Ernst & Young Tax Consultants Sdn Bhd Malaysia Tax Managing Partner Farah Rosley.
THE design of tax policies in Malaysia plays a crucial role in achieving national objectives by influencing economic behavior, redistributing wealth and regulating the economy.
This includes using tax policies as a fundamental tool for fiscal management to support the sustainability of the nation’s revenue, promote economic stability and enable the government to meet its financial obligations while pursuing national objectives.
As the country navigates a rapidly changing global landscape, effective tax policy design can help align fiscal strategies with the nation’s long-term goals.
Here are several ways where well-designed tax policies can enable better outcomes in meeting Malaysia’s national objectives.
Economic stabilisation
Taxation serves as a tool for economic stabilisation, allowing governments to adjust economic activity.
During economic downturns, reducing tax rates or implementing tax credits can boost consumer spending and business investment, including in targeted sectors which can increase employment and spur growth.
For example, tax incentives granted for capital investments will encourage businesses to spend more on capital expenditure that will increase production.
Incentives also create high-value jobs, and the incurrence of training expenditure will boost employment and consumption.
During periods of rapid growth and inflation, raising consumption taxes can help cool the economy by curbing excessive spending and controlling inflation.
Enhancing fiscal stability and resilience, combating evasion
Broadening the tax base, coupled with measures to minimise tax evasion and avoidance, can enhance revenue generation and provide the government with the resources to fund public services and infrastructure.
Transparent and efficient tax administration practices can create a resilient fiscal framework that supports long-term national objectives and reduces reliance on volatile revenue sources.
Policy measures to combat tax evasion include the digitalisation of the tax system, which collects real-time information and increases the use of data analytics.
Stimulating economic growth and investment
Malaysia’s economic growth is heavily reliant on both domestic and foreign investment.
Well-designed tax policies, such as competitive corporate tax rates and targeted tax incentives for key sectors including technology, advanced manufacturing and renewable energy, can stimulate investment and drive economic activity.
The tax policy design may also include incentivising businesses to invest in certain areas such as research and development, innovation or digital transformation. A favourable tax environment encourages businesses to expand operations, innovate and create jobs, contributing to robust economic growth.
Malaysia could become a centre for global or regional operations whereby tax incentives are granted for organisations conducting strategic functions in our country.
Income redistribution and promoting social inclusivity
Progressive tax systems, where higher earners pay a larger percentage of their income in taxes, help address economic disparities and promote social equality.
It is also important that the tax collected is channeled to development projects, public infrastructure and social programmes.
By directing tax revenue towards social programmes, education and healthcare, the government can improve the quality of life for marginalised communities and promote inclusivity, aligning with Malaysia’s vision of a fair and equitable society.
Further, a transparent use of tax collections to support those in need and benefit the country will boost the sense of pride and responsibility among taxpayers, as they see the link between their tax payments and the advancement of the nation.
Environmental and sustainability goals
Taxes can be used to address environmental and sustainability challenges.
In the Budget 2025 announcement, the government brought up the introduction of the carbon tax in 2026.
Carbon tax aims to reduce greenhouse gas emissions by making it more expensive to pollute, hence encouraging businesses and individuals to adopt environmentally cleaner practices.
In designing its carbon tax system, Malaysia must consider international developments such as the European Union’s Carbon Border Adjustment Mechanism (CBAM), allowing Malaysia to collect its fair share of environmental taxes in multi-country supply chains and mitigate the risk of double-taxation on Malaysian businesses.
As Malaysia strives to meet its Sustainable Development Goals, tax policies can be designed to promote environmental sustainability and responsible resource management, such as through tax incentives for green tech.
In this regard, Malaysia can drive the transition to a low-carbon economy and contribute to global efforts to combat climate change.
International competitiveness
Tax policies can influence Malaysia’s global competitiveness by attracting investment and promoting economic growth.
Policymakers must balance the need to attract and support investors with the need to address fiscal challenges, such as budget deficits and federal debt.
Malaysia has introduced various incentives to encourage foreign direct investment into the country.
The tax incentives allow investments into the country to generate other direct and indirect benefits to the nation. For example, the country benefits from the transfer of technology, upskilling and reskilling of local talent, research and development, and expansion of local supply chain.
Incentives which focus on increasing productivity will support our journey towards becoming a high-income nation.
Facilitating infrastructure development and digital economy growth
Tax policies play a vital role in funding infrastructure development, which is essential for Malaysia’s economic progress.
By allocating tax revenues to key infrastructure projects, such as transportation, healthcare and education, the government will be able to enhance connectivity, improve public services and stimulate economic activity.
In a rapidly evolving digital economy, Malaysia must also design tax policies that encourage innovation and support the growth of the digital sector.
Support should also be given to Malaysia educational institutions to help them design programs which produce graduates with the skills that tomorrow’s businesses will need.
Looking ahead
The design of tax policies is a critical factor in enabling better outcomes in meeting Malaysia’s national objectives.
By stimulating economic growth, promoting social equity, supporting sustainable development, enhancing fiscal stability, facilitating infrastructure development and encouraging innovation, well-crafted tax policies will be able to drive positive changes and contribute to the overall progress of the nation.
It is also important to have thoughtful implementation and allocate enough time prior to changes in any policy. As Malaysia continues to navigate complex economic challenges, geopolitical conflicts and in tandem with global development, prioritizing effective tax policy design will be essential for achieving long-term goals and fostering a prosperous and equitable society.
Farah Rosley is Malaysia Tax Managing Partner, Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writer’s own.
