Bold tax strategies needed to lift revenue

LAST week, this column highlighted Malaysia’s debt dependency and how the government should formulate a strategy to raise its tax revenue to reach 15% of gross domestic product (GDP) by 2025.

As it is, Malaysia has been lax in taxing its population and businesses to the extent that we have a very low tax to GDP ratio of less than 11% currently.

We need to enhance our taxation system to enable the government to collect more taxes. Before even attempting to introduce new taxes, we should review our current taxation system to improve our collection.

One of the reasons for our low tax revenue to GDP ratio is the countless reliefs that the government provides to taxpayers. There is room for the government to either adjust them lower, with the ultimate aim of abolishing them altogether.

There is no reason to provide a tax shield to individual taxpayers undertaking long-term measures for their well-being. If some of these reliefs are removed, an individual will start paying taxes if his or her monthly income hits about RM2,000 onwards. Call it cruel, but we do need to collect more taxes and there are no two ways about it.

Time to raise the progressive rates of tax

Presently our tax rates at the various chargeable income brackets start with zero for the first RM5,000 and this progressively increases with a 30% tax rate for income exceeding RM1mil.

Clearly, the tax rate that is applicable for individuals with low chargeable income is meaningless as the effective rate is barely 1%. The government ought to review this rate and should start with a higher tax rate of 3% for chargeable income between RM0-RM5,000, and progressively increase the rate across the board with the rates to be raised by three percentage points for each chargeable income bracket, meaning from 3% to 6%, 8% to 11%, 14% to 17%.

For income above RM100,001, the government should raise the tax rates by between three to six percentage points each for every chargeable income bracket and thereby making the top tier tax rate at 35%. A rough estimate suggests that this move, no matter how unpopular it may be, will help the government to raise individual income tax collections by about 20%, translating to about RM7.8bil.

Withdraw corporate relief

If less than 8% of corporates are paying taxes, there must be something seriously wrong as to how companies are being assessed to be subjected to corporate taxes as they have been enjoying too many reliefs as provided by the government in various forms.

This could be in the form of pioneer status, capital allowances, industrial building allowances, R&D allowances, selected green incentives allowances and not to mention tax reliefs for certain expenses, and even double-tax reliefs for specific expenses and so forth.

The government ought to re-look some of these measures as there is room to reduce some of these incentives other than opting to remove them altogether. In addition, the government could also introduce a non-deductible component for salaries, whereby allowable expense for salaries paid to an individual employee is restricted to RM50,000 per month or RM600,000 per year.

Any excess salaries paid should not be allowed as a deduction for tax purposes. This is to discourage companies from overpaying their top management and using excessive pay as a way to reduce a company’s tax burden.

In a non-pandemic year like in 2019, corporates paid some RM63.7bil in income taxes and if this amount can be raised by at least 10-15% by mere removal of some of the reliefs, the government can generate between RM6.4bil and RM9.6bil in tax revenue.

A wealth tax?

A wealth tax is normally based on an individual’s net worth, i.e. assets minus debts, and hence wealth tax is static as it takes into account values of assets and outstanding debt at a given date. A wealth tax will also help the government to keep track of declared assets by an individual. For simplicity, the wealth tax should start at a relatively high level and it is recommended that it should also be tiered whereby the more wealth one has, the higher the tax.

We can start a minimal wealth tax of just 0.5% for net wealth above RM10mil and up to RM20mil, this will then increase to 0.75% for the next RM30mil, a rate of 1% for the next RM50mil, 1.5% for the next RM400mil, and 1.75% for net wealth above RM500mil.

In this way, a person with RM50mil net wealth will pay RM325,000 in wealth tax or at an effective rate of 0.65%, while a person with a net wealth of RM1bil will end up paying RM17.1mil in wealth tax or 1.71%. It is expected that wealth tax alone can generate approximately RM14.2bil to the government.

Another issue on wealth tax is related to the method the tax should be imposed. Will it be on an annual basis, and if so, will it be on the incremental change in the net wealth of the individual, or will the wealth tax be imposed based on certain time intervals?

These are matters that need careful consideration, but the most appropriate one is to tax on incremental annual change and one that takes into account wealth that is not only owned in Malaysia but worldwide.

CGT in the form of a 1% transaction tax

It is not recommended for the government to introduce a Capital Gains Tax (CGT) to capture capital gains that are being made in the financial markets. For equity, it will be more palatable for the government to introduce a 1% transaction tax for every sale of securities that are carried out on Bursa Malaysia securities.

Based on a monthly equity market turnover of about RM75bil a month (YTD total turnover on Bursa Malaysia up to September 2021 was RM78.3bil), a 1% transaction tax on the sale of securities will allow the government to collect some RM9bil in taxes alone.

A transaction tax is much better than having to introduce a CGT as the latter requires much more administrative procedures and record-keeping for investors. There is also another form of CGT that the government ought to introduce and this is in the form of gain of disposal of shares of a subsidiary or associate of a company in a merger and acquisition or a takeover or a privatisation exercise. Presently, the disposal of subsidiaries or shares of companies owned by a corporation is not taxed.

A recent example includes the IJM Corporation (IJM) disposal of IJM Plantation to KL Kepong, which IJM is expected to make a clean RM700mil profit from. This profit ought to attract a CGT of at least 10% to 15%. In this way, the government can generate revenue from M&A deals too. Assuming in a given year that there are taxable capital gains of approximately RM10bil a year, the government can easily generate between RM1-1.5bil in tax revenue from this move.

Fuel tax is also necessary

Malaysia’s current RON95 pump price of RM2.05 is currently being subsidised as global crude oil price at more than US$80/barrel translates to an actual pump price of at least RM2.90 per litre. Interestingly, within the region, pump prices range from RM3.30 per litre in Indonesia to as high as RM4.80 in Thailand.

