Introduction Sustainability has surfaced as the key topic of society today to assess the societys impacts on the natural

ecosystem and resource base. In 1987, the Brundtland Commission issued the Bruntland Report, Our Common Future, which popularised the term sustainable development, where it emphasised on the concept of essential needs of the worlds poor and the idea of limitations imposed by state of technology and social organisation.1 According to ecologist, sustainability denotes preservation of the abundance, purpose and genotypie diversity of individual species in ecological systems, factoring in the human exploitation or intervention.2 On another viewpoint, economists portray sustainability as the maintenance of economic development for improvement of society well-being without compromising the existing resources for future generations.3 However, due to the lack of specificity and ambiguity, the large demand of sustainability as a policy objective resulted in a degree of political consensus. Tax Measures Introduced by Malaysian Government Historically, Malaysia is one of the environmentally rich and abundant in natural resources countries in the world. While the natural environment has several ameliorative characteristics, the fast changing pace of the society may cause their carrying capacities to be exceeded where sustainability issue may be raised.4 The underlying reason of these issues is the society attitudes toward natural ecosystem where it is taken to be a public good and of unlimited resources. As a result, the government has passed some environmental laws and policies where market-based instruments (economic instruments) such as subsidies and taxes, are used to control polluting behaviour.5

Report of the world commission on environment and development: our common future, United Nations Brundtland Commission, New York, 1987. 2 M. Gatto, Sustainability: is it a well defined concept?, Ecological Society of America, Vol. 5, No. 4, 1995, pp.1181-1183. 3 M.A. Toman, The difficulty in defining sustainability, Resources, Winter, 1992, pp. 3-6. 4 D.Z.R.Z, Abidin, Economic approaches in addressing environmental issues, Board of Engineers Malaysia, Buletin Ingenieur, 2004, http://www.bem.org.my/publication/septnov04/CF(Ei)(19-21).pdf, viewed 8 April, 2012. 5 Ibid.

(1) Feed-In Tariff (FiT) FiT was introduced to Malaysia early 2004 by the Sustainable Energy Development Authority Malaysia (SEDA), which then culminated in the passing of two laws associated to sustainable energy in mid 2011 under the Tenth Malaysia Plan.6 FiT system compels Distribution Licensees (DLs) to purchase electricity produced from renewable resources (renewable energy, RE), which are biogas, biomass, small hydropower and solar photovoltaic (PV), from Feed-in Approval Holders (FIAHs).7 The DLs will pay for RE supplied to the electricity grid at the FiT rate for a specific duration as determined by SEDA. FiT rate is the fixed premium rate for each unit of RE where it differs for different renewable resources and installed capacities. Where the criteria for bonus conditions are satisfied by the RE systems, the bonus FiT rate applies. Under the FiT system, the electricity tariffs of consumers will be hiked by 1% to be incorporated into a RE fund as to support the development of RE.8 However, utilitys customers will be exempted from contributing to this RE fund if they consume less than 200 kWh per month. This implies that consumer of heavy electricity usage will be contributing more to the RE fund.9 Additionally, FIAHs will be given government fiscal incentives such as claims on investment tax allowance on qualifying capital expenditure incurred to be set-off against 100% of statutory income for 5 years and waiver of import duty and sales tax on RE installation.10 (2) Incentives for Forest Plantation Project Due to the rising demand for timber and wood-based products, the Malaysia government has taken measures to increase forest plantation to counter the shortfall of natural forests. In 2009, the National Timber Policy was introduced to establish growth direction for timber industry, including implementing forest plantation programmes.11 New tax incentives are provided under the Income Tax (Deduction for investment in an approved forest plantation project) Rules 2009
6 7

Sustainable Energy Development Authority Malaysia, 2012, http://www.seda.gov.my, viewed 12 April 2012 Ibid. 8 StarBiz, Feed-in-tariff for renewable energy to start on Sept 1, TheStar Online, 14 June, 2011, http://biz.thestar.com.my/news/story.asp?file=/2011/6/14/business/8894718&sec=business, viewed 12 April, 2012. 9 Handbook on the Malaysian feed-in tariff for the promotion of renewable energy, Ministry of Energy, Green Technology and Water, Malaysia, 2011. 10 Sustainable Energy Development Authority Malaysia, op. cit. 11 Forests to tree farms, TheStar Online, 18 October, 2011, http://thestar.com.my/lifestyle/story.asp?file=/2011/10/18/lifefocus/9676709&sec=lifefocus, viewed 12 April, 2012.

