PETALING JAYA: The country needs a strategic plan on the way forward in respect to developing and improving its sources of tax revenue since oil reserves, from which petroleum income tax and royalties are generated, will dwindle in the near future.
Tricor Malaysia chairman Dr Veerinderjeet Singh said the Covid-19 pandemic provided an opportunity for the government to introduce policies that could help it tackle economic issues exacerbated by the pandemic, and reduce inequality.
“The Malaysian tax system has been in need of reform for some time but such downturns, coupled with a fall in petroleum prices, further shows us the weakness of the current tax mix in terms of direct taxes and indirect taxes, ” Veerinderjeet, a renowned tax expert, told StarBiz.
According to him, the pandemic has led to slowdowns and drop in profitability levels, which means lower tax revenue collection for the government to spend in meeting its economic and social obligations.
in late November last year, Maybank Investment Bank Research reported that the Finance Ministry has set up a committee to study various revenue enhancing measures, including the possibility of reintroducing the goods and services tax (GST), which was repealed in 2018.
Veerinderjeet said a robust fiscal framework over “a five to 10-year time frame to outline the way forward is what we need.” Additionally, there should be a holistic review of the legislative framework to simplify current provisions and to remove archaic ones.
With about 21% of registered companies and 15% of employees subject to income tax, this is an “extremely narrow base from which the government tries to extract its tax revenue”. Oil-related revenue, meanwhile, generated around 25% of the total revenue of the government.
“The personal tax base is affected by the granting of too many personal reliefs and there is a need to collapse these into four or five broad categories.
“Over the past 20 years, we also started lowering our personal tax rates together with corporate tax rates. So we have been seeing the top marginal personal income tax rates being increased so as to collect some additional tax revenue.
“That has led to an unclear fiscal policy on the part of the government, ” Veerinderjeet, who is also the president of the Malaysian Institute of Accountants, explained.
As for the corporate tax rate, he said it will be a challenge to lower it under the current economic circumstances if there is no additional tax revenue generator.
That said, to draw foreign direct investment and remain competitive, the country would need to seriously consider lowering its corporate tax rate when the economy stabilises.
“We may want to consider a gradual 1% annual cut until the current corporate tax rate of 24% drops to 20%, ” he said.
On areas to look into, Veerinderjeet suggested enhancing compliance and strengthening enforcement of the tax legislation and widening coverage to encompass the informal sector to ensure all those that should pay taxes do pay them.
“Currently, there is no clear data on how much tax revenue is being lost by the government. However, studies in various countries generally state that the size of the shadow economy, which include smuggling and prostitution, is about 25%-30% of the gross domestic product.
“So, greater sources of information, greater touch points, greater sharing of information and using technology efficiently and effectively is the solution to tracking such evasion of taxes, ” he said.
On calls by some to reinstate the GST, he said while it has greater checks and balances and allows for more effective audits, it is not the “golden bullet to solve our tax revenue issues”.
“If we do not have an effective government agency to monitor and enforce GST, we will fail. If we do not have a society which is compliant and is unwilling to contribute a fair share of taxes from its earnings, we will fail.
“For a start, what we should do is widen the scope of the existing consumption taxes in Malaysia, namely the sales tax and the service tax, impose it at a low tax rate, educate businesses, enforce it and then monitor the results.
“Over time, we could increase the tax rate and this could go hand-in-hand with corporate tax rate reductions and eventually, when ready, we can mould the sales tax and service tax into a tax similar to a GST with its in-built controls, ” he said.
However, the key enabler of all this must be technology and there are some lessons on this from how China enforces its consumption taxes, he said.