Tax SMEs on Turnover: Eliminate Burden on Filing Tax Returns

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This article was published in the Sun on 18th March 2019.

http://ipaper.thesundaily.my/epaper/viewer.aspx?publication=The%20Sun%20Daily&date=18_03_2019&tpuid=3#page/19

 

SMEs are the backbone to Malaysia providing 66% of employment and contributing 37% of the country’s GDP in 2017. They represent more than 95% of business establishments in Malaysia.

SMEs main focus is to grow their sales and profits. However, they face severe difficulties in raising finance and finding good people to work for them since they do not have a track record and therefore their credibility is always under scrutiny.

The owners of SMEs put in long hours and take enormous risks to run their business. Although the government is cognisant of their difficulties and have provided them with soft loans, lower tax rates, tax incentives, grants and assistance in non-monetary areas, SMEs are still burdened with significant bureaucratic requirements of various authorities.

The authorities sympathise with the plight of the SMEs, but when it comes to meeting their requirements such as filing tax returns, keeping records to satisfy the tax auditors or auditors from other authorities and in carrying out the enforcement activities, and imposing penalties, there is no sympathy shown to the SMEs. The same hammer is used to strike the SMEs as that applied to the “big boys”.

Are the authorities walking the talk?

Why not start with abolishing tax filing requirements?

Filing tax returns is not just a one-off annual affair. This involves keeping detailed records of income and expenses throughout the year and filing estimates of tax payable in the third year after commencement of operations, payment of advance taxes on a monthly basis, segregating expenses that are deductible and non-deductible and also complying with the idiosyncrasies of the Income Tax Act, whose rules are not synonymous with the accounting rules.

SMEs definitely need assistance of tax advisors / agents to assist them comply, which adds to their cost of operations and time is consumed unproductively in keeping the tax advisors informed.

The authorities should seriously consider abolishing the filing of income tax returns as a start, and simplify the tax collection with a tax on turnover.

Tax on turnover – is it workable?

The government will not lose out on tax collections as tax will be paid once a year or semi-annually on a percentage of turnover. It should be only applicable to SMEs and small companies. There should be turnover limits and it could be broken down to three sectors where most SMEs thrive: Services, Manufacturing and Agriculture. The example for turnover limits for the services and manufacturing sectors could be RM7.5million and RM30million respectively, and the reason for distinguishing them is because the manufacturing sector is more capital intensive from the services sector.

The tax rate should be reasonable and perhaps a rate of 2.5% to 3% of turnover could be considered. At 2.5%, an SME is expected to generate a net profit of approximately 13% based on the current tax rates of 19% for the first RM500,000 of chargeable income, and thereafter at 24%.

Which SMEs will qualify?

The current definition of SMEs needs to be modified and the factors that need to be taken into consideration include: turnover, paid-up capital, number of employees, etc.

How to avoid abuses?

There will be a tendency for successful companies to continue remaining small by splitting their businesses as they grow into different entities to continue enjoying the preferential tax treatment.

This can be overcome by introducing anti-avoidance rules based on ownership by the same shareholders / nominee arrangements, or sharing common resources such as facilities, employees, and benefitting from financing arrangements based on the strengths of sister companies / wealthy shareholders, etc. SMEs that are part of a bigger group should not enjoy this benefit.

The anti-avoidance rules may appear complex but it is not difficult in practice to implement if the authorities are clear on the main objective of assisting budding entrepreneurs to grow out of being an SME into a bigger business enterprise so that they can compete not only with other companies in Malaysia, but more importantly with international competitors.

Recommendation

The government and in particular the tax reform committee should consider this proposal seriously because the SMEs are the future of Malaysia.