Malaysia needs to move away from providing fuel subsidies, and in fact, we should impose a fuel tax on petrol consumption. First, we need to have pump prices that reflect the actual market and not a subsidised price.

Next, we should impose a RM0.20 fuel tax for every litre sold and in this way, pump prices will increase to RM3.10 per litre against the current retail price of RM2.05 per litre.

Hence, not only the government will save the subsidy that it is currently providing but collect an additional RM5bil from fuel tax. This fuel tax should be gradually increased from 20 sen per litre in 2022 to reach RM1.00 per litre by 2026. By then, the government will be able to collect an additional RM25bil in fuel tax based on our current consumption of approximately 25 billion litres of oil equivalent per annum.

Remove RPGT altogether and introduce Seller Stamp Duty

Real Property Gains Tax (RPGT) has been a bane for many, be it to individuals or companies. What is more troubling is the moving of the base year as in the previous budget and the imposition of a 5% RPGT on properties held even after the fifth year of holding.

To remove this uncertainty, the government should impose a Seller Stamp duty (SSD) instead on any property disposal and in this way, the element of subjectivity on the value of the property in the base year of 2013 is removed altogether.

Perhaps the government can start a SSD rate of 2% and this alone can help the government to generate some RM2.6bil in revenue based on the total value of transaction per year of RM130bil.

A moratorium on sin taxes

Malaysia last raised excise duties on tobacco and liquor in 2015 and 2016 respectively, with the latter now being taxed based on RM175 per 100% volume per litre. Statistics have shown that raising excise duties is a lose-lose game as the government losses revenue via additional taxes mainly due to a higher incidence of illicit trade.

In the tobacco industry, every a 10% hike in excise duties has led to a two percentage point jump in illicit trade and a correspondent loss of government revenue to the tune of RM254mil. As a hike in excise duties only widens the price gap between the legal supplies and contrabands, the government should instead make efforts to close this price gap, by either imposing a moratorium on any further increase in excise duties or better still, reducing it by at least 10-20% instead.

Separately, on e-cigarettes or vape, the government introduced a tax on non-nicotine-based vape e-liquids in last year’s budget but left the nicotine-based ones untouched. As it is, the market is very much driven by nicotine-based e-liquids, with about 95-97% market share, it would make more sense for the government to extend the tax imposed on e-liquids to both.

Raising the minimum wage to RM1,600 per month

The minimum wage in Malaysia was last raised to RM1,200 with effect from Feb 1, 2020, for urban areas and RM1,100 per month for rural areas. Malaysia’s current low-wage structure is unacceptable given the country’s current median wages and salaries of just RM2,062 per month for 2020.

According to International Labour Organisation (ILO) Global Wage Report 2020-2021, minimum wages are set at 67% of the median wage in emerging economies.

If we were to ignore the drop in median salaries in 2020 due to Covid-19, taking the 2019 median wage of RM2,442 suggests that Malaysia should raise its minimum wage to RM1,636 per month. A higher minimum wage will allow a more equitable income distribution. Hence, raising our minimum wages to at least RM1,600 per month will not only help more Malaysians to earn a better income but at the same time meet the international standard for developing and emerging economies like ours.

Some argue that minimum wages do not benefit Malaysian wage earners but rather foreign workers, both legal and illegal.

To counter this, the government should have a two-tier minimum wage structure, one for Malaysians and the other for foreign workers. Although the minimum wage of RM1,600 is the same, the additional amount of RM400 or RM500 per month (depending on whether the workers are in urban or rural areas) paid to a foreign worker goes to the government in the form of a levy.

With an estimated four million foreign workers in Malaysia and assuming half of them are at least at the minimum wage threshold of RM1,200 now, the higher minimum wage of RM1,600 for all workers would mean that the government stands to collect up to RM9.6bil in revenue with this two-tier policy. This will also encourage local employers to hire Malaysians with better compensation schemes.

Time to give back to B50s

The B50s – which comprise all households in the B40 group and the bottom 10% tier of the M40 group, are the most vulnerable in our society, financially. With approximately 4 million households in the bottom half of the category, the government, via the restructuring of the taxation system has the means to assist this group. Tax strategies discussed above are difficult to swallow for both the individual and businesses at one go but the ground must be laid for it to be implemented between 2022 to 2025 before Malaysia reintroduces a more comprehensive taxation system in the form of a VAT or a Goods and Service Tax (GST) thereafter.

Ballpark, the above strategies can raise government revenue to the tune of about RM50-55bil and straight away it will enable us to raise our tax revenue as a percentage of GDP from 10.9% to 14.2%.

With higher living costs, especially with the increase in pump prices, which may have some knock-on effect on end-consumer products as well as higher effective taxes to be paid even by the B50 group, the government can redistribute the additional tax revenue to the people with a payout of RM1,500 per quarter to the B50 group or RM6,000 a year. This will cost the government roughly RM24bil a year, leaving the government a healthy surplus of between RM25-30bil from the above tax strategies. This is what it means to address income and wealth inequality in society.

While the above measures are seen as drastic and not many will agree, Malaysia needs to make bold moves in rebalancing its financial position.

Budget time has always been a period where various stakeholders expect the government to continue its handout policy, provide tax reliefs or cut taxes, but without a proper medium to long-term tax strategy to raise the government’s revenue, there is very little the government can do.

While we may not be able to implement the above tax strategies at one go, the road map towards greater and more holistic tax measures are important to enable Malaysians to prepare themselves for the inevitable and to make efforts to correct both our income and wealth inequalities that we see today in our society.

Pankaj C Kumar is a long-time investment analyst. The views expressed here are his own.

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