Lower public revenue in 2020 in absence of Petronas special dividend

KUALA LUMPUR: The federal government’s revenue is expected to drop to RM244.53 billion in 2020, down 7.1% from RM263.3 billion in 2019. However, the amount will still be higher than the RM232.88 billion collected in 2018.

A revenue of RM244.53 billion in 2020 would be equivalent to 15.2% of gross domestic product (GDP).

Tax collection will be higher at RM189.9 billion, with non-tax revenue at RM54.6 billion, according to the 2020 Fiscal Outlook and Federal Government Revenue Estimates report issued by the ministry of finance.

The federal government's total expenditure is forecast to be RM297 billion or 18.4% of GDP in 2020.

Operating expenditure (opex), estimated to be RM241 billion, will account for 81.1% of total opex in 2020, while development expenditure of RM56 billion makes up the balance. 

The opex in 2020 is lower than in 2019, when the amount swelled to RM262.3 billion or 17.3% of GDP, taking into account the one-off allocation of outstanding goods and services tax refunds of RM37 billion.

The report explains that an increase in fuel subsidies following a rescheduling of the targeted fuel subsidy programme is expected to lift opex in 2019.

Total public expenditure in 2019 is also substantially higher at RM316 billion or 20.8% of GDP.

Public revenue in 2019 is estimated to be RM263.3 billion, of which tax revenue is expected to grow by 3.4% to RM180 billion, or 11.9% of GDP, due to higher sales and service tax (SST) collection, while non-tax revenue is projected to be RM83.3 billion of 5.5% of GDP.

Government expects RM26.8 billion SST collection in 2019, exceeding forecast of RM22 billion
SST collection, which was originally forecast to be RM22 billion in Budget 2019, has been revised upwards to RM26.8 billion due to better-than-expected collection in the first half of 2019, according to the report.

Sales tax collection of RM15.5 billion is targeted following higher demand for four-wheel drive (4WD) and sport utility vehicles (SUVs) as well as machines and spare parts.

Malaysian Automotive Association statistics show that 4WD vehicle and SUV sales in the first half of 2019 leapt 77.4% year-on-year.

Meanwhile, service tax collection is estimated to be RM11.3 billion, primarily due to higher demand in the food and beverage sector followed by the telecommunications and insurance sector.

Government's tax revenue up 3.4% to RM180 billion in 2019
Tax revenue is expected to go up 3.4% to RM180 billion, with the share of direct tax and indirect tax constituting 75.4% and 24.6% respectively.

Direct tax collection is anticipated to increase by 4.3% to RM135.6 billion, mainly contributed  by higher individual and companies income tax (CITA) collection following measures under the Special Voluntary Disclosure Programme (SVDP), continuous stable wage growth and corporate earnings.

Service and manufacturing sectors are the biggest contributor to CITA collection. Petroleum income tax collection is projected to decline by 10.9% to RM17.9 billion in tandem with lower global crude oil prices, expected to average US$63 (RM263.88) per barrel, compared with US$71 in 2018.

Stamp duty and Real Property Gains Tax collection is estimated to be RM6.3 billion and RM1.6 billion respectively, reflecting higher gains from property market transactions.

Under the SVDP, about 270,000 participants have voluntarily disclosed their undeclared income, which is expected to raise an additional collection of RM6 billion.

Indirect tax collection, such as of excise duty, import tariffs and the SST, is estimated to rebound marginally by 0.8% to RM44.4 billion, contributed by higher SST collection.

With weakening growth in government revenue, tax reforms necessary

The federal government’s revenue growth has exhibited a declining trend.

The annual average of 10.7% between 2000 and 2009 decelerated to 4.5% between 2010 and 2018.

The 4.5% pace indeed lagged the nominal GDP growth of 8.1% annually in 2010 to 2018.

In terms of percentage to GDP, total revenue recorded 20.9% (2000 to 2009), compared with 19% (2010 to 2018) during the same period. 

“The current tax revenue base in Malaysia is narrowed due to generous incentives, availability of various reliefs and a reduction in tax rates,” said the Tax Reform Committee (TRC) in the report.

As at end-2017, 62.4% out of 1.251 million companies were registered with the Inland Revenue Board, of which 7.8% were subjected to tax.

Likewise, only 2.47 million individuals, which were 16.5% of the 15 million workforce, were subject to individual income tax, according to the report. 

“Despite the government significantly reducing its dependency on petroleum-related revenue from 41.3% in 2009 to about 23% in 2018, the share is relatively substantial and could expose a risk, particularly when crude oil declines,” said the TRC. 

There are concerns over the effectiveness of current investment incentives in fulfilling government objectives. “Tax incentives granted to companies are a cost to the government as they are measured by the amount of tax revenue foregone. 

“Instead, the government could utilise the revenue foregone for other development projects or lowering the fiscal deficit. The incentives are also exposed to abuse, resulting in unnecessary revenue losses to the government. Therefore, it is timely to review the relevance, effectiveness and efficiency of the whole tax incentive structure both in the Promotion of Investment Act 1986 and the Income Tax Act 1967.

Furthermore, there is a “serious need” to address the issue of tax evasion and under-reporting of income, which undermines the self-assessment system as well as public trust and confidence in the whole taxation system. 

The committee pointed out that high reliance on direct tax increases the vulnerability of revenue collection as it correlates with economic growth and the business cycle.

Hence, shifting of direct tax to indirect tax, mainly consumption-based tax, does not only broaden the tax revenue base but also enhances tax buoyancy. “There is a growing global shift from direct to indirect tax as countries strive to boost sustainable tax revenue collection."