Budget 2027 and Malaysian Manufacturers: The Wage Bill Matters More Than the Tax Cut

Executive Summary

For most manufacturers, the Budget 2027 measure that will actually move costs is the minimum wage rising from RM1,700 to RM2,000 in June 2027 – unless the business is an MSME with annual sales below RM50 million, in which case it is exempt, at least initially. Manufacturers above that line should budget now for the increase and for the knock-on pressure on workers already paid just above the new floor. The tax measures help, but less than the headlines suggest: the one-point MSME tax cut excludes many capital-intensive and foreign-owned manufacturers. None of this is law yet, and the detail will only be settled through legislation and gazetted rules – but two things need action rather than observation: paying every worker through a bank account, and planning machinery purchases around the new sales tax reclaim and the capital allowances now extended to 2030.

The Budget is a statement of intent, not yet law

A Budget speech announces policy; it does not change the law on its own. The tax measures must be passed by Parliament through the Finance Bill. The minimum wage increase must be given effect through a new Minimum Wages Order published in the Gazette. Much of the practical detail – who qualifies, from when, and how to claim – will only come later, in subsidiary legislation and in guidelines from the Inland Revenue Board, the Royal Malaysian Customs Department and the Ministry of Human Resources. Some measures may change along the way, and how they will work in practice remains to be seen.

However, that is not a reason to wait. The direction is clear, and the measures with the biggest cost impact – higher wages and the rules on how wages are paid – take months to prepare for. Manufacturers that start now will have options; those that wait for the Gazette will be reacting to a deadline.

The RM2,000 minimum wage is the main cost item – the first question is which side of RM50 million a business sits on

From June 2027, the national minimum wage rises from RM1,700 to RM2,000 a month – a 17.6% increase at the floor. The Government estimates it will affect more than four million workers. It applies to foreign workers as well as Malaysians, so labour-intensive operations will feel it most.

Micro, small and medium enterprises (MSMEs) with annual sales below RM50 million are exempt. The Budget speech describes this as giving smaller businesses room to adjust their business models. It does not say how long the exemption lasts, how “annual sales” will be measured, or how group companies will be treated. FMM and the Malaysian Employers Federation have both asked for these guidelines. Until they are published, we would not restructure a business just to fall below the threshold – the treatment of related companies is exactly what is still missing.

The real cost is also more than RM300 per worker. Even then taking that alone, for a plant with 300 production workers on today’s RM1,700 minimum, the increase alone adds about RM1.08 million a year (300 × RM300 × 12), before any of the effects below. Overtime under the Employment Act 1955 is calculated from the worker’s ordinary rate of pay, so a higher basic wage raises overtime costs too. Statutory contributions calculated on wages rise with it. And workers currently earning RM2,000 to RM2,300 will expect their gap above the new entry wage to be kept.

For longer-term planning, the more important signal may be the announcement of a RM2,500 minimum wage for semi-skilled workers and graduates. No date was given, and the Government describes it as the first step in a wider reform of workers’ incomes. But it shows where policy is heading: pay floors linked to skill levels, not a single national figure. Manufacturers that rely heavily on semi-skilled operators should start identifying who is likely to fall into that category.

Paying wages in cash will cost larger employers their tax deduction

For companies that are not MSMEs, wages will only be tax-deductible if they are paid through bank accounts or cashless payment instruments as permitted under the Employment Act 1955. The stated aim is to curb the employment of undocumented foreign workers. Other business expenses are not affected.

The effect is simple. For a company paying tax at 24%, every ringgit of wages paid in cash loses 24 sen of tax relief. The measure is proposed to take effect from year of assessment 2028, subject to the final implementing legislation. Most established manufacturers already pay through banks. The risk sits at the edges: casual or daily-rated workers, overtime or allowances paid in cash, and arrangements where wages pass through an agent or contractor. Those are the arrangements to check now.

