The Malaysian Government has introduced three economic stimulus packages (“ESPs”) in the effort to stimulate economic growth and to ensure some measure of job security in the response to the financial impact of the Covid-19 pandemic. Our summary of the respective ESPs are available here, here, here and here. Some of the ESPs (for example the Special Prihatin Grant for Micro Enterprises and the Wage Subsidy Program) come in the form of grants and/or subsidies.
 
In this alert, we wish to highlight to taxpayers who are in receipt of the grant and/or subsidy to not overlook the proper tax treatment of said grant and/or subsidy.
 
Under the Income Tax (Exemption) (No. 22) Order 2006 (P.U.(A) 207/2006) (“the 2006 Exemption Order”), taxpayers are exempted from tax in respect of income received in relation to allocations given by the Federal Government or the State Government in the form of a grant or a subsidy. Thus, income received in the form of grants or subsidies under the ESPs would be exempt from income tax.
 
We wish however to highlight that taxpayers will not be entitled to claim any tax deduction in respect of an expenditure incurred out of the grant and subsidy received. One example is where an employer in receipt of the Wage Subsidy Program; the employer cannot claim a deduction for the expenditure incurred in relation to its employees’ salaries which partly or wholly fall within the subsidy amount received.
 
As such, taxpayers are advised to be prudent in maintaining records of the grant and/or subsidy received. Taxpayers are required to maintain a separate record (e.g. account) for the grant and subsidy received and any corresponding expenditure. Proper records would (i) avoid bringing the grant and/or subsidy to tax; and (ii) avoid any mistake in claiming a tax deduction on the expenditure incurred out of the grant and/or subsidy received.
 
Apart from maintaining proper record keeping, taxpayers must ensure that all conditions and requirements laid down in the relevant programs are strictly complied with. Otherwise, the 2006 Exemption Order may not be applicable and thus the grant and subsidy received will become taxable.
 
It bears noting that the relevant authorities (including the Inland Revenue Board of Malaysia) have the right to ask at any time for information and documentation in relation to the grant and subsidy.
 
If you have any queries, please contact Preetha Pillai (psp@skrine.com) or Desmond Liew (desmond.liew@skrine.com).