PETALING JAYA: Tackling Malaysia’s structurally narrow tax base will remain a key challenge for Budget 2027, with the government expected to prioritise stronger compliance and tax administration over introducing new revenue measures.
“It is recognised as a structural problem arising from a narrow tax base in both the direct and indirect tax revenue streams,” Sunway University economics professor Yeah Kim Leng told StarBiz.
In addition, he said the direct tax schedule is relatively compressed and less progressive, while the indirect tax rate is comparatively low regionally.
“With no new taxes expected next year, the focus of the coming budget will be on the efficient implementation of the revenue enhancement strategies and initiatives rolled out over the past several budgets.
“These include facilitating e-invoicing, enhancing tax administration efficiency, reducing tax evasion and encouraging compliance.”
Meanwhile, a CIMB Research report, citing KPMG senior adviser on tax policy Veerinderjeet Singh, said there was scope to collect more from businesses outside the tax net and existing taxpayers that do not fully report their income.
He noted that larger entities are already more visible to the authorities, leaving much of the opportunity among smaller businesses. “While the gains from individual businesses may be modest, these could add up as more businesses are brought into the tax net.”
Veerinderjeet’s view is that e-invoicing could help identify unreported activity and encourage businesses to file their returns, adding however that full participation would be necessary to realise its benefits.
While smaller firms could face technology and advisory costs, existing exemptions should help manage the burden, with participation expected to broaden as economic conditions improve.
Veerinderjeet also called for a “report card” on e-invoicing’s contribution to taxpayer participation and collections, which he expects to feature in Budget 2027.
At the operational level, collection costs relative to revenue provide a measure of administrative efficiency, while the broader tax-to-gross domestic product (GDP) ratio reflects the breadth of the tax base, he said.
Veerinderjeet also sees higher wages, a review of longstanding corporate special deductions and more efficient indirect taxation, as ways to lift Malaysia’s tax-to-GDP ratio towards 15% over time.
He estimated that only 15% to 16% of the workforce pays personal income tax, with many workers earning below the tax threshold.
Meanwhile, Yeah said stronger tax administration and compliance, coupled with more efficient government spending and reduced leakages and wastage, should provide sufficient revenue to ensure equitable sharing of economic growth while supporting low-income households and micro, small and medium enterprises.
On progressive taxation, Veerinderjeet sees scope for gradual fiscal changes, with recent dividend and capital gains taxes reflecting a more progressive approach by targeting those with greater capacity to pay.
He cited the 2% tax on annual dividend income exceeding RM100,000 as an example, although he does not expect the rate to be raised in Budget 2027.
He also sees little near-term scope to extend the capital gains tax to listed shares or raise the 30% top personal income tax rate, citing regional competitiveness.
On indirect taxes, Veerinderjeet said he favours strengthening existing instruments, with the goods and services tax (GST) elements potentially being used to improve the current sales and service tax (SST) regime.
However, he does not expect the GST to return in Budget 2027, viewing references to GST elements as efforts to enhance SST administration, supported by e-invoicing transaction records.
