This article first appeared in The Edge Malaysia Weekly on November 5, 2018 - November 11, 2018

A glance at the chart gives the impression that petroleum-related revenue is once again making up a chunk of total revenue for the coming year. In 2019, some 30.9% of total revenue will be derived from petroleum-related sources, while the remaining 69.1% will come from other sources.

However, the reason for the high petroleum-related revenue next year is largely Petroliam Nasional Bhd’s RM30 billion special dividend, which the government will need to fulfil its tax refund obligations amounting to RM37 billion, of which RM18 billion are from income tax and RM19 billion from the Goods and Services Tax.

Malaysia should thank its lucky stars for the recovery in Brent crude prices and that it has a national petroleum company to help support the economy in challenging times. Without the petroleum-related revenue, the Pakatan Harapan government would have a tough time paying the tax refunds — a problem inherited from the previous government.

If the special dividend of RM30 billion is excluded from the equation, the share of petroleum-related revenue of total revenue for 2019 is estimated at 19.5%, slightly lower than the 21.7% estimated for this year.

At 19.5%, petroleum-related revenue is still lower than the annual average of 34.6% recorded from 2009 to 2014 during the crude oil boom.

The government says the sources of revenue are fairly diversified and it is expected to further enhance its non-petroleum revenue base, particularly through tax reform.

For the medium-term fiscal framework for 2019 to 2021, as reported in the 2019 Fiscal Outlook Report, the government says it will focus its efforts on enhancing tax compliance and efficiency through tax reform initiatives.

“Among the key initiatives are bridging the tax gap arising from tax leakages, enhancing existing legislation to ensure clarity and simplicity as well as reviewing the effectiveness of tax incentives,” the report says.

What these reforms will look like in practice is still an unknown at this juncture.

Nevertheless, the government says that it is expecting to collect an additional RM1.43 billion in revenue next year under the measures proposed in Budget 2019.

The bulk of the additional taxes next year, based on the government’s estimates, will come from other direct taxes amounting to RM1.05 billion, while income tax is set to contribute an extra RM81.94 million. Indirect taxes, such as excise duty and service tax, are set to provide RM300 million.

However, the RM1.43 billion additional revenue is hardly enough to see the country through difficult times.

That said, while the government’s efforts on these initial tax reforms are to be applauded, more needs to be done in a consistent manner to further diversify revenue, in case there comes a day when petroleum revenue is not easily accessible.

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