The Center for Market Education released a new Policy Brief titled Developing a Modern Tax Framework from Malaysia, authored by Dr Veerinderjeet Singh, a prominent tax advocate and Adjunct Professor at Monash University, Malaysia.
Dr Singh observed that there is obviously a need to reform or modernize Malaysia’s tax framework to fit the nation’s requirements.
“Increasingly complex business transactions, rising cross-border transactions, new ways of doing business, the current speed of change and technological developments – all of these factors are contributing to the demand for a new tax framework”, he said.
The paper highlights that the proposed framework should be
1. Simply and easily understood,
2. Transparent and fair,
3. Robust and flexible,
4. Communicative and engaging.
The proposed central priorities in the tax reform framework are not only on the efficiency and effectiveness of the tax system to counter tax avoidance and evasion but to also take into consideration the aspects of equity and fairness.
Tax reform must be built on the following features:
1. Fairness and the lowering of the overall tax burden to provide more incentive to work, save, invest and compete.
2. International competitiveness for businesses and to encourage more investments in high technology and value added sectors, create jobs and to ultimately raise economic growth potential.
3. Effective, simpler and less complex tax administration so as to minimize compliance costs, reduce business costs as well as to discourage tax avoidance and evasion. The complexity of the tax system and fiscal incentives/reliefs/allowances increases costs, especially for Small and Medium Enterprises (SMEs).
4. Revenue adequacy and sustainability to enable prudent spending and budget management while maintaining fiscal stability.
The paper addresses the issue of the extremely narrow tax revenue base of Malaysia: 21% of registered companies and 15% of employees are subject to income tax. With around 2.2 million individuals paying income taxes compared to a workforce of 14 million, this puts into focus the extremely narrow base from which the Government tries to extract its tax revenue. In addition, oil-related revenues generate around 30% of the total revenue of the Government.
Possible solutions are:
- Increase in tax effort (reducing the tax gap).
➢ Enhance compliance and strengthen enforcement;
➢ Widen coverage to encompass the informal economic sector;
➢ Reduce tax evasion;
➢ Promote voluntary tax compliance.
b. Reform the tax structure.
➢ Increase the shift to indirect taxes (broaden coverage of the existing consumption taxes and increase the tax rate, as dictated by condition and need);
➢ Introduce wealth, digital and capital gain-based taxes, depending on the circumstances.
c. Streamline the tax incentive regime.
➢ Institute a review on the use of incentives and their effectiveness;
➢ Simplify the tax incentives legislation i.e. the Promotion of Investments Act 1986;
➢ Ensure a level playing field and equal access for both domestic and foreign investors.
d. Technology deployment, database and information sharing.
➢ Develop integrated databases and systems with inter-agency information sharing;
➢ Deploy artificial intelligence and data analytics to strengthen tax administration.
Similarly, the author highlights the need to address the issue of the underground economy, to improve the tax administration and to look for new sources of tax revenues. Several proposals are presented to improve tax compliance, including a tax file number allocated to all persons, irrespective of the tax status of a person.
Among the proposals to improve tax administration is the creation of a single agency for tax incentives. At the same time, a bolder move would be to prescribe a simpler set of tax rules for SMEs, which would reduce their compliance costs and administrative requirements.
Another consideration is for SMEs, below a certain threshold to be taxed based on a fixed prescribed amount or a percentage of sales generated (also known as a presumptive tax). A simpler tax system would not only help accelerate the growth of SMEs but it could also potentially increase voluntary compliance among them.
“In such a crucial moment, in which fiscal space is very limited, we hope that our proposals can contribute to the debate for relaunching the Malaysian economy in general”, concluded Dr Carmelo Ferlito, CEO of the Center for Market Education.