KUALA LUMPUR (Oct 12): A proper economic and distributional analysis will have to be carried out if the government intends to consider a full-fledged capital gains tax (CGT), said the Malaysian Institute of Certified Public Accountants (MICPA) and Deloitte Malaysia.
This is because the country is still a developing nation and is competing with foreign direct investments with various countries in the region, MICPA and Deloitte said in a joint report on tax reforms.
“However, a merger of the current real property gains tax (RPGT) into the income tax structure does make sense as an approach to enhance efficiency and reduce compliance costs,” they added.
The report also suggested that if CGT is to be implemented, the current RPGT Act 1976 could be a starting point to a full-fledged CGT legislation.
“The current RPGT form could be amended for the purpose of CGT. A collection mechanism such as withholding of tax may also be considered,” the report said.
MICPA and Deloitte said any new tax introduced needs to be relatively simple and should not impose undue compliance cost on the community and a disproportionate administrative burden on the authorities.
Noting that there are risks involved in introducing a new tax, the report said they include potentially increasing the effective tax rates on some investments when increasing the taxation of capital gains, which in turn will reduce the levels of investment.
“By itself, this is likely to have a negative impact on productivity and economic growth,” it said.
Furthermore, as a CGT regime is often perceived by taxpayers as being unfair or unreasonable, it would likely result in an adverse reaction among those impacted.
MICPA and Deloitte also said that the revenue volatility from taxing capital gains will pose challenges for fiscal management.
This, they said, can be seen in how direct macroeconomic impact becomes counter-cyclical, where tax revenue increase as asset prices rise and reduce as asset prices fall.
Besides that, the risk of introducing new taxes could make doing business in Malaysia become more expensive. That would mean that the country would have to bear with mid- to long term risk of businesses that may move out of the country, which will result in overall reduction in tax revenue.
“To overcome the above negative ramifications, the responsibility lies with the tax authorities, the advisers and the professional associations to educate the taxpayers from time to time through seminars, workshops, circulars and updates, among others.
“Further, CGT should be implemented gradually by way of a lower rate and limited scope, for starters. This is so as to not cause a major shock to the market, which may portray Malaysia as business unfriendly,” said MICPA and Deloitte.