and the Income Tax (Exemption) (No. 10) Order 2009 to encourage private sector investment in forest plantation.12 Firms undertaking forest plantation projects are given pioneer status with income tax exemption of 100% of the statutory income for 10 years where unabsorbed capital allowances including accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the firm.13 This suggests that the deduction of investment for firms with approved forest plantation project begins at the initial planting period which subsequently lower the income tax paid by the firm. Additionally, plantation companies are allowed for reinvestment allowance claim for the approved plantation project which will be credited through exempt income account for declarations of dividends.14 In turn, the dividend received by the firm will be no taxable. (3) Incentives for Waste Recycling Activities Malaysia government has been spending millions on solid waste management for more than 15 years. Solid waste is one of the three major environmental issues in Malaysia where waste has been increasingly generated over the years due to increasing population and development. Under the Tenth Malaysia Plan, the government has taken several measures to ensure that waste is managed in a sustainable manner. Companies embarking on waste recycling that are high valueadded and use high technology, which includes recycling of agricultural wastes or by-products, recycling of chemicals and production of reconstituted wood-based panel boards or products, are eligible for Pioneer Status or Income Tax Allowance (ITA). 15 The Pioneer Status allows income tax exemption of 70% of statutory income for 5 years.16 Otherwise, companies are given ITA of 60% on qualifying capital expenditure incurred within 5 years period where the allowance can be used to set off against 70% of statutory income.17 Additionally, activities in Perlis, Sabah and

12

Tax incentives for forest planting, TheStar Online, 14 October, 2011, http://biz.thestar.com.my/news/story.asp?file=/2010/10/14/business/7209855, viewed 12 April, 2012. 13 MIDA (Malaysian Investment Development Authority), revised 2012, http://www.mida.gov.my/env3/index.php?page=incentives-for-environmental-management, viewed 12 April, 2012. 14 Tax incentives for forest planting, op.cit. 15 MIDA, op.cit. 16 Tax incentives for companies, KPMG, http://www.kpmg.com.my/kpmg/publications/tax/tm/chapter5.pdf, viewed 13 April, 2012. 17 Ibid.

Sarawak and designated Eastern Corridor of Peninsular Malaysia are eligible for higher exemptions and allowances of 100% under Pioneer Status or ITA.18 (4) Tax Incentives for Building Obtaining Green Building Index (GBI) Certificate Malaysian firms have been making moves in embracing green technology, in tandem with the growing concern of the world in sustaining the natural resources and environment for the future. In May 2009, the government has launched the Green Building Index (GBI) as to widen the usage of green technology.19 GBI is a green rating device that evaluates the efficiency of resources used and the impact of building has on the environment and human health based on certain criteria.20 Subsequently, government has introduced tax incentives to encourage the construction of buildings using green technology. Owners of buildings with GBI certification are eligible for tax exemption equivalent to 100% of the additional capital expenditure incurred to obtain the GBI certificate which can be set-off against 100% of statutory income for each assessment year. However, this incentive is only applied for the first GBI certificate issued for the building.21 Additionally, stamp duty exemption on instrument of transfer of ownership to purchasers of GBI-certificated properties from developers is also allowed for where exemption amount is equivalent to the additional cost in acquiring the GBI certificate.22 These incentive programmes introduced by the government are effective only until 31 December 2014.

18

Globinmed, revised 2011, http://www.globinmed.com/index.php?option=com_content&view=article&id=77:incentives-for-theenvironmental-management&catid=45:malaysian-perspective&Itemid=137, viewed 13 April, 2012. 19 MIDA, op.cit. 20 Green technology: enticements to go Green, New Straits Times, 21 March, 2012, http://www.nst.com.my/nation/extras/green-technology-enticements-to-go-green-1.63378, viewed 14 April, 2012. 21 MIDA, op.cit. 22 Subramaniam, Budget 2010: seeing Green, TheStar Online, 9 November, 2009, http://biz.thestar.com.my/news/story.asp?file=/2009/11/9/business/5045481&sec=business, viewed 14 April, 2012.

