% corporate tax, instead of 24%.

CGS-CIMB Research analyst Ivy Ng Lee Fang stated that the tax will be levied at the company level (local subsidiaries) rather than group, and it will not impact companies with pioneer status or other tax exemption status.

“As such, companies that own multiple subsidiaries with each earning less than RM100 million will not be impacted, while those companies that derive most of their earnings from foreign subsidiaries will be least impacted,” she stated in a note yesterday.

CGS-CIMB Research estimated that the tax could lower its 2022 forecast of the FBM KLCI earnings by RM4.4 billion or 6.6% and cut its year end (2021) forecast target of 1,629 points to 1,521 points roughly.

“There could be downside risk to 2022F earnings if companies decide to front-load expenses, delay progress billings or income recognition and/or raise provisions to lower their tax expenses,” she stated.

Companies could reduce dividend payments or payouts due to the higher taxes.

Analysts also said the 50% rise in stamp duty on share trading will dampen market velocity. “We were negatively surprised by the

move to raise the stamp duty rate on contract notes for the trading of shares on Bursa Malaysia to 0.15% (which is equivalent to RM1.50 for every RM1,000) from 0.1%, and to abolish the stamp duty limit of RM200 for each related contract note,” she said.

This is partially offset by the exemption of 6% service tax on brokerage services related to the trading of shares.

“We are negative on this as it will raise the transaction costs for the trading of shares. We estimate this could raise total transaction costs from 0.18% to 0.32% of the value of trade of RM5 million assuming a brokerage rate of 0.15%,” she pressed.

This is likely to be negative for stockbrokers in Malaysia and Bursa Malaysia.

The higher transaction costs could push high volume stock market traders to venture into other stock exchanges with lower transaction costs and dampen trading activities in the local market, Ng added.

Budget 2022 is a win for palm oil producers, property developers and auto players. The government intends to raise the windfall levy threshold value for palm oil from RM2,500 to RM3,000 for Peninsular Malaysia and from RM3,000 to RM3,500 for Sabah and Sarawak.

It also revised up the Sabah and Sarawak windfall levy rates to match the Peninsular’s levy rate at 3%.

This will be positive for Peninsular Malaysia palm oil players but neutral for East Malaysia producers which stand to benefit from the revision only when crude palm oil price averages RM3,900 per tonne and below.

The abolition of the real property gains tax on properties sold after five years, from 5% previously, did not help stem the negative sentiment on the day.

“We are mildly positive on the six-month extension of sales tax exemption of 100% for completely knocked down passenger vehicles and 50% for completely built-up vehicles until June 30, 2022, for auto players,” Ng wrote.

CGS-CIMB Research analyst Winson Ng estimates the tax will lower banking FY22F total net profit by 9%.

He maintained an ‘Overweight’ call on banks given the potential re-rating catalyst from its projected core net profit growth of 7.3% in calendar year of 2022.

“However, we see downside risk from the higher tax rate for banks in FY22F arising from the prosperity tax. We think banking stocks could see selling pressure this week as a result of this,” he added.