This article first appeared in The Edge Malaysia Weekly, on November 2 - November 8, 2015.

TAX the rich and subsidise the poor — the bottom 40% of the Malaysian population (B40) are likely to hail the government’s proposal to increase the tax rates for high-income earners as fair. Simply put, those who can afford skiing holidays in the Swiss Alps or cruises in Alaska should carry a heavier tax burden. 

Indeed, some liken the proposal to the Robin Hood tax. 

In the recently tabled Budget 2016, the government proposed to raise the personal income tax rate for individuals with a chargeable income of more than RM600,000. Individuals with a chargeable income of between RM600,000 and RM1 million will be subject to a 26% tax rate while those with a chargeable income of more than RM1 million will be taxed 28%. 

This is an increment of 1% and 3% from the previous year’s rate, which was capped at 25% for those with a chargeable income of more than RM400,000.  

Meanwhile, the government has allocated RM5.9 billion for 1Malaysia People’s Aid (BR1M), which would benefit 4.7 million households and 2.7 million single persons. BRIM assistance for households with a monthly income of RM3,000 and below has also been increased from RM950 to RM1,000 a year. 

This is certainly pleasant news for the B40.  

By the same token and to the disappointment of the masses, there was no reduction in taxes for the middle-income group. The increase in relief for children and spouses and new relief for taxpayers acting as carers of their parents are welcome but quite insufficient to maintain spending power when the cost of living is creeping up.    

The increase in tax for the high-income bracket is expected to bring an extra RM400 million to the nation’s coffers, which would be a meaningful sum, especially when the government is scouting around for income streams given the shrinking oil revenue. 

According to the Ministry of Finance’s secretary-general, Tan Sri Dr Mohd Irwan Serigar Abdullah, only a small pool of 17,000 taxpayers will be affected by the proposed tax hike. This could be a wise populist move, ruffling the feathers of barely 2% of taxpayers. 

That said, the question that arises is, will the additional tax revenue collected from the rich outweigh the potential loss of these high-income individuals to more tax-friendly nations? This too when Malaysia needs talent and entrepreneurs to propel it to high-income nation status? 

“If taxes go up, global expatriates won’t want to be based here and Malaysia will lose the ability to attract talent. Politically, it is attractive to tax the rich but economically, it doesn’t make much of an impact. You cannot forget that a lot of businesses are actually footloose and can go anywhere,” says IHS chief economist Rajiv Biswas.  

He believes tax changes add uncertainty to decision-making. “Six months ago, taxes were down and now they are up again. People cannot make decisions because they don’t know in which direction taxes are going to go. Places like Singapore have that predictability,” he points out. 

Nonetheless, some quarters believe income tax is just one of many considerations for individuals deciding where to work and reside. EY Malaysia tax leader and partner Yeo Eng Ping does not think a tax hike would drive away high income earners from a country because they would also look at, for example, cost of living, family ties and political and economic stability.

Environmental health too is an influential factor for expatriates. In fact, a number of multinational corporations have moved out of Hong Kong to Singapore in recent years because of the poor air quality there. 

Tax and Malaysia Sdn Bhd chairman Veerinderjeet Singh agrees that an income tax hike might not be a strong push factor for people. He says many MNCs pay the personal income taxes of their senior executives, rendering tax rates a non-issue for highly paid executives. “However, an increase in tax rates will push up the cost borne by the MNCs,” he adds. 

Greener pastures 

Like it or not, the tax rates across the Causeway are enticing enough for a person to want to work there. 

An incentive to move to Singapore would be its relatively stable currency. Over the last year, the ringgit has depreciated dramatically against the Singapore dollar. Last Friday, it was trading at 3.06 to the Singapore dollar compared with 2.57 a year ago.  

Singaporeans pay 2% tax when their chargeable income hits S$30,000, which works out to tax payable of S$200 while the maximum rate for those with a chargeable income of more than S$320,000 is 20%. However, the latter will soon be revised to 22%.  

In Malaysia, taxpayers pay about RM650 on a chargeable income of RM30,000. When income reaches RM10,000, it is taxed at 1%. 

Malaysia’s tax rate is the second lowest in the region, after Singapore. Still, a common complaint here is that taxpayers reach higher brackets too easily because the bands are narrow. The government has sought to widen the tax brackets and reduced income tax by 1% to 3% in Budget 2015 as the Goods and Services Tax (GST) was to be implemented in April this year. 

However, the consensus is that the government should adjust the brackets to lighten the tax burden of middle income earners who, to put it simplistically, are already being taxed for a lightbulb or a latte. 

EY Malaysia’s Yeo points out that there are 10 different tax brackets now, five of which are for taxpayers earning less than RM100,000 (applicable tax rate is 21%). Each bracket is RM15,000 to RM30,000 wide and the rate for each bracket increases about 5% to 6%. 

By comparison, she says, Singapore has eight tax brackets, five of which are for individuals earning less than S$120,000, where the applicable tax rate is 11.5%.  

Up north in Thailand, where the maximum rate is 35% for income of more than THB4 million, the tax scheme only has seven brackets, five of which are for individuals earning less than THB1 million, where the applicable tax rate is 20%. 

“I believe at the right time, the government can consider widening the bands with the effect of lowering the tax rate for the middle-income group,” says Yeo. 

A back-of-the-envelope calculation shows that a family of four relying on a single income of RM5,000 per month would leave the sole breadwinner with a take-home pay of about RM4,300 after deductions for Employees Provident Fund contribution and income tax. 

This family does not fit Selangor’s revised definition of being “poverty stricken” with RM1,500, of course, but how far can RM4,300 be stretched today in the city?  

A housing loan or rent would chip off a quarter of the income earned while the rising cost of living will devour the RM4,300 take-home pay in no time. This family of four would have to be very thrifty to have some savings in the bank for emergencies or college.

Certainly, the current tax framework, coupled with the implementation of GST, has curbed consumer spending, particularly among the B40. 

Yeo says that could be the case but adds: “Zero-rate GST on essential goods helps alleviate the situation. However, I think the overall subdued outlook for the economy is probably causing cautious spending behaviour.”

Hong Leong Investment Research economist Sia Ket Ee opines that consumer sentiment will be affected by eroding disposable income. He says the weak growth in consumer spending over the last few quarters reflects this. 

That said, it would be unreasonable for Malaysians to expect the government to further reduce income tax rates for middle income earners after the 1% to 3% announced in Budget 2015 and while GST is still in its nascent stage. “The government is targeting an increase in revenue from GST; it can’t give back everything it has received,” says Sia.  

Veerinderjeet says he had expected the maximum personal income tax and corporate tax rate to be 20% in 2020 and GST to increase to 10%. “However, with the sudden increase in the top marginal personal income tax rate to 28%, it is now unclear and uncertain as to what the tax policy direction is for the future,” he adds.

Tax consultants and economists say the expectation is for income tax rates to be reduced gradually in the future whilst GST will be adjusted upwards. However, due to the government’s financial constraints now, it needs to broaden its tax revenue to reduce the budget deficit. Hence, any further reduction in income tax rates could be a pipedream for the middle-income group.

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