Revisiting the Malaysian tax scene a year after

This article first appeared in Forum, The Edge Malaysia Weekly, on May 13, 2019 - May 19, 2019.
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Before Pakatan Harapan (PH) took over Putrajaya — after winning the 14th general election on May 9 last year — the then Barisan Nasional (BN) government enforced a rigorous form of tax collection. Many taxpayers had their offices raided and travel restrictions imposed on them. In fact, large companies were slapped with tax assessments amounting to millions of ringgit. For instance, Magnum Holdings was hit with tax assessments of almost RM500 million, AEON Credit was slapped with a tax bill of about RM100 million and S P Setia was issued with a RM70 million tax assessment.

After winning GE14, one of the first announcements that the PH government made was that taxes would no longer be collected illegally and that no assessments would be raised without any substantive or concrete reasons. It also said taxes that were illegally collected previously would be returned or refunded to taxpayers. This was confirmed by Finance Minister Lim Guan Eng, who assured the people that the Inland Revenue Board (IRB) would not flout the rule of law or abuse its power, as was the case under the previous government.

The following are some of the changes brought about by the PH government on the country’s tax scene:

•    A tax reform committee was formed in September last year to tackle tax issues. The proposed changes included measures to reduce tax leakages, access the underground economy and enhance tax administration.

•    The Goods and Services Tax (GST) was abolished and the Sales and Service Tax (SST) reintroduced. While GST had a broad tax base, SST 2.0 is a single-tier system with a narrow tax base, making it a challenge for the government to balance the competing demands of raising additional revenue and ensuring that it sticks to its promise of reducing the people’s tax burden.

•    The government introduced additional taxes such as the sugar tax and airport levy along with several tax adjustments. Tax rates were lowered for small and medium enterprises with a paid-up capital of less than RM2.5 million and for businesses with an annual taxable income of less than RM500,000. Large companies, however, saw slightly higher tax rates despite added incentives. Further, a digital tax was introduced for foreign service providers, which will be implemented in January 2020.

•    A Special Voluntary Disclosure Programme (SVDP) was also introduced to encourage taxpayers to voluntarily disclose their undeclared income and settle any tax arrears from previous years. Taxpayers were assured that all voluntary disclosures would be accepted in good faith without further review of the matter. The programme has been extended due to its success in collecting almost 390,000 declarations so far.

While the government’s efforts should be applauded, a lot more has to be done to improve the economic well-being of the people. The reform committee should study further the tax appeal process in Malaysia. The following are some of our proposals:

•    There is an urgent need to repeal Section 127 (3A) of the Income Tax Act 1967 (ITA), which gives the finance minister the power to grant tax exemptions without the need to gazette or explain why. In fact, this provision was abused on many occasions by previous ministers who granted tax exemptions to various persons who may have had political and/or business connections with them. This issue was raised by MP Nik Nazmi Nik Ahmad at the tabling of Budget 2019, where he stated that the said provision should be removed to prevent the abuse of power and to  provide greater transparency.

•    The tax system should also be restructured by adopting a modern approach. The UK, for instance, has implemented the first tier tribunal that is headed by a judge. The current appointment system of the Special Commissioners of Income Tax (SCIT) creates the perception that it lacks independence. This is because members are appointed by the Yang di-Pertuan Agong on the recommendation of the minister, who also oversees the IRB. However, it appears that nothing has been done by the government to address the matter.

•    Sections 101 and 102 of the ITA should be revised as it gives the IRB’s director-general (DG) 12 months to review an assessment before forwarding a notice of appeal to the SCIT. A six-month extension may be granted by the minister when the DG requires a longer period to carry out the review. As taxpayers are forced to pay in spite of an appeal, the period for review should be shortened to a maximum of 60 days.

•    Section 44(6) of the ITA empowers the IRB’s DG to grant tax exemptions to organisations and institutions that carry out charitable or public work. In the examination of previous applications that had been approved, it was noted that deserving applications were either rejected or abandoned. More favourable organisations enjoyed tax-exemption status. A more transparent process must be introduced and such powers should not be vested in the DG alone.

Ultimately, it is crucial for the PH Government to realign its focus towards building the country’s economy for the better. The rights of taxpayers should be strengthened against the extensive powers accorded to the IRB and Customs to collect and enforce the tax system. Otherwise, negative perceptions will be created, especially when it comes to the people’s support of the government.

It is time the words “reform” and “transparency” were turned into actions that the people can actually benefit from. A better system that delivers taxes that are lower, simpler and fairer should be introduced. Indeed, lower tax rates in a simpler system would enable taxpayers to focus more on their businesses than trying to understand red tape. Most importantly, the tax system should be fair so as to support economic growth and a higher standard of living while improving our international competitiveness.

S Saravana Kumar is a tax lawyer and a partner with law firm Lee Hishammuddin Allen & Gledhill. Nurul Imani Hamzah is a paralegal with the Tax, SST and Customs Practice of LHAG.

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