This article first appeared in The Edge Malaysia Weekly on January 8, 2018 - January 14, 2018

IT is a known fact that the federal government’s expenditure is growing faster than its revenue. The 10-year average compound annual growth rate (CAGR) is 4.9% for public revenue, compared with 5.2% for expenditure.

The government is making efforts to close the fiscal deficit gap and aims to reduce it to 2.8% this year.

Last week, Second Finance Minister Datuk Johari Abdul Ghani said the deadline for the government’s zero fiscal deficit target, or a balanced budget, may need to be extended to 2023 from 2020. The reason given was that the original deadline was set at a time when oil prices were high.

But looking at the rate of increase in operating expenditure, which currently makes up over 90% of total revenue, one may conclude that the government really needs to work harder to raise more revenue to support the pace of spending.

Notably, federal revenue for 2018 is targeted to increase by 6.4% to RM240 billion, which is higher than the 10-year average CAGR of 4.8% between 2007 and 2017.

Experts agree that raising the Goods and Services Tax from the current 6% could be an effective way to increase federal tax revenue. However, many do not think it will happen anytime in the near future.

A case in point would be the Royal Malaysian Customs Department backtracking last June when it cancelled an order that would removed 60 food items from the GST zero-rated list after it was made public.

Tax consultants say that even if the 60 food items were to be subject to 6% GST, it would not have had a significant impact on tax revenue.

It is worth noting that Malaysia has the most GST zero-rated and tax-exempt items in the region. Furthermore, the GST rate of 6% is the lowest among neighbouring countries that have implemented the tax.

“Yes, increasing GST rates may well be an effective way of generating tax revenue but we must also note that GST impacts a larger segment of society and so, political and social aspects will need to be considered,” says Axcelasia Inc group executive chairman Veerinderjeet Singh. Any increase this year will be viewed negatively, he says.

“In essence, as a developing nation with a need to keep attracting investment and moving towards high-income nation status, an effective long-term fiscal strategy and outlook is required and simply increasing the GST rate will look like a knee-jerk reaction. The government must take steps to reduce operating expenditure and cut down waste, and that will indirectly assist in managing the deficit,” Veerinderjeet explains.

Deloitte Malaysia GST and Customs country leader Tan Eng Yew opines that the country needs to be clear in its objectives and spend wisely on areas that bring the most direct and multiplier benefits instead of just looking at increasing collection to meet rising expenses.

“In principle, GST is a tax collected on consumption. As such, the collection would increase or decrease depending primarily on the spending [power] of the rakyat at large. The idea then is to create a vibrant economy and enhance consumer confidence and spending. The GST collection will naturally increase when that happens.

“Governments also need to continually evaluate their tax base to address whether it is sufficient to meet needs, and also to ensure a country remains competitive and attractive to investment with respect to its neighbours,” he says.

Sunway University Business School’s Dr Yeah Kim Leng notes that countries around the region have been reducing corporate tax rates in a bid to make them more competitive and provide an attractive investing environment for companies. This mean there has been more emphasis on indirect tax, and a focus on GST, to make up for the lower corporate tax rates, says the professor of economics.

However, these experts think there are other ways of increasing tax revenue besides the unpopular move of raising GST.

United Overseas Bank (M) Bhd economist Julia Goh points out that the government’s coffers have been aided by rigorous tax auditing and compliance efforts so far.

“The government has intensified tax collection efforts by enhancing compliance and administration. A Collection Intelligence Arrangement (CIA) was set up to reduce tax evasion by integrating information between the three CIA members — the Inland Revenue Board, Royal Malaysia Customs Department and Companies Commission of Malaysia. The government is also reviewing tax incentives to focus on targeted sectors.”

Another measure was enhancing the Electronic Information System (EIS) to ensure GST declarations by businesses are consistent with their sales. The system enables transmission of real time information on supplies transacted. Thus, tax compliance and tax efficiency have increased, she says.

Veerinderjeet also suggests looking into tax evasion and under-reporting of income as the hidden and informal sectors could generate substantial tax revenue.

“A robust fiscal framework over a 5-to-10 year time frame to outline the way forward is what we need. Effective revenue and public expenditure management is a must. There is too much lip-service and no concrete steps being taken to safeguard tax revenue.

“Wastage abounds and no serious steps are being taken as far as taxpayers can see. We need to focus on making tax compliance a way of life and a national duty. We need to have a tax file number allocated to all persons, irrespective of the tax status of a person,” he says.

“We also need to revamp tax incentive legislation to remove certain incentives that have not been attractive, curtail others and review the type of incentives as the same type may not apply equally to different types of industries. We may have lost too much in tax revenue by granting tax incentives too generously,” Veerinderjeet says.

Meanwhile, across the causeway, there has been murmurs of a possible hike in the GST to 9% from the current 7%. This came after Prime Minister Lee Hsien Loong said last November that the city state will be raising taxes as government spending on social services and investments grows, although he did not specifically pinpoint GST.

He was quoted as saying that the need to raise taxes is partly due to the demographic shift in the country. By 2030, one in four of the population will be above 65, implying a greater demand for healthcare. The government is addressing this change by building more facilities and improving health insurance to ensure healthcare will stay affordable.

While nobody likes the idea of paying taxes, perhaps it would be less irksome if taxpayers feel tangible benefits from forking out the extra tax.

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