The appalling state of the tax system


  • Taxation
  • Saturday, 12 Oct 2019

Prime Minister Tun Dr Mahathir Mohamad(filepic) had said in Parliament that the government would not bring back the GST, as it expects to collect more from the SST over the years. The prime minister is not entirely wrong.

The report on the federal government’s fiscal outlook and revenue estimates showed some appalling statistics on the true state of taxes.

Out of the 1.25 million companies, some 62.4% or 780,742 are registered with the Inland Revenue Board (IRB), of which only a paltry 61,000 or 7.8% were subject to taxes as of end-2017. The ratio is better for the personal income tax.

Out of the 15 million workforce, only 16.5% or less than 2.5 million people are subjected to taxes.

Malaysians have all along been aware that a vast majority of individuals and companies do not pay taxes. However, the numbers are growing according to a study going back to the year 2000. The trend is not healthy for the country that is still reliant on oil money to grease the economy.

Malaysia is placed at the lower end of the bracket in the list of countries ranked based on total tax revenue relative to the gross domestic product (GDP). Malaysia’s tax revenue is 13.8% of the GDP. In comparison, South Korea’s tax revenue as a percentage of the GDP is 17.4%, while the ratio in Singapore and Thailand is 14.2%.

Regionally, the country with the lowest ratio of tax collected compared to the GDP is Indonesia, where the tax revenue is only 3.4% of the country’s total output of the domestic economy.

The reason why the majority of Malaysian companies or individuals do not pay taxes is because the current set of rules allows for a generous set of incentives and relief that allows companies to minimise or evade their tax bill.

The rules also do not capture the informal economy, which leads to leakages within the system.

In Indonesia, the informal economy is traditionally large which explains why the tax base is low. The informal economy is mainly linked to the agriculture sector and incomes are not stable, which explains the high level of poverty and unemployment in that country.

The emergence of technology-based companies such as Go-Jek, has improved the livelihood of millions of people. There are more than a million riders and Go-Jek’s money transfer services attract 20 million users per month. However, the service providers are not taxed.

As for Malaysia, the informal economy is just starting to grow. Plugging the leakage at this juncture is crucial if the lopsided tax system is to be rectified. Towards this end, the Tax Reform Committee (TRC) of the government is looking at imposing services tax on offshore companies providing digital services.

More than that, the TRC highlights that the effectiveness of the incentives and reliefs needs a review and that it opens up to abuse by companies, resulting in the government foregoing taxes that can be used to help plug the budget deficit. In this respect, the proposition in the offing is to review the Promotion of Investments Act and the Income Tax Act with the view of looking into their relevance, effectiveness and efficiency.

The federal government needs a more efficient tax system, as the low-hanging fruits from savings on excesses left by the previous government are over and done with.

Going forward, it needs to increase revenue from operations to meet its fiscal deficit target of below 3% by 2022. It has already missed the fiscal deficit target of 3% for next year.

The fiscal deficit is projected at 3.2% for 2020, as the government has said it needs to spend to keep the economy going to counter the slowing global economy.

Oil revenue is not expected to grow beyond 20% of total federal government revenue in the next few years. This is based on the assumption that oil would average US$60 to US$65 per barrel between 2020 and 2022.

For next year, the budget is based on US$62 per barrel, which is a much more realistic assumption compared to US$70 per barrel that the government had assumed in preparing Budget 2019.

Without a major boost from oil revenue, the government is looking at increasing revenue from the sales and service tax (SST) for next year, where it expects to collect RM28.3bil compared to RM26.8bil this year.

If anyone had thought that the government was going to lose out in a big way as a result of doing away with the goods and services tax (GST), they are likely to be proven wrong.

Prime Minister Tun Dr Mahathir Mohamad had said in Parliament that the government would not bring back the GST, as it expects to collect more from the SST over the years. The prime minister is not entirely wrong.

The SST replaced the GST after the change in government in May 2018. The full-year collection of the SST kicked off this year, where the government expects to collect RM26.8bil. Next year, the amount to be collected is targeted at RM28.3bil.

In comparison, under the GST regime, the total amount collected between 2015 and April 2018 was about RM131bil. However, the refunds that were not paid amounted to RM19.4bil. If the refund is stripped out, then the net amount that accrues to the government is less than RM30bil per annum.

It is more or less the same as the amount collected from the SST.

Some economists are of the opinion that the GST should be re-introduced, but at a lower rate, and that the government should ensure speedy processing of the claims for refunds. The GST, they say, is a fairer tax system as it is a consumption-based tax. On paper, it may sound good and their logic is right.

However, politically, it would be suicidal for Pakatan Harapan to revert to the GST so soon after taking power.

Also, considering that the system has just adapted to the SST, do we need another jolt for the tax system by going back to the GST? Certainly not, and it is a distraction to the more urgent matters at hand, which is to boost a slowing economy.

The tax system needs a review because the present set of incentives, reliefs and laws are not effective in plugging the leakages and attracting investments. But bordering along the lines of reverting to the GST is a shock that the system can do without.

What we need is a fairer system where the leaks and loopholes are plugged.

The views expressed here are the writer’s own.


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