Jump-starting tax collections

Soh Lian Seng

THE re-opening of most, if not all, economic sectors since the re-implementation of Covid-19 lockdown measures means that the upcoming Budget 2022 proposals would be a vital catalyst enabling our country to fulfill its international commitments as well as improve tax collection and raise tax revenue.

This is also the time when the government would forecast the expenditure for 2022 and announce the tax collection target to fuel its 2022 agenda.

For the past three years, our country’s direct tax collection target has been on a decline (RM150bil in 2019, RM127bil in 2020 and RM120bil in 2021) due to the devastating impact of the Covid-19 pandemic.

Although there are speculations of possible new taxes being introduced to widen the government’s revenue collection base, let us revisit the current practice in which direct taxes are being collected and how supplemental measures can aid to increase tax revenue while strengthening the current tax system until that new reality sets in.

Non-individual taxpayers

Under the current self-assessment system, taxpayers (non-individuals) are required to remit monthly tax payments based on estimates with the final balance (if any) payable upon the submission of tax return.

Taxpayers are often faced with a double whammy with this system – an underestimation penalty for being too conservative in estimating taxes or cashflow impediment (overpaying taxes and long wait for tax refunds) for being overly optimistic.

Although the above system enables a constant stream of revenue to the government, having a friendlier approach such as reducing the penalty rate for late payment or underestimation and guaranteeing a shorter time frame for processing tax credit refunds would encourage taxpayers to be less conservative in estimating taxes.Individual taxpayers

Monthly Tax Deduction (MTD), a mechanism where employers deduct monthly tax payments from the employment income of its employees, which include all employment income, whether cash or in-kind, has been a staple and vital system which contributes to the country’s tax collection.

In complying with MTD as a final tax and with aims to further simplify tax administration, the Inland Revenue Board (IRB) could consider an initiative where taxpayers are incentivised with reduced tax rates for inclusion of non-employment income in their MTD.

In addition to the above, individual taxpayers are currently presented with up to 17 types of income tax relief.

The IRB could take the opportunity to simplify the current individual tax system by reducing the number of unproductive tax reliefs.

Voluntary Coordinated Audit Review (VCAR)

More emphasis should also be placed on promoting better direct tax governance through enhanced activities.

While it should be lauded that the Pre-Budget Statement has proposed the implementation of a “Special Voluntary Disclosure Programme” for indirect taxes, the government could implement a VCAR programme in parallel where taxpayers could voluntarily subject themselves to an income tax audit review by the IRB.

In the event of tax adjustments arising due to the VCAR, a special penalty rate of no more than 10% should be imposed. This initiative would educate and incentivise taxpayers on greater compliance adherence while increasing the country’s tax collection.

Hopefully, this can also change the perception that tax audits are a bane to business operations and individuals.

While the above alternative measure could potentially aid in increasing tax revenue for the country, focus must still be placed on improving and promoting compliance with a degree of flexibility which would ease the burden of taxpayers.

New taxes?

As for the whispering of new taxes (for example windfall tax, capital gains tax and reintroduction of Good and Services Tax), the rakyat should be comforted that the government has not indicated any new taxes will be introduced in the short-term.

This is welcoming news considering the financial havoc caused by the Covid-19 pandemic.

That being said, immediate considerations to review current corporate and individual tax rates would help the nation on the road to economic recovery.

Perhaps the next question to ask is – Will the government review the country’s current foreign income tax exemption regime, considering the recent addition of Malaysia onto the “grey list” of the European Union list of non-cooperative jurisdictions?

We can only guess and wait patiently for the actual verdict to be unveiled tomorrow.

Soh Lian Seng is executive director and James How is manager, tax dispute resolution services, KPMG Malaysia. The views expressed here are the writers’ own.