Easing the burden of the urban middle class

THE middle class population in the main urban centres such as Kuala Lumpur and the other major cities in Malaysia are being squeezed by the rising cost of living, spiralling house prices without a matching increase in their disposable income.

Added to their woes is the possible introduction of goods and services tax (GST) in the upcoming Budget 2014. GST will affect this group as they tend to consume items beyond the exempted and zero rated items.

Consumption of coffee at Starbucks, Coffee Bean or one of the "kopitiams" is part of their normal lifestyle as compared with the same group in the rural areas or in the smaller towns where the tendency for the same group is to consume their coffee in a coffee shop which may not registered for GST as it is likely to be below the GST registration threshold.

It is critical that in the event GST is introduced together with a reduction in subsidies for electricity, water, toll and other essential food items perhaps over the next six months to a year, the government needs to provide assistance to the urban middle class to cushion them from drop in their living standards.

This is a group that is contributing very productively to the economy and paying taxes as most of them are salary earners. Even of greater concern is: if balancing their books becomes a big issue, naturally their productivity at work will be affected.

It is timely in this budget to help this group with the rising cost of living by reducing their income tax through a simple widening of tax bands and a more radical move would be eliminating taxation of all families with two children who earn less than RM4,000 per month. The personal reliefs should also be increased from the present RM9,000 to RM12,000 (with a similar proportionate increase for wife relief) and child relief from RM1,000 to RM2,000.

Targeted cash assistance needs to be given to this group to assist them increase their income. There are different segments amongst the urban middle class and they are the old (beyond 50), the middle age (35 to 50) and the young (below 35).

Generally the young need assistance to further their education to enhance their technical skills and middle group needs assistance to acquire new skills or skills to become more agile and be up to date with latest developments and finally the older group may assistance to keep themselves up to date with the technological changes happening around them so that they can continue contributing to society in the post retirement years.

Here the government should consider providing free education to upgrade their skills and knowledge or provide cheap loans to further their education. The latter can be done by channeling the interest subsidy for the educational loans through the banking system.

Another initiative we could adopt is to follow what is happening in some of the developed countries where the government provides part time or evening classes at nominal or subsidised rates to upgrade or acquire new skills.

The increasing prices of housing in the urban areas is particularly affecting the first time buyers. It is not uncommon for new launches of apartments measuring a 1,000 sq ft to be priced in excess of RM300,000 in Kuala Lumpur. How will a couple earning RM6,000 be able afford such housing? The government should step not in only through PR1MA housing scheme but more directly through the introduction of interest relief for all interest paid by first time buyers for housing up to RM500,000.

However, such a move by government should not be negated through increased housing prices by developers. If such assistance will result in an increase in the profits for the developers, the authorities may need to consider imposing an excess profits tax or a levy upon the industry.

Any imposition of new taxes or a levy on the housing property industry should only be done if there is evidence of a direct correlation between the government assistance and price increase.

The general trend worldwide is for the urban population to grow and Malaysia is no exception. Having a middle class whose disposable income is not increasing does not augur well for the Malaysia as it attempts to become a high income nation by 2020.

SM Thanneermalai is president of the Chartered Tax institute of Taxation of Malaysia and a senior executive director of PwC.