Reforming tax system to boost recovery

MALAYSIA has finally reached the turning point of the Covid-19 pandemic. Despite the more optimistic outlook, any increase in tax revenue from the economic recovery will likely take time.

The country’s statutory debt limit, which has recently been raised to 65% of gross domestic product or GDP (from 60% previously), reflects that an expansionary budget is imminent.

The speed at which the Malaysian economy will turn around will depend on the tax measures the government chooses to implement, and Budget 2022 to be announced on Friday will be the key event to watch.

The theme of Budget 2022 will centre around the 3 Rs, namely Recovery, Resilience and Reform.

In the short term, it will be crucial to implement tax policies to reduce the financial burden on certain businesses, especially the smaller ones, to help them survive and weather the disruptions.

At the same time, a reform of the tax system will be necessary in the medium term for it to be a more robust and reliable source of revenue.

Unfortunately, the current tax system has leakages and too much tax is borne by a narrow base of compliant taxpayers. There is clearly a need in the medium term to broaden the tax base and plug the existing gaps.

Against the above backdrop, the following four tax measures may be considered in Budget 2022 to support Malaysia’s economic recovery:

> Reduce tax burden on MCO-affected industries

Property development, construction and tourism are some of the most affected sectors. Currently, Malaysian citizens are exempted from real property gains tax (RPGT) on gains from the disposal of residential property from June 1, 2020, but this expires on Dec 31, 2021.

To further encourage individuals to purchase residential property beyond Dec 31, 2021, purchasers should be given the assurance that any subsequent disposal, say over the next two years up to Dec 31, 2023, will not attract RPGT.

Any increase in demand would help revitalise the property development and construction sectors as well as help generate multiplier effects on increasing employment and stimulating the supporting industries.

In addition, a boost to the domestic tourism sector would be most welcomed. To promote domestic tourism, the double deduction currently available to hotel and tour companies for promotion expenses incurred outside Malaysia may be extended to expenses incurred in Malaysia.

Furthermore, to encourage greater use of hotel facilities and conference centres, businesses organising events such as annual dinners and conferences may be given a double deduction on expenses incurred in hotels or conference centres.

With greater economic activity in the property development, construction and tourism sectors, the potential for tax revenue in the longer term will increase.

> Assist businesses to enhance information and communications technology (ICT) infrastructure to compete globally

Sadly, many businesses are unable to operate remotely due to poor ICT infrastructure. Although most economic sectors have now opened, these businesses continue to suffer in the new normal.

As a 10% withholding tax currently applies to payment of royalty (for licence or use of software) to non-residents (this may typically apply to payments for software or online service providers to facilitate e-commerce), the government may consider providing a withholding tax exemption for, say, up to two years.

In addition, accelerated capital allowances (ACA) and capital allowances (CA) for the purchase of ICT equipment and for development of customised computer software, respectively, may be allowed to be utilised in full in the year of purchase (currently the ACA and CA are spread over four years).

The above measures should help smaller local businesses compete with foreign businesses and e-commerce operators.

> Green taxes

To align with the third theme of the 12th Malaysia Plan to advance sustainability, a worthy medium-term tax strategy is to promote a greener Malaysia.

Three possible taxes which are practiced in other jurisdictions may be considered.

The first is carbon tax, which may be levied on the burning of carbon-based fuels. The second is emissions tax, which may be levied on pollutant emissions. The third is resource tax, which may be levied on extraction of natural resources.

With more businesses being encouraged to switch to greener alternatives, Malaysia may reduce the intensity of its greenhouse gas (GHG) emissions by 45% (compared to 2005 levels) by 2030, in support of the Paris Agreement.

Although now may not be the ideal time for the introduction of these new taxes due to priority to maintain cost, this is a possible medium-term solution for expanding the revenue base.

> Special voluntary disclosure programme (SVDP) for indirect taxes

The SVDP announced in the 2022 Pre-Budget Statement is a step in the right direction and many are eagerly awaiting detailed rules.

Taxpayers may have made genuine mistakes due to changes to the sales and services tax (SST) legislation and interpretation since its introduction on Sept 1, 2018.

Although some concessions have been given by the Royal Customs of Malaysia, a 40% penalty would apply on SST underpaid even if it is voluntarily disclosed.

In order to ensure that the SVDP is attractive, it would be good to see a full waiver of penalty with assurance of no further audits by the Customs.

The SVDP is a quick way to encourage a greater level of compliance and for Customs to boost tax collection.

In formulating Budget 2022, the government will have to deal with pressures from many angles – from politics, public finance to global competition.

With the huge expenditure on Covid-19 stimulus packages, striking a balance in Budget 2022 will be challenging.

Overall, we may expect short-term tax measures to be focused on reducing the burdens of both businesses and the people to accelerate economic recovery, and the medium-term measures to be aimed at expanding the revenue base and reducing tax leakages.

David Lai is an executive director of BDO Tax Services Sdn Bhd, member of Malaysian Institute of Certified Public Accountants and council member of Chartered Tax Institutes of Malaysia. Views expressed here are the writer’s own.

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