TO plug the widening gap between government revenue and expenditure, the tax base must first be enhanced as a reform of the tax system would require a three-to-five year timeframe.
There are questions on why our tax base is narrow, with many exemptions as well as double and special tax deductions.
Certain tax exemptions given to various investors should be reviewed especially when those investments are not in the targetted investment areas.
And there is still a focus on labour intensive areas.
“The Ministry of Finance (MoF) is reviewing the tax regime but that has taken quite a while; it is expected that some changes in this area will be announced in Budget 2022,’’ said Tricor Services (M) Sdn Bhd chairman Dr Veerinderjit Singh.
From the perspective of indirect taxation, there is a need to broaden the tax base and address the issue of the grey economy, to create a more robust consumption tax system.
Is the goods and services tax (GST) a much-needed bitter medicine, especially as the economy recovers and grows from the measures set out in the 12th Malaysia Plan?
While the GST may be a good option, some key areas need to be addressed:
> Delayed refunds that can cause difficulties especially for small businesses that have to account and pay taxes before money is received for goods and services provided.
“The Royal Malaysian Customs Department (RMCD) may have to take a ‘pay first, audit later’ approach to win business buy-in,’’ said Deloitte Malaysia indirect tax and global trade advisory leader Tan Eng Yew.
> Profiteering and unjustified price increases.
> Poor administration of the special one-off sales and service tax refund scheme that was given during the transition to the GST.
> A more facilitative approach by the RMCD and MoF in administering the GST.
“Goods and services that are not consumed locally should not be taxed to ensure that Malaysia remains competitive, while punitive actions should not be taken where errors do not lead to tax leakage from government coffers,’’ said Tan.
To make the transition easier, more efficient and less costly, some have suggested reintroducing the GST based on a model closely similar to that of the previous one.This includes the general rate of tax of 6%, said Tan, adding that a higher tax rate could be considered for selected goods and services deemed as luxury items.
From there, enhancements can be made in stages as people are re-acquainted with the GST regime.
The GST does not automatically increase tax revenue; if the coverage is narrow, we will get less revenue.
Other sources of revenue, in due course, would be expanding the scope of the sugar tax as well as vaping products and accessories.
Potential revenue will be from a tourism tax on rooms booked through digital platforms (which has been put on hold until 2023) and a tourism tax on accommodation locally which has been exempted until Dec 31, 2021.
The rate of the tourism tax is RM10 per room per night and is only applicable to foreign tourists.
“My view is that this exemption should not be extended as the tax should not have a significant impact on foreign tourist arrivals. The government does need to look at revenue collection as we recover from the pandemic,’’ said Tan.
A phased approach with clear milestones for certain changes should be introduced.
To widen the tax base, the informal sector as well as small and medium scale enterprises can also help.
“As the economy grows, we may consider a broad-based capital gains tax although in the short term, it is counter-productive to impose a capital gains tax on share transactions on the stock exchange,’’ said Veerinderjit.
The government is also considering a special voluntary disclosure programme (SVDP), enhancing enforcement activities and increasing the tax rate on certain targetted areas of consumption.
Under the SVDP, taxpayers are encouraged to voluntarily disclose any unpaid indirect taxes, underpaid indirect taxes or erroneous indirect tax filings or submissions to the RMCD.
There are concerns that while businesses generally try to stay on top of compliance requirements, they can get some things wrong due to the transactional nature of the tax.
Also, the relevant laws and guidance are complex, while the interpretation and application has changed a lot over time.
“At present, the RMCD does not have a formal voluntary disclosure scheme for businesses to disclose errors and obtain waivers of penalties,’’ said Tan.
Each disclosure is handled on a case-by-case basis and there are no published guidelines on when, or if the RMCD would waive penalties.
“The lack of a formal process or procedure for businesses on the treatment of penalties creates uncertainty, and acts as a disincentive for businesses to own up on errors, and also undertake self-review and compliance,’’ said Tan.
Since the pandemic began, it has been a challenge for the RMCD to undertake audits and other enforcement activities, including import as well as sales and service tax audit and investigation.
There are still companies which have not had a GST closure audit performed.
“Focussed efforts on these activities should have a positive impact on the collection of the RMCD,’’ said Tan.
Enforcement activities on frauds and smuggling activities can also be enhanced.
There are many ways that the government can increase its revenue base through more efficient and thorough review as well as implementation of tax measures.
Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.