THE government has implemented various initiatives aimed at revitalising the country’s revenue collection, notably via the introduction of the Capital Gains Tax (CGT) in the revised Budget 2023
In the same vein, calls are being made to reintroduce the Goods and Services Tax (GST), widely regarded as the most efficient form of taxation, in the upcoming Budget 2024 as an essential component to bolster Putrajaya’s finances and to enable the government to continue improving the rakyat’s living standards.
However, can the enforcement of a new tax, or the reintroduction of one, actually help?
According to Thannees Tax Consulting Services MD SM Thanneermalai, Malaysia’s tax system is straightforward and relatively simple.
“Malaysia only taxes income on a territorial basis and not on a worldwide basis. Furthermore, Malaysia does not have a wide CGT regime, it only taxes real property gains,” he told The Malaysian Reserve (TMR).
In terms of collections, he said the Inland Revenue Board of Malaysia (IRB) is well ahead of its collections target and is expected to collect more than the budgeted RM164 billion in net taxes from the RM176.1 billion gross tax collection target this year. In 2022, the IRB recorded its largest direct tax collection to date at RM175.4 billion, an increase of 21.75% from 2021.
Previously, the government announced an estimation of RM291.5 billion of total revenue in 2023. Of this, direct tax collection is expected to be RM131.7 billion — a growth of 6.9% compared to 2022 — of which RM96.4 billion comes in the form of company income tax, RM35.3 billion in individual income tax and indirect tax collection projected to be RM54.1 billion in 2023.
“It is unfortunate that the government withdrew the GST. GST is more efficient than the Sales and Service Tax (SST) and it would have allowed the government to collect more taxes.
“The problem with SST is that it is a single-stage tax and it can have a snowball effect as it can be applied in multiple stages of the supply chain,” Thanneermalai added.
Meanwhile, stressing on the flaws in our tax system, he mentioned that the public will not welcome too many taxes.
At the moment, there are the Tourism Tax, Departure Levy, Excise Duty, Customs Duties, Sales Tax and Service Tax. In the future, new taxes may be introduced such as CGT, Luxury Tax and Tax on Low Value Goods.
Capital Gains Tax, is it necessary?
Previously, Prime Minister (PM) Datuk Seri Anwar Ibrahim announced the government’s decision to introduce CGT for the disposal of unlisted shares by companies in 2024. However, questions arose as to whether this will really benefit the economy.
CGT is a tax applied on capital gains arising from the sale of investments such as shares, bonds, cryptocurrency, precious metals, real estate and so on. The tax will be imposed at the time the investments are sold.
According to accounting firm Crowe Malaysia plt, Malaysia does not levy CGT, with the exception of gains deriving from the disposition of real estate in Malaysia, which may be subject to Real Property Gains Tax (RPGT) at a maximum rate of 30%.
Thanneermalai opined that the government’s effort in introducing CGT is long overdue.
Nonetheless, he said it is only reasonable for persons who earn capital gains to pay this tax on the basis that taxpayers who are earning income are paying income tax and that it puts taxpayers on a level playing field.
“I think there is a lot of unnecessary ‘hoo-ha’ about the introduction of CGT. It is about time for the people who benefit from the capital gains to contribute a portion of those gains to the treasury.
“It is incorrect for people to make a lot of noise saying that CGT will affect investments and impact businesses. People are already operating in countries that have CGT like India, China, UK, Europe, and America.
Meanwhile, tax industry veteran Dr Veerinderjit Singh expects the possible rate of CGT to be around 10%, which he said would not have a detrimental effect on the capital market.
“We understand that there will be an exemption given for shares that are going to be listed in an IPO. So, as much as no one likes taxes, the traditional differentiation between trading gains/profits and capital gains is now slowly being dissipated such that taxes will be imposed on all forms of gains with the view of placing them on a level playing field.
“This is becoming an international trend due to the initiatives taken by the Organisation for Economic Cooperation and Development (OECD) and the European Union (EU) to blacklist countries that do not apply the same approach,” he explained to TMR.
Is it the right time for Malaysia to introduce new taxes?
