Key tax measures to boost revenue

BUDGET 2025 will likely be both business and people-friendly, but there will be some measures to ensure Malaysia’s path towards fiscal sustainability.

These measures may require time for implementation as Malaysia tries to improve the low tax revenue to gross domestic product ratio of just over 12% to at least 15%, and even higher in the longer term.

Businesses and households will need time to adjust to the higher tax regime and the eventual re-introduction of the Goods and Services Tax (GST).

GST in its original form was not well thought out, especially the refund mechanism, and lacked an efficient net collection system. The GST re-introduction will take 18 to 24 months if the announcement is made in Budget 2025.

In the immediate term, e-invoicing is expected to be a strong revenue contributor as the second and third phases of implementation are expected from Jan 1 and July 1, 2025, respectively. Meanwhile, the Global Minimum Tax will ensure Malaysia collects a fair share of taxes, despite the many tax breaks for multinational corporations.

No new taxes?

The implementation of High-Value Goods Tax announced in Budget 2024 has been delayed, but is expected to be fine-tuned in the upcoming budget.

The Prime Minister has also hinted that there will be “no new taxes” given the introduction of e-invoicing and the potential GST announcement. However, the tax net under the current Sales and Services Tax will be widened to more goods and services.

Reduced subsidies

Malaysia, which has already floated diesel to the current market price, will likely eliminate the subsidy for RON95 as soon as possible given the strengthening of the ringgit and lower global crude oil prices.

This is the most opportune time to do so, as the current market price for RON95, at just RM2.89 per litre (based on the 30 sen spread between RON97 and RON95), is 84 sen or 41% higher than the current subsidised price.

In order to phase in the adjustment for consumers, the government could increase fuel prices by 20 sen per litre per quarter over the next year or extend the period until the global market price is reached.

Additionally, the direct subsidy for diesel users should be gradually withdrawn. Sugar subsidies should also be withdrawn since we are already used to the “kurang manis” culture, and there is no reason to subsidise a product that is harmful to health.

RM2,000 minimum wage

Budget 2025 will also likely see the minimum wage of RM1,500 being raised to RM2,000 from Jan 1, 2025. This will be in line with the raise for civil servants. Although it is a 33% increase, it is still well below the 2022 Poverty Line Income of RM2,589. The higher wage structure is essential if Malaysia is serious about implementing wage reforms.

Rebalancing personal reliefs

It is hoped that this is the last year the RM8,000 tax relief is granted to individuals for contributions made to Skim Simpanan Pendidikan Negara.

Other deductions that can be removed include the RM3,000 relief for the Private Retirement Scheme as well as the RM2,500 relief for the purchase of personal computers, tablets or smartphones.

These are not targeting the right taxpayers as it has become a tool for tax avoidance, although perfectly legal. There is no reason to grant concessions to individual taxpayers to save for rainy days as this is the individual’s responsibility.

Also, personal relief should be raised by RM2,000 to RM11,000 while relief for Employees Provident Fund (EPF) contributions is raised by the same amount to RM6,000. Similarly, medical insurance should be raised to RM5,000 from RM3,000 presently.

This is in line with the higher wage economy as well as encouraging self-contribution to the EPF, especially among gig economy workers and to ensure taxpayers have adequate savings and medical insurance, which has seen an unprecedented increase in cost.

Review of tax rates

Individual taxpayers have long complained about the narrow tax brackets. Although the current rates are progressive, an individual taxpayer could easily hit the 25% tax bracket if the chargeable income is more than RM100,000.

This should be reviewed to a slower progression to each bracket. For example, the current chargeable income above RM5,000, RM20,000, RM35,000, RM50,000, RM70,000, and RM100,000 of 1%, 3%, 6%, 11%, 19%, and 25% respectively is rather steep. The brackets should be adjusted to ensure higher disposable income, especially for middle-income earners.

One way is to impose a tax rate of 3% for the above RM5,000 bracket and increase the tax rate by three percentage points for every subsequent bracket. This will see the above RM20,000 bracket being imposed a 6% rate (from 3%) while the above RM35,000, RM50,000, RM70,000, and RM100,000 will see a rate of 9% (from 6%), 12% (from 11%), 15% (from 19%) and 18% (from 25%) respectively.

However, the rates for richer taxpayers with chargeable income of RM400,000, RM600,000 and RM2mil should be fixed at 26% (unchanged), 30% (from 28%), and 35% (from 30%) respectively. The quantum of increase for the lower chargeable income group is not high in absolute terms, but there will be a significant increase for those in the higher income group.

In essence, Budget 2025 should focus on boosting government revenue by removing personal tax reliefs, gradually removing subsidies, and reviewing tax rates.

The re-introduction of GST, implementation of Global Minimum Tax, and e-invoicing, are the main drivers of future revenue for the government.

Next week, the column will explore Budget 2025 and the country’s fiscal position.