By Benedict Weerasena, Research Director of Bait Al Amanah
Our current taxation model is unsustainable. As Malaysia transitions towards a high-income economy, our nation’s revenue level remains low and trails many of its aspirational peers. For instance, Malaysia continues to under-collect in personal and consumption taxes, trailing many regional ASEAN peers, countries that achieved high-income status in the last 3 decades and also OECD countries.
Second, how much longer can we depend on petroleum-related revenue, considering the volatility of global prices? Also, petroleum reserves for oil and gas resources are projected to last for only 15 years, as announced by the Ministers in the Prime Minister’s Department. When GST was implemented, our dependency on petroleum-related revenue dropped to 14.6% in 15.7% of total revenue in 2016 and 2017 respectively. In 2023, petroleum-related revenue is projected to contribute to 22.4% of total revenue. However, will we see a repeat of the year 2022, where the initial projection of petroleum-related revenue 18.8% skyrocketed to 28% of total revenue due to additional dividends from PETRONAS? We clearly need to re-evaluate the sustainability of our taxation model.
In addition to significant initiatives to improve tax compliance and minimize tax leakages, exploring new sources of revenue is essential to boost revenue collection. First, we need to introduce a progressive consumption tax, where basic necessities are exempted, key development items are charged a lower rate of 2-3%, all other goods are charged at a rate lower than 6%, and luxury goods are charged a higher rate. This time around, several improvements are needed including introducing the consumption tax for overall goods at a lower rate than 6 per cent in the next 1 to 2 years, to ensure that the recovery momentum is not adversely impacted. Second, considering that GST is regressive in nature, mechanisms such as exemptions for all basic necessities and other cash transfers are needed to reduce the impact on lower-income households. Third, auxiliary measures such as enhanced price monitoring efforts need to put be in place to prevent an unjustifiable rise in prices. Fourth, there is a need to consider reducing income tax rates slightly to provide some relief from the new tax on consumption.
Next, a progressive capital gains tax (CGT) is crucial to raise revenue. It is important to know Malaysia is one of the few remaining countries in the region without the CGT. A progressive CGT can regulate speculative investments in times of economic overheating. On the flip side during periods of economic stagnation, it encourages investors to retain their investments in the capital market, thereby facilitating long-term development.
Such a tax can motivate investors to shift their funds towards the capital market to promote more sustainable growth. Similarly, during periods of economic stagnation, the CGT can encourage investors.
*Excerpts of this statement were published in an interview with Free Malaysia Today.