(5) Tax exemption on Income from Trading of Certified Emission Reductions (CERs) Certificate Certified Emission Reductions (CERs) are emission units issued pursuant to the Clean Development Mechanism (CDM) of the Kyoto Protocol.23 Emissions trading allow countries with excess emission units (unused permitted emissions) to sell the excess capacity to countries that are over their targets.24 Under the Income Tax (Exemption) (No. 8) Order 2008, Malaysia Government exempted Malaysian-incorporated company resident in Malaysia from income tax payment in respect of income received from sale of CERs.25 This Order has effect only from year of assessment 2008 until year of assessment 2010. Following the 2011 Budget announcement, Income Tax (Exemption) (No. 2) Order 2010 has been gazetted to exempt company resident in Malaysia from tax payment of income received from sale of CERs, effective from year of assessment 2011 to year of assessment 2012.26 Effectiveness of Tax Measures Undertaken and Their Improvements (1) Feed-In Tariff (FiT) The implementation of FiT mechanism under the enactment of Renewable Energy Act aims at enhancing the utilisation of indigenous RE resources to contribute towards a sustainable socioeconomic development.
27

FiT system would ensure that RE becomes a viable and good

long-term investment for companies, industries and individuals by warranting access to the grid and fixing a favourable price per unit of RE. As a result of RE fund mechanism, which is deemed to be an effective tool for boosting RE, consumers are more encouraged to adopt energy efficiency measures in order to reduce their electricity consumptions. This relates to the polluters pay concept whereby the ones who pollute the most, pays the most to the RE fund.28
23

The World Bank, revised 2012, http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/ENVIRONMENT/EXTCARBONFINANCE/0,,conten tMDK:21849022~menuPK:5232839~pagePK:64168445~piPK:64168309~theSitePK:4125853,00.html, viewed 14 April, 2012. 24 United Nations Framework Convention on Climate Change (UNFCC), revised 2012, http://unfccc.int/kyoto_protocol/mechanisms/emissions_trading/items/2731.php, viewed 14 April, 2012. 25 Raja, Darryl & Loh, Corporate & commercial law updates, No. 5, 2008, http://www.rajadarrylloh.com/images/pdf/Corp%20&%20Commercial%20Law%20Update%20-%20Vol%2052008.pdf, viewed 14 April, 2012. 26 Deloitte, revised 2011, http://www.deloitte.com/assets/DcomMalaysia/Local%20Assets/Documents/Tax/my_Tax_EspressoJan11_160211.pdf, viewed 14 April, 2012. 27 Handbook on the Malaysian feed-in tariff for the promotion of renewable energy, op. cit. 28 Ibid.

Furthermore, the fiscal incentives provided by the government encourage RE installations where the FIAHs or DLs will be liable to a penalty if failed to comply, attempted to contravene or obstruct the RE Law. Consequently, FiT mechanism has greatly impacted on the countrys environment where the carbon emission and pollutions have been reduced. Moreover, dependency on fossil fuels has also been reduced as RE has been increasingly used by society. However, the FiT system has only been implemented recently in Malaysia. Due to the rapid development of RE market, the Malaysia government should analyse tariff payment guaranteed in neighbouring countries with similar resource potential such as Thailand and China to re-assess the tariff levels frequently as to avoid windfall profits. Contributions of consumers to RE fund should also be revised as to increase the awareness of society of advantageous of RE. Taking Germany as a lead example, greater reliance on RE will advance the country into green technology. 29 (2) Incentives for Forest Plantation Project The new tax incentives introduced by the government were well received by the plantation firms as timber is one of the major contributors to Malaysias economy. These measures boosted the annual export revenue as firms were more encouraged to invest in the forest plantation project. Despite several tax incentives available, investments in forest plantation are being manifested only slowly. The long gestation period for trees to mature for commercial harvesting resulted in huge initial capital outlay and high recurrent maintenance costs which discouraged firms from investing. The land availability is also an ultimate constraint to forest plantation development as there is relatively few uncommitted state land.30 As an alternative to the present incentives, firms should be allowed to deduct the development expenditure incurred on forestry activity, including forest management and forest plantations, against other sources of income. Consequently, an immediate benefit would result in reducing tax payable by the firm on his other sources of income. Furthermore, tree plantations are subjected to high degree of risks associated with crop disease and adverse weather conditions, which may hamper the development the forest

29

Leong & Choong, Malaysia adopts German solar technology model, TheStar Online, 3 December, 2011, http://biz.thestar.com.my/news/story.asp?file=/2011/12/3/business/10017184&sec=business, viewed 12 April, 2012. 30 R. Sulaiman, Forest development on idle land in the Sandakan Division, Sabah, Malaysia a feasibility study, Dissertation for M.Sc programme, Silsoe College, 1990.

