Kuala Lumpur, October 10, 2025 – The Federation of Malaysian Manufacturing (FMM) views Budget 2026 as a balanced one in its broad macro direction, as it continues the Government’s fiscal consolidation efforts by reducing the targeted deficit from 3.8% in 2025 to 3.5% of GDP in 2026 under the MADANI Government’s fiscal responsibility framework. It is also satisfactory from a revenue standpoint, with Federal revenue projected to increase to RM343.1 billion in 2026 from RM334.1 billion in 2025. This growth will be driven by improved tax compliance through initiatives such as electronic invoicing, self-assessment for stamp duties, and the introduction of digital tax stamps to curb counterfeiting. FMM commends the Government’s goal of achieving a 3% fiscal deficit in the medium term as a sound and responsible target.

The projected GDP growth of 4.0 – 4.5% reflects cautious optimism, acknowledging persistent global economic challenges while maintaining confidence in sustaining the momentum from the first half of 2025’s 4.4% growth. The Government aims to achieve this through stronger domestic demand supported by continued cash assistance, rural development, and initiatives such as Sejati Madani. While the Budget rightly focuses on long-term priorities such as digitalisation, energy transition, and green growth, FMM is concerned that it does not provide sufficient attention to the manufacturing sector, in particular the micro, small and medium enterprises. The manufacturing sector, already burdened by higher operating costs and multiple taxes in 2025, see little in Budget 2026 that alleviates these pressures.

Nevertheless, FMM wishes to commend the Government on several of the initiatives announced in Budget 2026 as follows:

Strategic Support for Exporters and Trade Integrity

FMM applauds the Government for addressing key industry priorities in Budget 2026 by strengthening export promotion, enforcement, and trade integrity. FMM welcomes the timely allocation of RM60 million for the MATRADE Market Development Grant (MDG), which is essential for SMEs seeking to diversify into new markets such as Africa, Latin America, and Central Asia following the disruptive effects of the US reciprocal tariffs.

The FMM Business Conditions Survey 1H2025 shows that many manufacturers are already adjusting strategies to expand beyond traditional markets. To ensure maximum impact, FMM reiterates its proposal to enhance the MDG framework by removing the RM300,000 lifetime ceiling and waiving the RM25,000 collaboration fee for association-led trade missions.

FMM also welcomes the new Customs digital enforcement initiatives, including the introduction of digital tax stamps and the Centralised Screening Complex CCTV system. These measures reflect the Government’s commitment to modernising border control and protecting legitimate businesses from illicit trade. FMM has long advocated for such reforms to safeguard consumers, strengthen product integrity and promote fair competition. 

FMM further calls for the full implementation of the pending provisions that empower Customs to verify and enforce origin declarations. With rising global tariffs and growing risks of transshipment, these measures are critical to prevent misuse of Malaysian Certificates of Origin and protect the country’s trade credibility.

Strengthening High-Value Sectors to Drive Malaysia’s Advanced Manufacturing and Technology Agenda

FMM commends the Government’s strong commitment to strengthening high-technology, high-value sectors, particularly the electrical and electronics (E&E) and semiconductor industries, through targeted funding and investment initiatives under Budget 2026. The allocations under the Strategic Co-Investment Fund, NIMP Industry Development Fund, and Bank Pembangunan Malaysia Berhad (BPMB) financing for high value-added activities such as R&D, along with Khazanah’s and KWAP’s investments and the new SemiconStart incubator by MTDC, will enhance local industry capabilities, strengthen domestic supply chains, and accelerate Malaysia’s transformation into a regional hub for advanced manufacturing and technology.

Reducing Business Costs Through Higher Stamp Duty Exemption Threshold for Employment Contracts

FMM welcomes the Government’s announcement to raise the salary threshold for employment contracts exempted from stamp duty from RM300 to RM3,000 per month effective January 1, 2026, as this measure will help reduce the cost of doing business. This initiative was among FMM’s recommendations in its pre-Budget submission. However, FMM had proposed a higher threshold of RM10,000 to better reflect current wage levels.

Enhancing Talent Development and Facilitating Strategic Investments

FMM acknowledges the Government’s strong focus on strengthening the education and skills ecosystem, particularly through the enhanced promotion of STEM in schools and the increased allocation of RM7.9 billion for TVET. These initiatives are vital to ensuring a steady pipeline of industry-ready talent equipped with the technical and digital skills required by Malaysia’s high-growth, high-value industries. FMM also supports the introduction of a TVET Bill to enhance governance, coordination, and quality assurance across training institutions, fostering stronger collaboration between industry and higher education providers to align training with current and future industrial needs. In addition, FMM notes positively the Investor Pass initiative led by MIDA, which offers a Multiple Entry Visa of up to 12 months and will be proactively extended to multinational and prospective investors in key sectors such as E&E, as well as the continuation of the Residence Pass–Talent Fast Track, which ensures the efficient management of strategic talent inflows by exempting the three-year Employment Pass requirement. 

FMM Welcomes Continued Support for Green Transition and Calls for Balanced Implementation of Carbon Tax

In support of energy transition initiatives, FMM applauds the continuation of the rebate programme for energy efficient appliances with the allocation of RM20 million. The Solar ATAP programme which replaces the Net Energy Programme will encourage participation of more factories in the renewable energy sphere. In addition to that, the Green Technology Financing Scheme 5.0 which will be launched soon will further enhance the financing options for businesses.

FMM also welcomes the support for green industry with the introduction of the 100% Green Asset Investment Tax Allowance for Own Use for companies that use green technology products in their locally manufactured networks that are recognised by the MyHIJAU Mark.

