In today’s challenging economic environment, the government has to improve its tax base in order to strengthen the country’s fiscal position.
This is because the current tax system, the sales and services tax (SST), is only predicted to collect RM22 billion this year, which had caused a shortfall as the previous tax system - the goods and services tax (GST) - had managed to collect RM44 billion.
In a recent announcement, Finance Minister Lim Guan Eng said there will be no new tax measures in the upcoming Budget 2020.
However, several measures are expected to be taken amid the sluggish global economic environment.
Tax experts said with the current oil price hovering around US$55 to US$65 per barrel, the budget should be drafted in that range to avoid over-dependency on Petronas’ reserves.
Since last year, benchmark Brent Crude had peaked at US$84 per barrel before sliding to US$53 per barrel in January, and hovering between US$55 to US$75 until today.
Malaysian Institute of Certified Public Accountants (MICPA) president Veerinderjeet Singh said currently the SST only covers 38 percent of the consumer price index basket of goods compared with the 60 percent with the GST.
He said that in the current economic situation, the government should consider widening the tax base, especially income tax.
“Currently, only two million of the workforce are contributing to income tax. Besides the workforce, there are also people with a high level of income who do not pay their income taxes. This is because our current low salary level coupled with various tax incentives have caused many to be excluded from paying taxes,” he told Bernama.
He added that with technological advancements, the Inland Revenue Board (IRB), commercial banks and Bank Negara Malaysia should have an interlinked system to avoid tax evasion.
“Currently, we rely entirely on the enforcement of IRB. With technology, it would be difficult for tax evaders to run away, hence bringing those people under the tax net,” he said.
Veerinderjeet also said the government could also tap into the shadow economy as according to studies conducted by the World Bank, the shadow economy accounts for approximately 30 percent of the nation’s gross domestic product (GDP).
Calls to restore GST
From an economic and tax policy perspective, there has also been support for reversing the tax system back to the GST due to its transparency and ability to collect higher revenue.
Veerinderjeet said that what makes the GST clearer is the input and output tax, which would be difficult to manipulate.
However, he said that for the time being, there is no necessity to restore the GST but there is a need to ensure that the current tax system could function at a higher level.
Meanwhile, Deloitte Global Indirect Tax Clients & Industries Leader Senthuran Elalingam said the reintroduction of the GST is popular as it provides a wider tax base and a more efficient method of collection.
“The government has acknowledged that GST is a more efficient system than the current SST regime. However, the question remains on the timing and what makes sense for the Malaysian economy and the rakyat,” he said.
He added that the first attempt to introduce the GST was not successful as there was limited understanding of how it worked and the benefits, combined with critical inefficiencies such as late payment of GST refunds.
“If Malaysia is to reintroduce the GST at some point, we would need to learn from what didn’t work so well the first time and have measures in place to address it to ensure GST 2.0 succeeds,” he said.
Meanwhile, the government has announced that it would implement a service tax on digital services of six percent beginning on Jan 1, 2020.
However, the guidelines have yet to be announced by the Royal Customs Department.
Senthuran said that given the limited timeframe, many businesses would not be fully ready by the time the tax goes live.
“We are hopeful that the authorities will take a more relaxed approach to enforcement - especially in the imposition of penalties during this transitional period,” he said.
He added that from the consumer’s perspective, the main impact will be on pricing as the price of digital services from foreign service providers will most likely increase by six per cent from Jan 1.
However, for purchases from local service providers, there will be no change as these services are already subject to six percent in the SST regime.
Senthuran emphasised that the adoption of indirect tax rules for taxing foreign digital service providers is not new and is a global trend.
“Singapore will also go live with its own version of the rules on Jan 1, and so many of the larger technology companies are already aware of such requirements,” he said.
On the sin tax, Veerinderjeet said the industry itself has already been taxed heavily and any additional tax will only open a bigger hole in the future.
A sin tax is a tax that is often targeted in every budget as it is viewed to be the easiest way of obtaining additional revenue for the country.
“I do not foresee the government increasing the sin tax this time around, as in the previous budget it had increased casino duties to 35 percent and on gross gaming income and gaming machine duties and to 30 percent on gross collection,” he said.
Under the SST regime, alcohol is currently taxed at 10 percent, compared to only six per cent in the GST system.