plantation.31 Additional benefits should be granted to the firms to compensate for the additional capital invested to protect the forest plantation. Moreover, the government should increase the 10-year period of income tax exemption as high-value timber species require longer rotation. (3) Incentives for Waste Recycling Activities The government efforts in providing incentives for waste recycling activities have enhanced the efficiency and effectiveness of solid waste management. Besides increasing awareness on sustainable development among society, better solid waste management helps to resolve dual crisis of non-renewable resources depletion and environmental degradation.32 Subsequently, these incentives also contribute to the reduction of greenhouse gases (GHGs) emission.33 However, the waste recycling activities are still at an infant stage whereby the Malaysia government is seeking to integrate the existing solid waste management. To encourage the participation of household in recycling activities, government should introduce recycling subsidies. This suggests that incentives are given to household to recover waste and reduce amount being disposed. A value-added tax should be also levied on goods which is included in their price. The tax component would then be returned to the local authority for waste management. Moreover, penalties should be charged against those companies that do not practice a good waste management. This would discourage the firms from disposing waste in an unsustainable manner. (4) Tax Incentives for Building Obtaining Green Building Index (GBI) Certificate The determination to sustain the environment involves monetary costs. Government incentives to alleviate such cost from the society will thus bring economic sense to environmental goals. With implementation of this tax exemption, the running cost of building will be reduced. This implies that the developers and building owners will have a double benefit of not only saving long-term operational expenditure but also upfront tax savings.34 Moreover, developers and building owners will be more encouraged to incorporate the green technology into their buildings to
31 32

Tax incentives for forest planting, op.cit. L.A. Manaf, M.A.A. Samah & N.I.M. Zukki, Municipal solid waste management in Malaysia: practices and challenges, Elsevier, Vol. 29, No. 11, 2009, pp. 2902-2906. 33 Tenth Malaysia plan: building an environment that enhances quality of life, Economic Planning Unit, Malaysia. 2010. 34 Subramaniam, op. cit.

obtain GBI certificate as to take advantage of the tax incentives whereas buyers of their products will also acquire benefit from the stamp duty exemption.35 Nevertheless, it is difficult to quantify the actual additional expenditure as it could be overstated for the purpose of higher-income tax exemption. Qualified architects of quantity surveyors should be employed to project out the actual additional capital cost. As the incentives are only applicable until end of 2014, the government should introduce longer-term policies to persevere the green momentum going. (5) Tax exemption on Income from Trading of Certified Emission Reductions (CER) Certificate Through participation in the CDM, Malaysia would benefit from investments in the GHG emission reduction projects which will contribute towards countrys overall improvement of the environment besides additional financial flows.36 Companies will be more encouraged to reduce their gas emission as any excess permitted emission units are allowed to be traded to other countries where its value is monetised and is tax exempted. Additionally, the sustainable development objectives will also be achieved whereby the benefits attained include reductions in air and water pollution through reduction in use of fossil fuel and improved water availability, reduced soil erosion and protected biodiversity.37 However, due to the rising GHG emissions, demand for CERs will increase in the future. Government should have a longer-term viewpoint to ensure that the country is able to cope with the rising demand. Moreover, Malaysian tax laws and policies will need to be reviewed from a macro level rather than a need to do basis in order to have a more comprehensive environmental policy.

35 36

Ibid. GreenTech Malaysia, revised 2010, http://cdm.greentechmalaysia.my/cdm-malaysia/national-perspective.aspx, viewed 14 April, 2012. 37 Ibid.

Conclusion Society today are increasingly concerned about sustainable development where meeting the needs of the future is highly dependent on the balance of social, economic and environmental objectives in making decisions. The sustainable development policies implemented should lean toward longer-term and broad-spectrum interventions, touching upon the driving forces functioning in human society where health and environment concerns are an essential part within the framework of sustainable development.38 As a result, Malaysia government has been taking different approaches in tackling global warming as there is no one-size-fits-all solution. As sustainability is a relatively new matter to Malaysia, incentives and taxes are perhaps the most effective manner to allure society in embracing green initiative. In 2010, the New Economic Model was introduced which envisions Malaysia as a green technology leader through the commercialisation of the countrys biodiversity into high-value products and services and to reduced the GHG emissions to 40% of 2005 levels by 2020.39

(2425 words)

38

C.R. Corvalan, T. Kjellstrom & K.R. Smith, Health, environment and sustainable development: identifying links and indicators to promote action, Epidemiology Resources Inc., Vol. 10, No. 5, 1999, pp. 656-660. 39 Malaysian Accountancy Research and Education Foundation (MAREF), Stress at work amongst auditors: is there a light at the end of the tunnel?, Malaysian Accountancy Research and Education Foundation (MAREF), MAREF Review, Vol. 1, No. 2, 2011, http://www.maref.org.my/pdf/MAREF-Review-Vol-1-Issue-2-20102011.pdf, viewed 15 April, 2012.

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