GEORGE TOWN: Addressing tax cascading under the Sales and Service Tax (SST) framework is the first priority for Budget 2027, as rising costs squeeze manufacturers and weigh on Malaysia’s competitiveness for high-value investment, said the Federation of Malaysian Manufacturing (FMM).
Its president, Jacob Lee Chor Kok, said FMM’s Business Conditions Survey 1H2026, released on Sept 3, found that 69% of manufacturers experienced higher production costs in the first half of the year and 53% cited higher raw material and input costs as a key challenge, while 38% expected profits to decline in the second half despite relatively more positive revenue expectations.
He said manufacturers identified direct tax or duty relief on essential inputs and lower corporate tax, particularly for SMEs and mid-tier companies, as their leading Budget 2027 priorities.
“FMM therefore proposes addressing SST tax cascading, ultimately moving towards a low-rate GST framework, and introducing more competitive SME corporate tax rates,” Lee told SunBiz.
FMM has proposed introducing the Goods and Services Tax (GST) at 3%. It has also proposed input-tax credits or offsets and prompt refunds within SST to reduce tax cascading, following the government’s indication that it was open to studying selected GST features in the current system,
For qualifying SMEs, it proposed a corporate income tax rate of 15% on the first RM1 million of chargeable income, 17% on the next RM1 million and 24% thereafter.
“Budget 2027 should therefore focus on reducing avoidable business costs while preserving companies’ capacity to invest,” Lee said.
The second priority is accelerating smart manufacturing through a proposed RM1.5 billion Smart Manufacturing Support Package for 2027 to 2030, comprising RM500 million for automation, RM750 million for digitalisation and RM250 million for artificial intelligence, backed by enhanced automation allowances and financing at 2% to 4%.
“This responds directly to manufacturers’ focus on cost efficiency and productivity. Forty-six per cent see operational efficiency as their leading growth strategy, while automation and digital technologies remain important opportunities,” Lee said.
The third priority is strengthening Malaysia’s innovation, talent and supplier ecosystem, including through industry-led technical and vocational education and training, and stronger links between multinational corporations (MNC) and local suppliers.
“Investment incentives should increasingly reward quality outcomes such as R&D, engineering capability, technology transfer, skilled employment, local sourcing and supplier development,” Lee said.
He added that this was consistent with the direction companies were taking, with 28% of manufacturers seeing product quality, innovation and higher value-added capabilities as a growth opportunity and 26% targeting specialised or higher-value niche products.
Industry 4.0 adoption stood at 36%, indicating considerable scope to deepen technological capability, he said.
“Budget 2027 should therefore support investments that establish R&D, engineering and advanced manufacturing activities in Malaysia, while linking MNC incentives more systematically to skills development, supplier upgrading and technology transfer to Malaysian companies,” he said.
Lee said FMM’s proposed RM1 billion Manufacturing Research and Innovation Endowment Fund, funded equally by the government and industry, would support this.
He said Malaysia needed a more structured MNC–local supplier development model, including supplier matching, vendor-development programmes, technical assistance, product qualification, certification and incentives for MNCs to develop capable Malaysian suppliers.
He added that SMEs often needed substantial investment before they could meet MNC requirements in areas such as automation, quality systems, cybersecurity, testing and advanced manufacturing.
Lee said the smart manufacturing package would help SMEs make these investments and move into higher-value supply chains.
This was particularly relevant given current supply-chain risks, he said, with 74% of manufacturers affected by geopolitical developments reporting raw material shortages or cost increases, and 72% facing higher freight and logistics costs.
FMM proposed a RM100 million National Supply Chain Resilience Fund.
“The central message is that Budget 2027 should help companies manage immediate cost pressures while continuing to invest in productivity, technology, skills and higher-value manufacturing,” Lee said.
