This article first appeared in The Edge Malaysia Weekly on December 18, 2017 - December 24, 2017

THE introduction of the Goods and Services Tax (GST) helped broaden Malaysia’s tax base but it is high time policymakers, businesses and tax experts came together to review and reform the country’s tax structure into one that will best serve the country and economy for years to come, say experts.

“The tax system should be a good one that encourages growth. Malaysia is already industrialised and we are moving forward to a digital economy … the tax structure should be totally relooked at in view of the new [high-income] economy,” says Datuk Latifah Merican Cheong, former Bank Negara Malaysia assistant governor and a member of the Group of 25 (G25) former high-ranking civil servants and prominent Malay figures.

The call to set up a panel for a public review of the tax system, comprising mainly business leaders and tax experts, is one of a series of economic and structural reforms listed in a 92-page report titled Invigorating Economic Confidence in Malaysia that Latifah jointly launched with other G25 members in Kuala Lumpur on Dec 9.

The group reckons that the government should keep the GST rate at 6% and take advantage of the widened tax net to restructure the corporate and personal income tax regime to be regionally competitive in order to attract and keep talent and investments.

“Malaysia should consolidate all incentives into a common effective tax for corporations, enabling corporate tax to fall to 20% for big corporations and 15% for small firms and SMEs (small and medium enterprises). At the same time, consolidate personal income tax relief into three major buckets to simplify relief. These measures, together with consolidating tax incentives to corporations, will raise revenues by making tax buoyancy more responsive to GDP growth. Tax rates on individuals and companies should be competitive with those of regional peers,” the G25 report reads.

The recommendation, if implemented, would be a boost for smaller firms and put Malaysia’s corporate tax rate in line with Thailand and Vietnam’s 20%, and closer to Hong Kong’s 17% and Singapore’s 18%, which are countries whose natural resources may not be as abundant as Malaysia’s and whose other costs are higher. Malaysia’s corporate tax rate currently stands at 24% while the tax rate for SMEs (with a paid-up capital of up to RM2.5 million) was reduced from 19% to 18% for the first RM500,000 for assessment year 2017.

To widen the tax net, G25 says all rent-seeking behaviour should be eliminated and recommends that the informal sector be incentivised to register itself to get an introductory flat tax rate of 10%. In fact, government contracts should only be given to those registered in the tax data base with tax deductions instituted in contract payments until all tax liabilities are paid.

As “sin” taxes on liquor and tobacco products are “extremely high”, the group urges the government to review and reduce them to make it unattractive for smugglers to operate “as experience elsewhere has shown [this] usually leads to larger collections”. Revenue loss from the smuggling of cigarettes, for example, has reportedly been estimated at RM4 billion a year.

The government must also “address the decadent effects of corruption, which is the main cause of the rising cost of doing business as well as undercutting efficiency”. It should also remove protectionist policies that are “artificially forcing prices to be higher”.

“A reduction in the excise duties and domestic tariffs for cars will help reduce the household debt burden among the younger city population,” the report adds.

The group also says the Ministry of Finance (MoF) “must be more transparent on government expenditure” by releasing details of allocations and not just consolidated expenditure items — a move that is likely to win the favour of international credit rating agencies as well as the people.

Outcome-driven aid for B40

“With GST, the lower-income group is now paying taxes compared with not being taxed before. Hence, they are naturally concerned about government spending [and] whether there will be better services for the poor. The current situation of cuts in health and education allocations is seen as affecting the poor, and hence the growing call to abolish GST,” the G25 report says, recommending that the MoF “make new efforts on expenditure impacting the lower-income group” as those in the bottom 40% (B40) income group have a higher propensity to consume and are the hardest hit by the rising cost of living.

Expenditure on scholarships and education support will be seen as assisting the poor.

“[The government] is right in wanting to do more for the B40 but it has to be done based on needs. Programmes [and aid] have to be structured to be outcome-driven, so that people can graduate out of the poverty trap,” Latifah says, adding that a strong education system is the basis of a strong workforce.

Thus, greater attention should be paid to building the capacity of the B40 and other disadvantaged citizens. Existing programmes and institutions supporting the needs of the bottom 40% “should continue but must be revamped to remove its rent-seeking and perceived discriminatory nature” that distorts its effectiveness and blemishes the programmes. The new generation of supportive assistance programmes must consider “all ethnic groups fairly and equally as long as they are in the low-income 40% of households or businesses”.

Incidentally, the World Bank, in its Malaysia Economic Monitor report released on Dec 14, recommends that the government make special assistance programmes, such as 1Malaysia People’s Aid (BR1M), more effective by introducing vouchers or stamps for food or defined services to the qualifying lower-income group “to better influence how such support is utilised to promote healthy living and family well-being”.

BR1M “makes no distinction between high-cost and low-cost areas in terms of income eligibility thresholds or benefit levels” — an underlying bias against urban households that mars its redistributive efficiency.

“The design of the scheme could also be improved to better account for household size and composition. For example, at present, a single mother with five children is subject to the same eligibility requirements and receives the same level of benefits as a household with two working-age adults and a single child,” the World Bank says, advocating better-targeted social assistance measures to support the poorest of households, especially in the urban areas, who have been disproportionately hit by the rising cost of living as they tend to spend a larger portion of their income on goods and services that have recorded the most significant price increases.

This adverse impact on higher inflation has been confounded by the persistent deterioration in the affordability of houses since 2012, which has reached acute levels in highly urbanised areas. While the government has implemented a number of measures to address the structural undersupply of affordable housing, the World Bank reckons that the rate at which new low-cost housing materialises “could be accelerated” to bridge the immediate gap.

As at end-August this year, a total of 4.2 million households and three million individuals had benefited from the RM6.3 billion disbursed under BR1M — more than the RM5.4 billion disbursed as at end-September last year to 4.2 million households and 3.1 million individuals, according to the latest two Economic Reports. There were 7.2 million households and 28.7 million Malaysian citizens (excluding 3.3 million who are non-citizens) as at August. Last year, there were 7.3 million households and 28.4 million Malaysian citizens, according to data from the Statistics Department of Malaysia.

As the BR1M payments for next year are scheduled to be disbursed in February, June and August, there is still time to better target the aid at those who need it the most.

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