Taxes are the backbone of any government.
It is important for a country to develop a stable tax policy that can withstand
pressure and deliver revenue, especially during times of global uncertainty.
Malaysia has
successfully diversified its economy from one that was initially agriculture and
commodity-based, to now include robust manufacturing and services sectors.
However, her economy is still reliant on agriculture and commodity-based industries.
For example, Malaysia exported RM158.72 billion (17% of total exports) worth of
mining and agriculture goods in 2017.[1] Reliance
on such industries are inherently risky as commodity prices can be uncertain,
due to external factors such as currency fluctuation, political and global
demand.
Therefore, the focus should be on
strengthening revenue collection and broadening revenue base without disrupting
the lives of local residents and containing inflation.
With the removal of GST, the government stands
to lose about RM44 billion per year, based on 2017 figures. The government
estimates that with the implementation of SST, it stands to earn about RM4 billion[2] in 2018, and RM30 billion[3] in a calendar year.
The Finance Ministry has announced that
federal government debt has exceeded RM1 trillion. It has identified RM10 billion of expenditure cuts, which includes
downsizing, delaying or cancelling expensive projects and non-urgent spending. These
measures will no doubt help, however, they are short-term. What the government
needs to look at is creating tax policies that remain competitive and promote
sustainable revenue increase.
The focus of Malaysia’s revenue policies
should be on identifying approaches to increase revenue by leveraging on existing
opportunities rather than relying on products such as timber, oil and gas which
are subject to market conditions.
Below are
several options that the government may consider to increase its revenue
collection.
Luxury tax
Luxury tax is a tax imposed on products
or services that are deemed to be non-essential. Generally, it is a transactional
tax, imposed on the consumer who purchases or uses the good or service. Luxury
tax is usually associated with products enjoyed by the ultra-wealthy such as
private jet plans, expensive jewelry and cars like Ferraris, Rolls Royce, etc. The
administration of this tax could be placed under the Royal Malaysian Customs
Department (RMCD). The RMCD shall determine the type of products that are
considered “luxury” for tax purposes. However, the list of such products need
to be reviewed over time, especially if Malaysia moves towards becoming a
high-income nation.
Regulating
charity services
The Registry of Societies Malaysia (ROS) is responsible for monitoring
all societies in Malaysia, which includes non-profit organisations and
charities. However, although most of the established charities operate in
accordance with the law [especially if they are approved organisations under s
44(6) of the Income Tax Act 1967],
there are small-scale, independent charities that operate with minimal
supervision. As such, there may be a lack of control and transparency on how some
charities are run, especially when it comes to fundraising.
A Charities Commission could be set up as a monitoring body under the ROS
to govern the activities of charities in Malaysia. Its roles could include:
1. Regulating financing and fundraising activities of charities.
2. Ensuring that charities provide truthful information on their activities
and expenditure.
3. Monitoring charities to ensure that there are no tax abuses.
The Charities Commission should work closely with the ROS and Inland
Revenue Board (IRB) to ensure that there are no tax fraud/abuse of financing for
personal gain. Their activities will assist in promoting public
trust and confidence in the charitable sector domestically and internationally
as it will bring about good governance and transparency among charitable
organisations.[4]
Compulsory tax number
for ALL
Rather than imposing
new direct taxes, the Government could focus on enforcing tax compliance among
the existing income-earning population in Malaysia.
To do so, the government
could consider imposing a requirement where residents and non-residents who
open bank accounts in Malaysia must register with the IRB and obtain an income
tax number. Having an income tax number would enlarge the pool of potential
taxpayers under the IRB’s purview. This should make it easier for the IRB to monitor
taxpayers’ activities and determine if they would be liable to tax.
This allows the
establishment of a stronger paper trail as there will be communications between
the IRB and the banks via Bank Negara Malaysia (BNM). Apart from that, banks
are required to report any suspicious transactions to BNM which should allow
IRB to act quickly on any possible tax evasion cases.
Increase timber
premium and/or mining royalty
The government
can take advantage of the low value of the ringgit. As it has made Malaysian
goods cheaper overseas, this could possibly lead to an increase in foreign
demand for such goods. Currently, state governments impose timber premium
and/or mining royalties. In 2017, Sarawak increased its hill timber premium
from RM0.80 to RM50 per metric meter of logs harvested.[5] As such, other state
governments can consider increasing its timber premium and/or mining royalties.
Tax on
“worldwide income” for individual residents
Income tax in
Malaysia is imposed on income accruing in or derived from Malaysia except for residents
engaged in banking, air and shipping enterprises, which are taxed on a
worldwide basis.
Malaysia could
consider shifting to the worldwide taxation system to increase its revenue, where
individual taxpayers are taxable on their worldwide income regardless of where
the income is derived.
For example, Malaysians who are working or doing business abroad, but
with families staying in Malaysia, should be liable for tax in Malaysia.
New Zealand is an
example of country that taxes its individual residents on their global income.
Taxing foreign workers
As a rule, there is no tax for those
with income less than RM5,000 per month. However, this privilege is also enjoyed
by all foreign workers who fulfill the tax residency rules.
As they also benefit from the use of
Malaysian facilities (e.g., public amenities), foreign workers who earn above
RM2,000 or RM3,000 should be subject to Malaysian taxes. Subject to a comprehensive
study, a flat rate tax of, say 2% to 5%, could be imposed on these individuals.
Tax on money transfer using non-banking
facilities (eg Western Union)
In Malaysia, there are no taxes imposed
on remittances overseas. Tax is only imposed on the fee charged by the
remittance company. However, with GST abolished in Malaysia, no tax will be imposed
on remittance transactions. At time of writing, it is unclear whether service
tax under the SST regime will be imposed on such services.
The government can consider imposing a tax
of RM5 for remittance below RM1,000 and RM10 for remittance above RM1,000, per
transaction. By doing so, the government could gain some revenue from the
outflow of money.
There is an estimated 1.7 million legal
foreign workers in Malaysia as of 30 June 2017.[6] By merely taxing the legal
foreign workers would yield a revenue of at least RM8 million, i.e. 1.7 million
x RM5 = RM8.5 million. By imposing a tax on the money transfer, this could
possibly act as a catalyst to the legalisation of illegal foreign workers.
[1] Anon., 2017. Components of Malaysia's
Exports 2017. [Online]
Available
at:
http://www.matrade.gov.my/en/28-malaysian-exporters/trade-statistics/3793-components-of-malaysias-exports-2017
[Accessed
11 June 2018].
[2] Amarthalingam, S., 2018. RM21b GST
revenue loss to be plugged. [Online]
Available
at: http://www.theedgemarkets.com/article/rm21b-gst-revenue-loss-be-plugged
[Accessed
11 June 2018].
[3] Hassan, H., 2018. Malaysia keeps
deficit goal despite GST removal. [Online]
Available
at: https://www.straitstimes.com/asia/se-asia/malaysia-keeps-deficit-goal-despite-gst-removal
[Accessed
11 June 2018].
[4] For further reading on the governance
of charities, please see “Not all charities are honourable and
honest”.
[5] T.W., R., 2017. Sarawak to raise tax on
hill timber by more than 6,000%. [Online]
Available
at: http://www.freemalaysiatoday.com/category/nation/2017/05/09/sarawak-to-raise-tax-on-hill-timber-by-more-than-6000/
[Accessed
14 June 2018].
[6] Nasa, A., 2017. More than 1.7 million
foreign workers in Malaysia; majority from Indonesia. [Online]
Available
at:
https://www.nst.com.my/news/nation/2017/07/261418/more-17-million-foreign-workers-malaysia-majority-indonesia
[Accessed
14 June 2018].
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