On introducing new taxes in Malaysia, Thanneermalai stressed that now is not a good time due to the current economic situation.
In fact, he suggested that the government move to improve the current tax system. Should the Putrajaya want to introduce a new tax, he advised that it would be better to reintroduce GST instead.
GST is seen to be regressive if it is imposed on all items because it will affect the poorer sections of the economy. However, he said if GST is applied correctly with the correct items being zero-rated and exempted, the situation can be managed.
“We should have learned from the mistakes of the previous implementation of the GST. We should now be looking more closely at how we can help goods and services that flow directly or indirectly to the bottom 40 (B40) and even the lower middle 40 (M40) segments without GST being applied.
“If GST is introduced properly, it will only affect the businesses and the people who can afford to pay the tax,” he explained.
Between GST and SST, the former is deemed more efficient because businesses do not have to bear the tax, and they only act as tax collectors of the system.
“If other countries such as Thailand, Indonesia, Vietnam, Singapore, India and China operate a GST system, why do we not want to implement it?
“Why are we the only ones left out? Why did we walk out of something that everybody is following? We seemed to be out of sync when we introduced the GST and withdrew,” Thanneermalai said.
Veerinderjit opined that GST needs better planning, better structure, wider coverage, minimal exemptions, a reasonable rate and an efficient tax authority which acts without fear or favour.
“In the Malaysian context, we must manage the inflation level, cost of living, the constrained supply chains and develop self-sufficiency in many areas, in addition to increasing salaries.
“Once the structural aspects are managed, we can introduce a wide-ranging GST, plus returning some of the tax to the population that requires assistance. Whether the government makes a u-turn on policies introduced by its predecessors or not is the price one pays for democracy and we just have to cross the bridge when we come to it,” he added.
Besides reintroducing GST, Thanneermalai said reducing subsidies is a necessity to reduce deficit. He opined that introducing taxes such as Luxury Tax and Tax On Low-Value Goods will not solve the problem. If new taxes are to be introduced, he reiterated that they must bring in significant money.
Sharing this view, Veerinderjit said Malaysia should not be too concerned about new taxes, instead, look at extracting more from the current taxes.
He also suggested for Malaysia’s Budget 2024 to look at managing government expenditure, which he said a lot have to be done including reviewing what Parliamentarians are paid for and the various exemptions that they enjoy
Furthermore, he suggested widening the scope of existing taxes such as the SST and look at how these can be made more efficient before moving into a total revamp, as well as introducing taxes such as a Luxury Goods Tax or Inheritance Tax.
On whether the new changes in the tax system will impact businesses and individuals, Veerinderjit said all taxes do but depending on the scope, the rate and the administration of the tax.
“Any tax is a cost to a business and generally impacts the net profit and lowers the amount available for distribution to its shareholders, while individuals may see lower disposable income or may face higher prices of goods or services,” he said.
Government’s tax reform effort.
Thanneermalai said the government’s tax reform effort is working slowly and he foresees no major tax reform in the near future other than adding new ones and working on the current system.
“All I can see is they are trying to bring in new taxes to bring in extra revenue and meet some conditions from OECD. Tax reform is not a hot item on the agenda at the moment,” he added.
Currently, tax collections are approximately 11% to 12% of Malaysia’s GDP, but a well-performing economy is expected to generate around 15% of GDP.
Hence, Thanneermalai stressed the need to increase Malaysia’s tax revenues to around 15% of GDP for the government to lower the country’s deficit and to have sustainable tax revenues.
Meanwhile, Veerinderjit said Malaysia needs a five-to 10-year plan to build the nation’s tax revenue framework, as well as a clear roadmap outlining possible tax changes which must be tied in with the industrial plan, unlike ad hoc measures taken these past years.
“Without a roadmap, we live year to year facing all kinds of challenges,” he added.
Veerinderjit added that the ones developing such a roadmap should be in the civil service and not just rely on ministers.
“We should look at things objectively based on the needs of the nation and the economic circumstances we are facing, and open the discourse to all relevant stakeholders.
“This then provides us with a solid platform to finalise a suitable tax reform roadmap,” he added.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
This article was originally published on the Malaysian Reverse.