Tax reform is the process of improving the way taxes are collected or managed by the government. This week, we examine the tax reforms undertaken in several countries, including Malaysia.
TAX reform is the process of improving the way taxes are collected or managed by the Government. These can have different aims. While certain reforms seek to lower the level of tax for all or seek to make the tax system somewhat progressive, others may try to make the tax system more understandable, or more accountable. A tax reform may involve changes in tax rates, adjustments to thresholds, abolishment of existing taxes or creation of new tax legislations.
According to McDonald and Kippen (2005), a long-term agenda for tax reforms in Australia was propelled by four guiding principles: administrative efficiency, labour market efficiency, equal distribution of tax burden and adequate revenue raised to finance government’s planned expenditure. The authors observed that these principles build the foundation in establishing a decent tax system.
In Britain, the Finance Act 1965 introduced the capital gains tax, which taxes the proceeds from asset disposals at the rate of 30%. In 1973, a partial imputation system was implemented in Britain which introduced the advance corporation tax (ACT) for companies making distributions. A significant reform in the US was the Tax Reform Act 1986, whereby many tax shelters were eliminated, corporate tax rates were reduced and special treatment for capital gains was also abolished.
In Singapore, one major tax reform undertaken by the Singapore government was the introduction of the Goods and Service Tax (GST) in 1994. GST is a tax on domestic consumption. The Inland Revenue Service (IRS) of Singapore has used deductions, tax credit, and exemptions to promote a variety of social or other objectives in their tax reform. For example, the IRS provides generous deductions and tax credits for younger, academically qualified women, who bear children. Furthermore, the corporate tax rate in Singapore would be lowered from 20% to 18% from year of assessment 2008.
As a result of the 1997 Asian financial crisis, South Korea introduced new tax laws to stimulate the economy. During the crisis, numerous firms became indebted; hence, the government reduced or exempted taxes that were needed for corporate restructuring, which resulted in lowering of their debts. Several companies restructured, the whole economy improved and South Korea is now one of Asia’s most developed Asian countries alongside Japan.
An example of tax reform undertaken by the Swiss tax jurisdiction in 1999 is the “ecological tax reform” whereby tax is levied on revenue in proportion to the consumption or emissionof polluting substances.
There are two recognised methods in carrying out tax reforms: the incremental approach and the tax package approach. The former comprises a sequence of small tax changes while the latter is a major change that could revolutionise a tax system. Generally, the Malaysian Government has adopted the incremental approach as such a move does not involve drastic changes that may “upset” taxpayers. The incremental approach is naturally preferred as changes are made with less resistance from the tax-paying public. Under this approach, a series of small measures are undertaken and directed towards a predetermined goal. The reforms are often introduced through the annual budgets or by way of subsidiary legislations.
Since 2000, the Government has embarked on significant tax reforms to promote efficiency, growth and stability. The series of significant tax reforms include the introduction of current year basis of assessment in the year 2000; the implementation of the self assessment system for companies in 2001, and other taxpayers (sole-proprietor businesses, partnerships and salaried individuals etc) from 2004; the launch of e-filing of returns for individual taxpayers in 2006; and exemption of Real Property Gains Tax (RPGT) with effect from April 1, 2007. Another development is the issuance of 37 Public Rulings so far by the director-general of the Inland Revenue Board.
One significant reform that has yet to materialise is the planned introduction of the GST. In 2005, a commitment was made to introduce GST but its implementation was postponed. The introduction of GST would provide an opportunity for the Government to lower corporate and individual tax rates, thereby encouraging greater inbound investments. If implemented, the GST would be a tax that is far better than the outdated sales and services tax regime.
The writer is a Professor and Chair of Malaysian Business at the School of Business, Monash University, Sunway Campus. He is also a member of the Taxation Law and Policy Research Institute, Monash University, Melbourne.
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