Malaysia's shadow economy 21% of GDP, Guan Eng says


  • Economy
  • Monday, 13 Jan 2020

Finance Minister Lim Guan Eng said the loss in tax revenue from the hidden economy could threaten the stabillity of the nation’s tax ecosystem particularly in the aspects of fair taxation and voluntary tax compliance.

GEORGE TOWN: Malaysia’s shadow economy accounts for 21% of gross domestic product (GDP) and amounts to an estimated RM300bil, says Finance Minister Lim Guan Eng.

He said the strong underground economy, which he attributed to illegal activities that are difficult to track down, should be tackled effectively.

"If not handled well, it will not only result in a big loss of revenue to the country but also reflect the inefficiency of the government agencies and implementing machinery in handling issues related to the shadow economy, ” he said after opening the Inland Revenue Board of Malaysia (LHDN) annual conference of directors here on Monday.

He said the loss in tax revenue from the hidden economy could threaten the stabillity of the nation’s tax ecosystem particularly in the aspects of fair taxation and voluntary tax compliance.

Lim urged LHDN to constantly enhance its collaborative network and information sharing with other government agencies in the effort to curtail the leakage from the underground economy.

"I am ready to give support and assistance, should there be a problem in getting the necessary cooperation from other government agencies in the administration machinery in the effort to achieve the goal, ” he said.

Meanwhile, Lim, who is also Bagan MP, said the government has set the direct tax collection target for 2020 at RM154.676 billion, up from RM147 bilion in 2019.

He said although Malaysia’s economy continues to grow every year, the tax collection as a percentage of GDP has not been keeping pace.

"For instance, based on World Bank figures for 2017, although the size of Malaysia’s economy was RM1.353 trillion, the tax-to-GDP ratio was only 13.1 per cent.

"This put Malaysia below comparable countries such as Vietnam, Chile, Poland and South Korea, for which the ratio was 19 per cent, 17.4 per cent, 16.8 per cent and 15.4 per cent respectively," he said.

He attributed Malaysia’s relatively poor performance to aggressive incentive policies, lowering of tax rates each year, revenue leakage due to diversion, tax evasion, and a still low tax compliance rate.

To overcome this problem, he said, the government will constantly formulate fiscal policies that can safeguard the interests of all quarters, including fine-tuning policies related to investment incentives.

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