Expected shortfall in govt revenue calls for tax system reforms, raising statutory debt limit

Expected shortfall in govt revenue calls for tax system reforms, raising statutory debt limit
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KUALA LUMPUR (Sept 3): The Ministry of Finance (MoF), in its inaugural Pre-Budget Statement (PBS) for Budget 2022 released on Aug 31, noted that the revenue collection for the first half of 2021 (1H21) was lower than expected. 

The subsequent collection for the rest of the year is likely to be even less as many economic activities were halted due to the implementation of the various iterations of the Movement Control Orders (MCOs) to contain the resurgence of Covid-19 cases. 

The implications are clear, according to the Institute for Democracy and Economic Affairs (IDEAS) chief executive officer Tricia Yeoh. In order to maintain its spending levels to continue stimulating domestic economic growth, the federal government would have to either borrow more or expand its tax base. 

Tax consultants concur that tax system reforms, including the reintroduction of the Goods and Services Tax (GST), are necessary to help replenish the nation’s coffers and reduce dependency on oil revenue. However, the federal government will strike a fine balance between raising tax collection while maintaining a business-friendly environment that encourages domestic investments and attracts foreign direct investments. 

Malaysia in grave need of tax reforms

PwC Malaysia tax leader Jagdev Singh highlighted that the government must initiate tax system reforms in order to broaden its tax base as it could not solely rely on burgeoning debt levels indefinitely to finance government spending. 

“I believe that broadening the tax base is something that the government perhaps needs to consider. Because they cannot continuously increase its debt ratios, debt limit, and they cannot continuously run a (budget) deficit on and on. So the revenue side of things needs to be looked at and there need to be avenues to see how they increase the revenue,” he said. 

As such, he commended that the MoF has rightly come up with the right measures to address the issue in the PBS. 

For instance, the MoF has identified various measures which are being evaluated to increase tax revenue and enhance tax compliance, such as the Special Voluntary Disclosure Program (SVDP) for indirect taxes, the introduction of a Tax Compliance Certificate (TCC) as a pre-condition for tenderers to bid for government contracts, the implementation of a Tax Identification Number (TIN) system and review of tax treatments which have resulted in revenue leakages or harmful practice, as well as the support for the Organisation for Economic Cooperation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) 2.0 initiative, which is designed to address cross-border tax leakages and aggressive tax planning. 

On top of that, Jagdev also advocated for greater tax education. 

“With the changing landscape, the sources of revenue for individuals and companies have changed. A lot of people are now, for example, selling things online, but are they aware that they need to pay tax on it? So how does the government disseminate this information and encourage people to voluntarily comply rather than going after everyone?

“I think it's also an opportunity for the government to use a carrot and stick approach to drive certain behaviour out there by using the tax policy,” he added. 

Deloitte Malaysia tax leader Sim Kwang Gek pointed out that the introduction of the TCC as a pre-condition for tenderers to participate in government procurement should improve the level of tax compliance among taxpayers. 

She said this is not uncommon and has been practised in some countries such as South Africa and Ireland. For this to work, she said the TCC will need to take into account direct and indirect taxes to be as comprehensive as possible and this would require information sharing between the Inland Revenue Board (IRB) and the Royal Malaysian Customs Department (RMCD). 

“At minimum, the TCC should provide confirmation on tax filing and tax payment status. It is by no means a blanket clearance of the tax affairs of a taxpayer. Normal tax audit process would still prevail,” she said. 

Besides that, Sim argued that the implementation of TIN for businesses and individual income earners aged 18 and above would help tackle the shadow economy. “This should contribute towards more tax collection as it will increase the number of registered taxpayers and reduce tax arbitrage activities.” 

Furthermore, EY Asean and Malaysia tax leader Amarjeet Singh highlighted that a comprehensive review of the tax incentive framework should be done to ensure that the tax incentives offered to foreign and local investors remain relevant to the current business landscape whilst continuing to maintain the country’s competitiveness in attracting quality investments. 

Most importantly, Amarjeet said the focus should really be on how best to increase tax revenue whilst ensuring that the country is still business-friendly, and can continue to encourage and attract investments, both domestic and foreign, as well as can alleviate the challenges faced by the rakyat, particularly the B40, and at the same time, pave the way for sustainable and inclusive economic growth. 

“The answer requires comprehensive and well-thought-out tax reforms that can help our nation boost its economy, while growing the tax revenue in the long run. If done right, we can increase tax revenue and still grow the economy,” he added. 

Higher debts to steer economy on recovery path

In fact, in the PBS, the MoF already hinted that there is a need to increase the statutory debt limit to “provide additional fiscal space” in strengthening the economy and sustaining recovery efforts.

As at the end of June 2021, the federal government's debt level had risen to 61.2% to gross domestic product (GDP) with the statutory debt level at 56.8%, which is still below the statutory limit of 60%.

"In short, we should be ready to expect higher debt to GDP ratios, which include correspondingly a potential downward grading of Malaysia's rating. This should not necessarily be received negatively, as a downgrade can be cushioned by other long-term economic policies introduced by the government towards growth. 

“If the government emerges with strong policies that are aligned with both short-term and long-term economic growth, I expect we can afford to increase debt limits. However, there must be a long-term plan towards fiscal consolidation as well,” Yeoh said when commenting on the possible increase of the statutory debt limit. 

PwC Malaysia deals partner of economics and policy Patrick Tay concurred, saying that although the rise in the statutory debt limit would make the credit agencies “nervous”, a ratings downgrade would not negatively affect that significantly as most government debts are denominated locally. 

“I don't think the government would dare not to spend. This is definitely not a fiscal hawk government, there won't be any deep austerity measures being imposed. 

“So, hence the signalling about increasing the statutory debt limit. And correctly as well, they (the government) could create an even worse scenario if they cut back on spending as it would actually accentuate the down cycle. So it's probably correct for the government to counter cyclical,” he told The Edge in an interview.

However, Tay stressed that the borrowings must be channelled to “quality spending”, as he pointed out that the fear is that government spendings are being misused for unintended purposes.

“In this particular environment, if the government is trending up [its statutory debt limit] because they are doing the right thing to keep the rakyat and the economy fiscally sound, then even if it trends up to 75%, I think they can defend it. But if they let it trend up, and let’s say the economy is recovering and we are getting back to pre-covid levels of revenues, and they are borrowing big to spend on projects that are dubious in nature, then even 70% is a problem,” he added. 

Similarly, EY's Amarjeet said spending discipline must be inculcated and there should be strict accountability towards the usage of government funds, especially borrowed funds. On this, careful planning should be undertaken to only borrow what is needed and to avoid wastage. 

“If there is a need to increase the statutory debt limit, this should only be done with a plan to rein in the debt limit as soon as possible, and with a continued focus on adopting the necessary reforms to ensure fiscal sustainability in the long term.

“If this fiscal discipline can be inculcated, in the longer term, the savings can be channelled towards reducing the budget deficit and continuing to grow the economy. Post-pandemic, there should also be greater focus on shifting government expenditure from operating expenditure to development expenditure which can spur economic activity,” he added. 

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Kathy Fong