The current worldwide trend is a shift from direct tax to indirect tax by decreasing direct tax rates and increasing Value Added Tax (VAT)/Goods and Services Tax (GST) rates. According to the International Monetary Fund (IMF), over 160 countries had a VAT/GST as of 2020.

Malaysia’s direct taxes (comprising company income tax, personal income tax, petroleum income tax, stamp duties and real property gains tax, etc.) contributed to 70% of total tax revenue in 2016-2020 (2010-2015: 75%). Indirect taxes (such as Sales and Service Tax (SST), export duties, import duties, betting and sweepstakes and gaming tax, etc.) made up 30% of total tax revenue in 2016-2020 (2010-2015: 25%).

The approach to pro-growth and investment tax reform is to focus on the neutrality, economic growth and efficiency of the tax system, which minimises the effect of the tax on businesses and individuals making decisions; does not distort the allocation of capital; and does not unduly impede or reduce the productive capacity of the economy.

The tax system needs to avoid ambiguous interpretations, exemptions and loopholes that distort investment decisions and consumer choices. It is important to minimise and balance out the excessive or high tax burden on households and businesses while ensuring fiscal sustainability.

Domestic companies and foreign multinational enterprises are attracted by a stable and predictable tax system, which is administered in an efficient and transparent manner. Marginal tax rates are also an important determinant of how a country’s tax competitiveness and attractiveness to businesses and investors relative to other countries.

In a globalised world with high capital as well as people mobility, businesses can choose to invest in any country to maximise their after-tax rate of return while talented individuals will seek employment in places that reward work effort through lower tax rate. If marginal tax rates are too high in Malaysia compared to her regional peers, investment is likely to go elsewhere, and economic growth and investment are likely to suffer.

We need a shift away from taxing employment and business activity towards taxing consumption.

1.Broad-based Consumption Tax

As the Sales and Service Tax (SST) is not a broad-based consumption tax compared to the Goods and Services Tax (GST), this had resulted in a revenue shortfall of RM17.2 billion, taking the differences between RM27.1 billion SST revenue collected on an annualised basis in 2019 and RM44.3 billion GST revenue in 2017.

It’s time to consider the reintroduction of GST to replace SST when the economy has recovered from the COVID-19 pandemic, starting with a lower rate between 3.0-4.0% and raise it gradually over time when the economic and business conditions permit.

To ensure a smooth GST implementation and ease the burden on SMEs and low-income households, it is proposed that a wider selection of basic necessities be zero-rated; set a higher threshold for SME registration of GST; and to have an efficient and prompt GST refunds by adopting strict measures to ring fence tax collections that are eventually refundable to secured GST accounts that will only be used for tax refunds and nothing else.

GST will eliminate leakages caused by businesses willfully avoiding registration while enhancing tax collection for the government.

2. Investment Enhancement

Reducing corporate tax rates (simpler and transparent) is more effective than providing special tax reliefs or incentives to enhance investment. When the rationale for granting tax and financial incentives is based more on discretionary and subjective qualifications and reporting requirements, instead of automatic and objective requirements, they can instigate rent-seeking behaviour and facilitate abuses on the granting of approvals process.

Lowering the corporate tax rate and removing differential tax treatment among sectors and industries would improve the quality of investment by reducing possible tax-induced distortions in the choice of investments.

Malaysia’s current level of entrepreneurship, income and capital market development does not warrant the implementation of capital income related taxes as in the rich developed countries. Capital gains tax (CGT) and wealth tax run counter to the international trend of declining tax rates on capital income and wealth.

We cannot compare with advanced nations as Malaysia is still a developing country. Our priority should be to remain cost-competitiveness attractive to FDI to complement domestic direct investment to boost the nation’s productive capacity.

Taxing wealth and income from capital such as capital gains tax reduces savings and investment incentives and, thus, greatly dampens the nation’s long-term prospects for increased productivity and economic growth. Imposing taxes on the wealth accumulation is counterproductive as it stifles innovation and entrepreneurship, encourages avoidance, evasion and capital flight.

While the CGT would broaden the tax net to include more capital assets, leading to a higher collection of tax revenue, it could also adversely impact the income of genuine long-term investors who rely on dividends and capital gains.

Foreign portfolio institutional investors, which had already marginalised Malaysian equities, would further shy away from putting their money in our stock market with the CGT. CGT on listed shares transaction would significantly reduce Malaysia’s attractiveness and competitive edge as a place of equities investment compared to countries with no capital gains tax on shares trading such as Singapore, Hong Kong, New Zealand, and the Philippines (individual).

As the CGT increases marginal cost of investing, it makes a compelling case that such levies are self-destructive.

3. Productivity Improvement

Reduction in the top marginal rate on personal income, since it rewards work efforts and boosts productivity, retains talent as well as reverses brain drain. Malaysia has too many personal income tax bands and lower taxable income thresholds. As a result, individuals’ earning high income hit the higher tax rate bracket too fast.

-- BERNAMA

Lee Heng Guie is Executive Director of the Socio-Economic Research Centre (SERC).