The measure also has to be read against the labour market. Manufacturing is the largest employer of foreign workers in Malaysia – around 622,000 of them as at late 2025 – and employers in the sector have repeatedly raised concerns about shortages. The Government has kept intake tight, with a freeze on new quota approvals that was still in place in late 2025, and has lowered the foreign worker ceiling to 13% of the workforce this year, with a target of 10% by 2030.

Employer groups have linked tight legal supply to the use of undocumented labour. In December 2025, the president of the Malaysian Employers Federation described “the imbalance between employers’ labour needs and the cumbersome official hiring system” as the main cause of illegal foreign employment. A 2024 World Bank report cites estimates that irregular workers make up between 40% and 44% of all foreign workers in Malaysia.

Closing off the cash-wage route without a matching improvement in legal supply is therefore likely to disrupt the workforce, at least in the short term, for businesses and labour suppliers that have relied on undocumented workers to fill gaps. The Government’s position is that moving all quota applications onto a single online system in July 2026 leaves employers “no excuse” to hire undocumented workers. Whether legal supply actually keeps pace with demand remains to be seen. Until it does, manufacturers should plan for the possibility that some roles become harder to fill, not just more expensive.

Budget 2027 tackles labour through wages – and that pushes manufacturers towards automation

Taken together, the labour measures in Budget 2027 work through pay: a higher wage floor, a proposed higher floor for semi-skilled workers and graduates, and a tax penalty for wages that cannot be traced. The speech says little about expanding access to workers. The likely effect is to make low-skilled labour more expensive relative to machinery, and to strengthen the business case for automation.

That is consistent with what policymakers have been saying. In August, Deputy Investment, Trade and Industry Minister Sim Tze Tzin told businesses to prepare for a tighter labour market by automating, arguing that reliance on cheaper foreign labour discourages investment in technology. In September, Investment, Trade and Industry Minister Datuk Seri Johari Abdul Ghani urged businesses of all sizes, including MSMEs, to bring automation into their operations “as soon as possible” to reduce reliance on foreign labour. After the Budget, KPMG’s Dr Veerinderjeet Singh argued that minimum wage increases should come with productivity incentives so that businesses invest in machinery rather than simply absorb higher labour costs, and CIMB Securities suggested that productivity gains and automation can help labour-intensive manufacturers offset the increase.

Two caveats. First, the evidence that cheap labour holds back automation in Malaysia specifically is thinner than the policy rhetoric suggests: the 2024 World Bank report notes that the question has not been studied in the Malaysian context and that the international evidence is mixed. Second, the main barrier to automation for smaller firms is upfront cost, and the Budget offers relatively little direct help with that (see below). Even so, in our view the direction of travel is clear. Manufacturers whose business model depends on a large pool of low-wage labour should treat Budget 2027 as a signal to review that model, not as a one-off cost increase.

The tax cut is welcome, but many manufacturers will not qualify

MSME tax rates drop by one percentage point: 14% on the first RM150,000 of chargeable income and 16% on income between RM150,001 and RM600,000. That saves a qualifying company up to RM6,000 a year. The speech did not announce any change to the standard 24% rate for other companies.

The catch is who counts as an MSME for tax purposes. The test is different from the minimum wage exemption. Broadly, a company needs paid-up capital of RM2.5 million or less, gross business income of RM50 million or less, and must meet ownership conditions, including a cap on foreign shareholding. FMM has already pointed out that the paid-up capital limit shuts out capital-intensive manufacturers. So a manufacturer can be exempt from the wage increase and still pay tax at the full rate. Check both tests separately.

Buying machinery locally will get cheaper – once the rules are out

Today, when a manufacturer buys machinery, spare parts or equipment from a local trader or distributor, the sales tax built into the price is generally a cost it cannot recover. Budget 2027 proposes allowing manufacturers to reclaim it. The same applies to locally bought raw materials for pharmaceuticals, animal feed, fertilisers and pesticides.

