The taxing bits of Budget 2023

Costlier: With the new tax, the prices of high-end goods will increase. — AZHAR MAHFOF/The Star

PETALING JAYA: The goverment’s definition of “luxury goods” will determine how much it will gain from the new tax, say experts.

“Around a third of luxury goods are fashion and clothing related, so it would depend on what products are eventually defined as luxury goods and how much the tax rate is,” said Malaysia University of Science and Technology economics professor Dr Geoffrey Williams.

“In principle, anything could be a luxury product based on its brand, quality, price and exclusivity.

“So the definition is very important,” he said, adding that the government should avoid labelling products that are needed by ordinary folk, such as mobile phones or cars, as luxury items.

In economic terms, Prof Williams said luxury goods are products and services that people buy more of when their income rises.

At present, he said the luxury goods market is estimated at around RM8.4bil. So, if the tax is fixed at 5%, it would raise only RM420mil.

On Friday, Prime Minister Datuk Seri Anwar Ibrahim tabled Budget 2023 which outlined a slew of measures aimed at lowering the cost of living amid high inflation, as well as more progressive taxes.

One of them is a luxury goods tax for items like luxury watches and fashion goods. This is aimed at broadening the tax base of those who can afford it through a more progressive approach.

Tax expert Datuk Koong Lin Loong said that similar to the goods and services tax (GST) and real property gains tax (RPGT), the luxury goods tax is progressive, where those who can afford high-end and non-essential goods are taxed.

If it is done correctly, he said it can contribute good revenue to the government.

Citing the example of the GST collection of RM44bil in 2017, Koong said an estimated 20% of it in the form of luxury goods tax would amount to about RM10bil today after factoring in inflation.

“This is better than the prosperity tax, which affects domestic and foreign investments,” he said.

Koong, who is treasurer-general of the Associated Chinese Chambers of Commerce and Industry Malaysia, said the luxury goods tax should work based on three main criteria.“It should be imposed only on certain goods, such as gold, yachts, private jets, and sports cars. It should apply to a certain group of consumers, such as the T20 or some of those from the M40 group.

“Lastly, it should help the government generate revenue,” he said.

Budget 2023 also proposed that the personal income tax rate be lowered for those earning RM100,000 and below annually. Those with higher earnings who are in the T20 group will incur more tax, which will be raised by 0.5% to 2%, for those getting between RM100,000 and RM1mil annually.

There is also the re-introduction of a special voluntary disclosure programme, which takes place from June 1 this year to May 31, 2024, to allow a 100% waiver of penalties on unpaid direct taxes and indirect taxes.

On taxing the T20 more, Koong said it was one way of “not hurting the coffers so much” from the loss in the government’s net tax revenue of RM900mil in lowering tax for the low- and middle-income earners.

“However, we need clear guidelines and details to see good success rates for this initiative,” he said.

Koong added that the goverment had come up with measures to broaden the tax base. However, he called for careful planning and in-depth engagement before the capital gains tax for unlisted shares disposal by companies is introduced.

“This is because we do not want to affect the genuine transfer of shares,” he said.

Referring to the special voluntary disclosure programme, Prof Williams said a rough estimate showed that it could contribute about RM3.4bil or 1.2% of government revenue.

“It’s bigger but still less than, for example, what could be saved by cutting spending wastage or by improving the efficiency of tax collection overall.

“(Although) only around 150,000 taxpayers will be affected, the danger is that they may find ways of avoiding the tax through clever legal tax accounting.

“So even the voluntary disclosure process might not help much,” he said.

Calling for a more efficient tax system, Prof Williams said the government’s approach of lowering income tax for low- and middle-income earners and increasing tax on high earners was a static approach, based on applying the new tax rates to income levels.

“There is a much lower tax from the M40 but a slightly higher tax from the T20, so the net effect is a lower tax overall. This approach does not consider the behavioural effects or the wider economic impact,” he said.

He added that a lower tax for the M40 increases their spending power, which increases revenue for companies. The higher taxes from the sales and services tax and company profits could offset the lower tax income by reducing the tax rate.

“As a general rule, lower tax rates in a more efficient tax system tends to raise tax revenues. This is why we need a full review of the tax system, and not just ad hoc changes in each (federal) budget,” he said.

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