THE current worldwide trend is shifting from direct tax to indirect tax by decreasing direct tax rates and increasing value-added tax (VAT) as well as goods and services tax (GST) rates.
According to the International Monetary Fund, more than 160 countries have VAT/GST in place as of last year.
Malaysia’s direct taxes, which comprised of company income tax, personal income tax, petroleum income tax, stamp duties and real property gains tax contributed to 70% of the total tax revenue from 2016 to 2020 compared with 75% from 2010 to 2015.
Indirect taxes, such as the sales and service tax (SST), export duties, import duties, betting and sweepstakes as well as gaming tax made up 30% of the total tax revenue from 2016 to 2020 compared with 25% from 2010 to 2015.
The approach to pro-growth and investment tax reform is to focus on the neutrality, economic growth and efficiency of the tax system.
It will minimise the effect of the tax on businesses and individuals. It should not distort the allocation of capital and unduly impede or reduce the productive capacity of the economy.
The tax system needs to avoid ambiguous interpretations, exemptions and loopholes that will distort investment decisions and consumer choices.
It is important to minimise and balance the excessive or high tax burden on households and businesses, while ensuring fiscal sustainability.
Domestic companies and multinational enterprises are attracted to a stable and predictable tax system.
Marginal tax rates are also an important determinant of a country’s competitiveness and attractiveness to businesses and investors.
In a globalised world, businesses can choose to invest in countries that maximise their after-tax rate of return while talented individuals will seek employment in places offering a lower tax rate.
If the marginal tax rates in the country are too high, investors are likely to go elsewhere.
We need a shift from taxing employment and business activity to taxing consumption.
> Broad-base consumption taxAs the SST is not a broad-based consumption tax compared with the GST, it had resulted in a revenue shortfall of RM17.2bil. The SST collected RM27.1bil in 2019 compared with the RM44.3bil GST revenue in 2017.
It’s time to consider the reintroduction of the GST when the economy recovers from the Covid-19 pandemic, starting with a lower rate of between 3% and 4%.
To ensure a smooth GST implementation and ease the burden on the small and medium enterprises (SMEs) as well as low-income households, it is proposed that a wider selection of basic necessities be zero-rated, higher threshold be set for SME registration of the GST as well as efficient and prompt GST refunds. Strict measures should be adopted to ring fence tax collections that are refundable to secured GST accounts.
The GST will eliminate leakages caused by businesses wilfully avoiding registration while enhancing tax collection for the government.
> Investment enhancementThe reduction in corporate tax rates is more effective than providing special tax reliefs or incentives to enhance investment. When the rationale for granting tax and financial incentives is based on discretionary and subjective qualifications and reporting requirements instead of automatic and objective requirements, it can instigate a rent-seeking behaviour.
The lowering of the corporate tax rate and removal of differential tax treatment among sectors and industries will improve the quality of investment by reducing possible tax-induced distortions in the choice of investments.
Malaysia’s current level of entrepreneurship, income and capital market development does not warrant the implementation of capital income related taxes as practised by rich developed countries.
The capital gains tax (CGT) and wealth tax run counter to the international trend of declining tax rates on capital income and wealth.
We cannot compare Malaysia with advanced nations as it is still a developing country.
Our priority should be to remain cost-competitive to complement domestic direct investment to boost the nation’s capacity.
Taxing wealth and income from capital such as the CGT will reduce savings and investment incentives, thus, greatly dampens the nation’s long-term prospects for increased productivity and economic growth.
Imposing taxes on wealth accumulation is counterproductive as it stifles innovation and entrepreneurship and thus encourages avoidance, evasion and capital flight.
While the CGT would broaden the tax net to include more capital assets, it can also adversely impact the income of genuine long-term investors who rely on dividends and capital gains.
Foreign portfolio institutional investors, which had already marginalised Malaysia equities would avoid putting their money in our stock market with the implementation of the CGT.
The CGT on listed shares transaction will significantly reduce Malaysia’s attractiveness and competitive edge as a place of equity investment compared with countries with no capital gains taxes on shares trading like in Singapore, Hong Kong, New Zealand, and the Philippines.
As the CGT increases marginal cost of investing, it makes a compelling case that such levies are self-destructive.
> Productivity improvement
The reduction in top marginal rate on personal income will boost productivity, retain talent as well as reverse a brain drain.
Malaysia has too many personal income tax bands and low taxable income thresholds.
As a result, individuals earning high income will hit the tax rate bracket too fast.
This is the final of a two-part comment on tax reforms.
Lee Heng Guie is Socio Economic Research Centre executive director. The views expressed here are his own.