MALAYSIA has made strides in addressing income and wealth distribution disparities, but challenges remain in finding a balance between promoting economic growth and ensuring equitable wealth distribution.
As the sources of income vary significantly depending on a country’s economic structure, development and its natural resources, tax collection is forms a major revenue base in the country as well as government expenditure.
Although tax collection aims to expand the country’s income threshold, a system that is less progressive could slow down the progress of a prosperous nation.
Over the years, Malaysia has implemented various policies to address income disparity while reducing the wealth imbalances between ethnic groups.
Mixed Successes
However, these initiatives have had mixed successes.
Inland Revenue Board of Malaysia (LHDN) CEO Datuk Seri Nizom Sairi said indirectly, the whole revenue that comes from tax collection is redistributed to benefit the economy as the government must spend money to boost economic activities.
“Obviously, whatever revenue collected by the government will be used again whether for administration, development and infrastructure of the country,” he told The Malaysian Reserve (TMR).
He noted that relevant ministries have been introducing various initiatives to help boost incomes including cash aids. Even though the names change under different government tenures, the objective is the same, to help the people.
Like many countries, operating and development expenditures are two key components of the government’s budget, which outlines its financial priority and plans for the fiscal year.
Nizom said this year, LHDN aims to achieve a direct tax of RM176.14 billion, based on last year’s encouraging trends, government expenditure and budget.
On the other hand, according to the Economic & Fiscal Outlook and Revenue Estimates 2023, in 2022, the country’s operating expenditure increased by 25.4 % to RM292.7 billion compared to budget estimates during the year, mainly due to higher requirements for subsidies and social assistance.
Meanwhile, the development expenditure decreased moderately by 5.3% to RM71.6 billion compared to earlier budget estimates following the re-prioritisation and implementation progress of programmes and projects.
Malaysia’s tax system has undergone a few adjustments, which raises the question of whether there are taxes in place that handle the fiscal situation and are beneficial to the economy.
Malaysia Youth Council fellow Adli Amirullah opined that to solve the fiscal situation, the government can implement a policy which encompasses cutting the government spending or increasing tax revenue, or both.
He said the country’s fiscal sustainability has been a continuous discussion since the 2008 financial crisis after which the Goods and Service Tax (GST) was first introduced.
Admitting that GST did have an implication on the lower income group, Adli said it could arguably be categorised as a “progressive tax” since the more people spend, the higher GST they paid.
“Unfortunately, it has been reversed by the PH1.0 government and we are back with the same issue today, which is the government coffer is depleting and it needs to find ways to fund development expenditures.
Implement GST Again
“However, if the government truly wants to reintroduce GST, I recommend reintroducing it at a lower rate and address all of its problems based on past experiences,” he told TMR.
Welcoming the move on reintroduction of GST as a progressive tax, however, Adli said it must be improved while taking into consideration the public and cost of living concerns, especially to the middle- and lower-income groups.
He said currently, the prime minister’s approach to tax is more centred on improving transparency and governance, which can be categorised as cutting expenditure, given that the government is cutting some unnecessary spending to increase efficiency.
This is also reflected through the soon-to-be-implemented targeted subsidy, which Adli said will address equal income distribution.
The government is seemingly committed to widening the revenue base to achieve a sustainable revenue collection in the medium- and-long-term towards achieving a high-income and developed nation.
In that regard, various initiatives, among others minimising tax leakages, enhancing tax compliance and effective auditing through enforcement will be given priority.
As part of the effort, the government also laid out new taxes, namely Capital gain tax (CGT) and luxury tax.
Adli said since both will tax the rich, the inequality gap between them and the poor could be reduced.
Regardless, he said any type of progressive tax system is welcome in theory, but the implementation has to cover three important areas which is it must be well structured, done in stages and discussed with the private sector.
This is to prevent shock on the economy and allows some buffer time for the industry to adapt. If the implementation method is not feasible for the private sector, it will just delay the collection and even cause some leakages along the way.
“For example, the small and medium enterprises (SMEs) will need to adjust their back-end system to reflect tax collection from customers and some SMEs may not even be able to implement it due to system limitations,” Adli added.
Similarly, Socio-Economic Research Centre (SERC) ED Lee Heng Guie believed re-introducing the GST at a lower rate of 4% to 5% compared to its 6% previously, would build progressive tax and address the unsustainable tax base.
He noted that the current revenue bases are narrowed by at least 20% compared to other countries due to heavy reliance on the oil and gas revenue while the current Sales and Services Tax is also not as progressive.
“Our current tax consumption is not broad. Recently, we depend even more on Petroliam Nasional Bhd’s dividends,” he said during the SERC Quarterly Economy Tracker briefing July-Sept 2023 recently.
He said re-introducing a transparent and effective GST can be sustainable compared to forming other additional taxes. It will broaden the tax base enabling the country to have more revenue.
“GST also can mitigate tax erosion, transfer pricing and value shifting, as well as cover the tax net on the shadow economy which estimated turnover of almost RM275 billion or 18.2% of GDP in 2019,” he added.
However, he added that if the government is concerned that the implementation of GST will be regressive, it can consider exempting the tax on the essential items or mitigating it by giving cash and vouchers.
Lee also suggested for the government to look into shifting its reliance on direct taxes to indirect taxes, citing that currently, direct tax to revenue stands at 52%, while indirect taxes is only about 18%.
“Regardless of GST or other taxes, the government must think how to build a sustainable revenue that continues to cover the rising expenditure and consider all aspects,” he said.
However, he was concerned that the introduction of CGT may hinder entrepreneurship, discourage capital information and deter long-term investment, while luxury tax may lead to black market and dampen the domestic luxury goods market.
Touching on targeted subsidy and cash programmes, Lee said this should be undertaken in stages at a measured pace and reviewed based on the needs, income and consumption behaviours.
While some economists favour GST, Universiti Kuala Lumpur’s Business School economic analyst Assoc Prof Aimi Zulhazmi Abdul Rashid was more inclined for the government to introduce the CGT with a certain minimum threshold and specific type of income.
He said people are not ready as they are still reeling from the high cost of living.
“Another type of tax that can be continued is the windfall tax on companies that make extraordinary incomes,” he said.
Source: https://themalaysianreserve.com/2023/10/11/sustainable-improvised-tax-structure-key-to-address-income-equality/