Specifically on carbon tax which is expected to be rolled out in 2026, initially covering iron and steel as well as the energy sectors, FMM reinforces its view for the Emission Trading Scheme, which is the preferred mechanism by the industry to be in place, to drive more cost-effective emission reductions. FMM also hopes that the carbon tax to be introduced for the energy sector by 2026 would not translate into a higher electricity tariff for the industrial sector. The forthcoming Climate Change Bill should also consider the cost implications to industry and adopt a phased implementation approach to minimise compliance costs for affected businesses and its supply chains. FMM continues to reiterate its request to be involved in stakeholder consultations on the carbon tax implementation mechanism.

Strengthening the Halal Industry Ecosystem

FMM welcomes the Government’s commitment to strengthen the national halal industry ecosystem through measures to accelerate certification by JAKIM and enhance compliance promotion by HDC. This initiative is vital to enhance SME competitiveness and expand access to global halal markets.

FMM also applauds the announcement of RM100 million in halal financing by SME Bank and the increase in the Government guarantee under SJPP (Skim Jaminan Pembiayaan Perniagaan) to RM2 billion as positive steps to support the halal industry growth. FMM urges that these financial facilities be widely promoted and made easily accessible to SMEs across the country to ensure broad and inclusive benefits. If implemented effectively and transparently, these measures would further strengthen Malaysia’s position as a resilient, competitive and high-integrity global halal hub.

Advancing Digital Transformation and Artificial Intelligence (AI)

The Government’s proactive investment of RM780 million to ensure 80% 5G coverage by 2026 reflects a strong vision to empower citizens and businesses with affordable, world-class digital infrastructure. This initiative will strengthen Malaysia’s digital ecosystem and the smart manufacturing transformation, unlocking opportunities for innovation and elevate productivity and competitiveness.

FMM also welcomes the Government’s continued focus on Artificial Intelligence (AI) and innovation under the MADANI framework. By strengthening the National Artificial Intelligence Office (NAIO), Malaysia is well-positioned to accelerate digital transformation and drive innovation-led growth. The 50% tax deduction for AI-related training is a positive start but should be expanded to include expenses related to technology adoption, not just training. To speed up AI integration among SMEs, FMM proposes that the deduction rate be increased to 100% or even 200%. A more aggressive fiscal approach is needed to help SMEs overcome initial adoption barriers and achieve AI-driven transformation.

Driving Commercialisation of Local Innovation

FMM fully supports the Government’s Beli Produk Buatan Malaysia initiative as a crucial market-demand driver for local R&D commercialisation, especially given the low 5% success rate of university spin-offs. To accelerate the transition from research to market, FMM urges the Government to provide targeted incentives in the form of tax deductions for manufacturers that adopt, license or scale up locally developed technologies.

FMM has been working closely with MyIPO to bridge this gap by linking manufacturers’ production capacity and market insight with university-generated intellectual property to turn local innovation into commercial success.

What Is Lacking from Budget 2026

Despite several positive measures, key areas that could significantly accelerate the growth and competitiveness of the manufacturing sector remain under-addressed in Budget 2026:

• Insufficient R&D Tax Incentives: SMEs need stronger support to invest in innovation. The Government should introduce enhanced tax allowances for qualifying R&D expenditures, ideally at 200% or 300% deductibility, in line with regional benchmarks such as Singapore’s 400% allowance.
• Limited Support for Manufacturing: To stimulate domestic industrial growth, Budget 2026 should include an enhanced Accelerated Capital Allowance (ACA) for businesses purchasing locally manufactured machinery. Additionally, a Sales Tax exemption on these purchases would further encourage local sourcing and industrial upgrading.
• Lack of Incentives for Local Supply Chain Integration: More targeted incentives are needed to encourage businesses to source from Malaysian suppliers. This would strengthen the local manufacturing ecosystem, reduce import dependency, and promote national industrial resilience.
• Need for Dedicated ESG Support: The creation of a RM2 billion ESG Fund and a one-stop ESG agency would help SMEs meet international sustainability requirements, drive green transformation, and enhance Malaysia’s competitiveness in global supply chains.
• Labour and Skills Development: FMM proposed that 60% of foreign worker levy collections be channelled into a National TVET Apprenticeship Fund (with an initial RM100 million allocation) and the remaining 40% into a National Automation & Industry 4.0 Fund (with an initial RM500 million allocation) to upskill local talent and accelerate industry automation.
• Absence of a National Export Resilience Fund: FMM’s proposal for a dedicated fund to support exporters in diversifying markets and realigning supply chains was not included. Such a fund would provide critical assistance for certification, product redesign, repackaging, logistics and market-entry costs to help exporters navigate global trade realignment and sustain Malaysia’s export momentum.
• Unresolved Sales and Service Tax (SST) Issues: FMM remains concerned that several long-standing SST challenges continue to burden manufacturers, including the lack of exemptions for B2B services (e.g., logistics, warehousing, maintenance), the imposition of sales tax on raw materials used in exempt goods, and the absence of input exemptions for manufacturers with mixed supplies. FMM urges the Government to review and streamline the SST framework to prevent cascading costs, support local production, and enhance industrial competitiveness.
• Non-Reinstatement of the Brand Promotion Grant (BPG): FMM regrets that the Brand Promotion Grant, which has been vital in helping Malaysian manufacturers build and promote local brands abroad, was not reinstated. Reviving this initiative is essential to strengthen export presence, enhance brand recognition and improve competitiveness in global markets amid rising trade challenges.

Click Here to Download Press Statement

Tan Sri Dato’ Soh Thian Lai
President, Federation of Malaysian Manufacturing
FMM Advocates Transparency, Integrity, Accountability and No Corruption

---