FEW would deny that the recent increases in petrol price, toll rates and utility charges have made the cost of living more expensive. From 2005 to June 2007, the consumer price index (CPI) increased by 5.3%, with the largest increases seen in the cost of transport, beverages and tobacco, pharmaceuticals, and restaurants and hotels. The CPI provides an indication of the cost of living based on a defined basket of goods and services.
Although the CPI increases appear benign, in reality, each strata of society would consume different goods and services, and it is probably true to say that as a group, the middle-income earners, especially those living in urban areas, are most challenged in terms of rising cost of living.
These are likely to be families with two or three children, probably earning RM6,000 to RM8,000 a month, own a car and are trying hard to invest or save. They enjoy dining out with the family once in a while, and perhaps look forward to an occasional holiday.
Their basket of goods and services is therefore more likely to include items that have increased beyond the CPI, thus adversely affecting their purchasing power more than other groups.
At the same time, this income group must have received the least attention in terms of tax breaks and relief, both direct and indirect, over the years, on the assumption that they are capable of absorbing the mounting prices.
The direct tax relief provided in the past few years have given this group only very mild benefit, for example, the child relief (for dependents below 18 years) was increased from RM800 to RM1,000 per child from year of assessment (YA) 2004.
However, the effective cash savings from this additional relief of RM200 is quite small. The same could be said for the purchase of books and computers and other miniscule changes.
This class of taxpayers is likely to comprise persons in their most productive years, are in demand and can be hugely mobile in a globalised world. Going forward, it is worthwhile exploring whether there are merits in giving them incentives, as they are the least likely beneficiaries of fiscal reforms. Yet, a tax cut may have a positive impact on attracting and retaining talent.
Furthermore, from a macroeconomic perspective, it is believed that spending stimulates growth. Therefore, an increase in the disposable income of individuals will fuel consumer-led demand, which ultimately generates economic activity.
Lower taxes can further increase Malaysia’s attractiveness to expatriates and other skilled workers, and at the same time encourage the retention of Malaysian workers onshore. In turn, this promotes the growth of the service sector and establishment of Malaysia as a hub for regional services such as operational headquarters.
Against this backdrop, the time may therefore be ripe for personal tax rates to be reduced both to provide a measure of relief against overall increase in costs and to maintain the spending ability of these individuals.
The last decrease in personal tax rates was five years ago, in YA 2002. Historically, the top marginal tax rate has kept up with the headline corporate tax rate, hence with the corporate tax cut to 27% in YA2007 and expected to be cut further to 26% for YA2008, many are expecting a reduction in the top marginal tax rate from 28% to 26%.
An overall reduction in personal tax rates will also help close the gap with the tax rates in countries such as Singapore and Hong Kong, which are attractive destinations for Malaysian and other workers.
To illustrate, a Malaysian family earning a gross income of RM70,000, RM80,000, RM100,000 and RM120,000, is compared with a Singaporean family with gross income of S$70,000, S$80,000, S$100,000 and S$120,000 (we assume that families at these income levels represent the middle to upper middle class in the respective countries).
From the tax perspective, it is clear that the Singaporean family is better off overall since their effective tax rate is half of that borne by the Malaysian family (see Table 1).
At the lowest level of taxes, with the rebate system for individuals with chargeable income of less than RM35,000, few individuals are likely to pay any income tax if their income is below RM30,000 a year. After this, the tax rate progresses rapidly with each small band of increase in chargeable income. This is where it really hurts.
To benefit the middle-income group, there should be a “broad-banding” of income so that they are not taxed at the higher rate too rapidly. To this end, it would also be appropriate to reduce the number of “tax bands” from nine to perhaps seven.
Particular focus should be provided to the taxation of chargeable income of between RM30,000 and RM70,000 per annum, as these income levels typically represent the lower middle-income family (covering scenario with two income earners or a single income earner). At present the tax rates for this group go up with every RM15,000 to RM20,000 increase.
In this regard, the existing bands could be broadened and spread out more evenly (see Table 2), to allow for alignment of the top marginal rate with the corporate rate for YA2008.
Apart from band adjustments, there are many other tax relief that could be reviewed to address the needs of this group of taxpayers, many of which have been proposed by professional bodies but central to this is whether the Government can afford to give these tax breaks?
The answer is obviously dependent on factors that cannot be fully covered here. However, let’s consider the following statistics:
·Total estimated collection from direct taxes was RM62.6bil in 2006 and RM70.1bil in 2007.
·Of this, the estimated personal income tax collected was RM9.6bil in 2006 and RM10.5bil in 2007.
Personal income taxes, therefore, represent a relatively small proportion of total direct taxes, i.e. about 15%. In contrast, it is estimated that nine in every 10 tax returns filed are by individual taxpayers. Therefore, an estimated 90% of tax returns contribute to 15% of the tax revenue collected. Hence, there are merits in reducing the number of individual tax files whereby the revenue collected does not justify the processing cost.
There is suggestion that statistically, a 1% across-the-board cut in personal tax would result in a reduction of government revenue by RM700mil. This suggests that personal tax cuts of between 2% and 3% across the board and additional tax relief would cost just about RM2bil. This loss should then be matched with the increasing efficiency and effectiveness of tax collection from the corporate sector where resources can be better deployed.
Making taxation on benefits-in-kind more practical
Related to personal taxation and the matching revenue with the costs of collection is the taxation of benefits-in-kind or perquisites enjoyed as part of employment. Common examples are the taxability of car park space and mobile phones provided by employers.
From the employee’s perspective, tax on such items may border on unfairness - after all, these “benefits” are necessary and closely connected to the effective performance of his duties, yet he has to pay tax (cash) on a non-monetary benefit.
From the employer’s perspective, yet another issue arises. The employer is obliged to identify, record and report the value of these benefits for the employees’ tax purposes, and to deduct and remit the correct amount of scheduler tax deductions. All this adds to an employer’s administrative burden, and in many cases, it is disproportionate to the tax generated from these small value items.
One way to deal with this is to introduce formal Extra Statutory Concessions (ESC) to exempt these items from tax. ESCs are practised in Britain as it is recognised that whilst certain items can be technically taxable, it is more practical to simply allow the item to be exempted from tax purely as an administrative concession.
The ESC approach of addressing the exemption also provides the necessary flexibility as they can be amended or removed with ease, should it be desirable to do so in the future.