DO TAX INCENTIVES MAKE A DIFFERENCE? A CASE OF MALAYSIAN MANUFACTURING FIRMS

Abstract

Tax incentives are an important part of Malaysia's investment promotion policies, and they are used to stimulate economic development. While tax incentives have helped Malaysia's manufacturing sector grow since the 1980s, the cost of these incentives has risen, making it even more important to weigh the benefits. As a result, the goal of this study is to determine if different types of incentives had varied effects on the performance of the incentivized company and if the government benefited in terms of income generated from employment through monthly tax deductions. This study examines all companies that claimed Reinvestment Allowance (RA), Investment Tax Allowance (ITA), and Tax Holiday (TH) between 2017 and 2019 using secondary tax panel data from the Inland Revenue Board of Malaysia (IRBM). According to the findings, RA is the most claimable incentive among manufacturing companies. This study also discovered that the type of incentives claimed has a statistically significant impact on firm performance and tax revenue collection from employment. Although there was a significant difference in profitability and tax revenue collection between companies that claimed ITA and those that claimed RA and TH, there was no difference in profitability or tax revenue collection between companies that claimed ITA and those that claimed RA and TH. As a result, RA and TH incentives made a difference in company and government revenue, which will be accepted as policy tools to achieve policy goals, such as assisting a firm's growth or creating better spillover to the country. Future research should consider using both financial and non-financial variables in their studies, as well as how this affects economic indicators such as foreign direct investment (FDI) and gross domestic product (GDP) growth.