For many FMM members this could be worth more than the tax cut, because it removes a cost penalty for buying through local distributors rather than importing directly. The facility is proposed to take effect on 1 January 2027, although the detailed claim process and conditions remain to be clarified. In the meantime, manufacturers should keep supplier invoices that show sales tax clearly, and ask distributors how they intend to document it.

Capital allowances now run to 2030 – but do not count on the Reinvestment Allowance

Accelerated Capital Allowances for locally produced plant and machinery, and for ICT hardware and software, are extended to 31 December 2030. The Green Investment Tax Allowance – up to 100% for green technology projects and green assets bought for a company’s own use, such as integrated solar systems incorporating battery or other energy storage – is extended to the same date. That gives manufacturers a four-year window to plan automation and energy projects with reasonable tax certainty.

Small purchases also get simpler. Each low-value asset that can be written off in full may now cost up to RM3,000 (up from RM2,000), and the annual cap for non-MSMEs rises to RM30,000 (up from RM20,000).

The warning sign is the Reinvestment Allowance. It is a mainstay for established manufacturers expanding existing plants, and the Government says it is reviewing both who qualifies and how the incentive is given. No details were announced. If an expansion only makes sense with the Reinvestment Allowance on today’s terms, test it against less generous terms before committing.

Manufacturers hoping for direct automation grants will be disappointed. FMM’s proposed RM1.5 billion Smart Manufacturing Support Package was not adopted. The main automation allocation is RM30 million to MDEC to help around 4,000 MSMEs adopt AI and automation.

More financing is on the table, mostly for mid-sized firms and exporters

Government-backed financing and guarantees rise to RM57 billion in 2027. The SJPP guarantee scheme now covers mid-tier companies, with the guarantee limit raised to RM50 million. BPMB has RM1 billion for MSMEs entering export markets, and a RM2.1 billion NIMP fund targets mid-tier companies in E&E, digital technology, aerospace and medical devices. FMM’s point stands: these facilities only help if the criteria are clear and approvals are quick.

What manufacturers should do now

• Confirm whether annual sales fall below RM50 million – and wait for the guidelines before restructuring around the threshold.

• For businesses above the line, model the wage bill from June 2027, including overtime, statutory contributions and pay differentials for workers just above RM2,000.

• Review employment contracts and pay structures, particularly where allowances, overtime or bonuses are tied to basic pay.

• Move every wage payment onto bank transfer, including casual, daily-rated and agency-paid workers.

• Map which roles depend on foreign or casual labour, and test how operations would cope if some of those workers could no longer be engaged.

• Check whether the company actually meets the MSME tax test, especially if it has a foreign shareholder or paid-up capital above RM2.5 million.

• Keep invoices for locally bought machinery and spare parts, and watch for the sales tax reclaim guidelines.

• Build the business case for automating the most labour-intensive processes now, plan automation and green capital spending within the 2030 window, and do not commit to an expansion that only works under today’s Reinvestment Allowance.

This article is based on the Budget 2027 speech delivered on 9 October 2026 and public commentary available as at 16 October 2026. Most measures take effect only through the Finance Bill, subsidiary legislation and agency guidelines, and the final details may differ. It is general information, not legal or tax advice.

To discuss how these changes affect a particular business, please get in touch with the author.

‍Raja Nadhil Aqran is the Managing Partner of Aqran & Partners in Kuala Lumpur. His practice centres on complex commercial disputes, including cross-border fraud, asset recovery and international arbitration, alongside corporate advisory, ESG and compliance work across Malaysia and the wider region. He advises manufacturing and industrial businesses on how changes in wage and tax policy affect their workforce, contracts and compliance obligations.

Hafiiz Rashid is an Associate at Aqran & Partners, focusing on non-contentious matters, including corporate restructurings (share and asset deals) and employment. He works with employers on the practical effect of wage and tax policy changes – reviewing pay structures and employment contracts, and assessing group structures against statutory thresholds such as the MSME tests.