KUCHING: Malaysia’s Budget 2026 tightens its belt while opening new fronts for innovation, combining fiscal reforms, targeted subsidies and carbon-pricing measures to strengthen public finances without slowing growth. The budget brings together subsidy rationalisation, SME incentives, carbon-pricing readiness and tax-base expansion to balance fiscal discipline with economic opportunity amid rising living costs.
Members of the Institute of Chartered Accountants in England and Wales (ICAEW) said the measures show a clear intent to restore fiscal credibility while positioning Malaysia for sustainable prosperity.
They included BDO Malaysia Head of Tax Advisory David Lai, BDO Malaysia Executive Director of Transfer Pricing Tan Chin Teck, KPMG in Malaysia Head of Financial Services Kevin Foo, KPMG in Malaysia Director of Corporate Tax Advisory Elliot Chaw, and Scatec Solar Senior Asset Manager Chong Yen Ting.
Targeted subsidies and social protection
ICAEW members said Budget 2026 continues the shift towards targeted subsidies through the BUDI95 petrol and SKDS 2.0 diesel schemes, alongside Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (SARA) assistance totalling RM15 billion.
“SARA now covers all nine million STR recipients, offering up to RM100 monthly and RM200 for e-Kasih households.
“The programme is funded by RM2.5 billion to RM4 billion in savings from rationalised diesel and RON95 subsidies,” they said. Lai said subsidy rationalisation was fiscally unavoidable but must be supported by more efficient delivery systems.
“Relying solely on PADU could exclude some eligible households. The government should combine e-invoicing, Commitment to sound public finance income and consumption data for fairer targeting,” he said.
Tan said subsidy withdrawals should align with welfare and tax reforms. He suggested MyKad-linked quotas to protect low-income households while maintaining fiscal efficiency.
Foo and Chaw said linking data across ministries and adopting outcome-based budgeting would strengthen transparency and ensure measurable results from public spending.
Tax reform and competitiveness
ICAEW members noted that Budget 2026 also expands the Service Tax to cover additional professional and digital services and raises the rate from eight to ten per cent for selected sectors.
They said that the phased rollout of e-invoicing to all taxpayers by 2026 will continue, alongside the Global Minimum Tax (GMT) for large multinational enterprises and refined capitalgains-tax reporting for unlisted shares. Lai said Malaysia’s taxto-GDP ratio of 12.5 per cent remains among the lowest in ASEAN.
However, he cautioned that new levies such as dividend and capitalgains taxes could affect Malaysia’s competitiveness against Singapore and Hong Kong. He proposed a simple two per cent flat tax on dividends net of direct costs and exemptions for Securities Commissionapproved Single-Family Offices to attract high-net-worth investors.
Meanwhile, Tan said the Service Tax expansion had already caused cascading costs along supply chains.
He urged the government to broaden business-to-business exemptions within industries to minimise cost duplication.
SME support and innovation
According to Foo and Chaw, the Budget supports small and medium enterprises through targeted R&D and automation grants under the New Industrial Master Plan 2030, the National Semiconductor Strategy and the AI Sandbox initiative.
“Financing support will be provided through BSN, SME Bank and Bank Negara Malaysia’s HighTech Facility, with incentives for AI, chip-design and digital-technology start-ups linked to investment tax allowances and faster approval timelines,” they said.
They opined that Malaysia should pursue ‘smart tax administration’ by leveraging AI, e-invoicing and MBRS reporting to enhance compliance and improve taxpayer experience through prefilled returns and predictive risk profiling.
They added that clear policy signals on digital assets and fintech adoption could position Malaysia as a competitive international financial hub. Tan noted that while SME tax rates of 15 to 17 per cent are regionally competitive, current frameworks discourage firms from scaling up.
He urged the government to introduce innovation-specific tax regimes and shorten application processing time from twelve to six months.
Lai added that linking strategic projects such as the JohorSingapore Special Economic Zone and Industry4WRD incentives with local supply chains could create multiplier effects and widen benefits from foreign investment.
Green economy and carbon pricing
Chong said fiscal tools such as green-tax rebates and R&D grants could steer SMEs toward sustainability while boosting competitiveness. She called for greater access to ESG-linked financing and for R&D grants to be tied to measurable outcomes to position Malaysia as a hub for green innovation.
ICAEW members said Budget 2026 also advances the National Energy Transition Roadmap with an estimated RM60 billion investment pipeline, supported by the Energy Efficiency and Conservation Act 2024 and the Carbon Capture, Utilisation and Storage (CCUS) Act 2025.
“A staggered carbon-tax framework will begin with heavy emitters, complemented by green-investment tax allowances and accelerated capitalallowance claims for renewable-energy upgrades and electricvehicle infrastructure,” the members said. Chong said affordability remains key for both consumers and industry.
“Green-energy pricing should be transparent and predictable to give investors clarity while protecting end users,” she said. She also highlighted the need for effective land and area allocation for solar and hydropower projects to support sustainable investment.
Foo and Chaw said the success of carbon tax requires a clear roadmap with sectoral timelines and guidance. They suggested self-assessed capital allowances for green upgrades and incentives to accelerate electric-vehicle adoption, including tax exemptions for components, grants for charging infrastructure and fleetconversion support.
Broadening the tax base
ICAEW members said Malaysia targets a fiscal deficit of 3.5 per cent of GDP in 2026, supported by subsidy savings, improved enforcement and new tax measures.
Lai said the country’s heavy reliance on a small group of taxpayers and volatile petroleum income is unsustainable.
He urged a review of reliefs and deductions to bring more individuals into the tax net, simplify structures and improve transparency.
Tan said reforming aid programmes such as STR and SARA could mirror Singapore’s GST Voucher Scheme to offset the impact of indirect taxes and preserve system integrity.
He added that clear communication on how new revenues are used for healthcare, education and infrastructure is vital to building public trust.
Meanwhile, Foo and Chaw called for structured stakeholder consultations and a pause on new administrative layers to allow taxpayers time to adapt as frameworks are consolidated. ICAEW members concluded that Budget 2026 balances fiscal consolidation with fairness and competitiveness.
From subsidy rationalisation and tax reform to SME incentives and governance, they said Malaysia’s fiscal credibility will ultimately depend on transparent and effective execution.
