MY Say: Act on tax reforms and pandemic’s lessons

This article first appeared in Forum, The Edge Malaysia Weekly, on November 8, 2021 - November 14, 2021.
MY Say: Act on tax reforms and pandemic’s lessons
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It seems that the Malaysian government did not want to risk anything with Budget 2022. The focus is undoubtedly on boosting growth. Operating expenditure is set to increase by 6.3% while net development expenditure will jump 21.9% as the government sows the seeds of a long-run recovery.

Revenues, however, will only increase by 6%, well below estimated nominal gross domestic product growth of 8%. After all, the government did not implement new taxes (apart from some extensions in the Sales and Service Tax (SST), an excise duty on sugary drinks and a one-off prosperity tax) in order to sustain the recovery, despite Malaysia’s low tax base.

This, of course, suggests that Malaysia will continue to face downward rating pressure. But with the country’s strong growth prospects, imminent action appears unlikely until there is more political certainty. The government’s medium-term plan for a fiscal deficit of 3.5% by 2025 suggests relatively sharp fiscal consolidation is to be expected in 2023 and 2024, but a general election is likely and this may complicate such plans. Rating agencies will probably wait for more policy clarity on the likelihood of further tax increases before taking any action.

Given the various economic issues faced by the world, including Malaysia, with regard to the Covid-19 pandemic, the need to start thinking seriously about the country’s future is clear as daylight. So, the introduction of reforms must be instituted seriously in an apolitical manner as we have the opportunity to deal with all issues at one go and as such, clear strategies must be set out and executed almost immediately so that we can see results over the next few years. These include technology adoption, innovation, entrepreneurship, a cashless society, cutting down dependence on foreign labour, and a sound fiscal policy.

The Ministry of Health needs to continue to remind the public to follow the strict health safeguards. All the public announcements and infographics that we see in the media must continue for a very long time because if they do not, another wave of Covid-19 or another virus will come along and cripple our economy again.

So, do we have a clear exit strategy with respect to the pandemic? Are we prepared for another pandemic in the future? Are we thinking hard about this? It does not appear so.

We still continue to pander to the racial divide. We still see the need to focus on race-based allocations rather than the Keluarga Malaysia concept being espoused by the prime minister. We are not taking the family concept seriously … it appears to be just a convenient tagline.

Budget 2022 set its focus on protecting and driving the recovery of livelihoods, rebuilding national resilience and catalysing reforms. It is a feel-good budget with many initiatives, funding and allocations for various segments of society. If not for the pandemic blues that we are facing, this would be termed an “election budget”. Nevertheless, it is essential to plant the seeds of a solid recovery and the focus on Malaysians so we can accept it. There is no choice but to have an expansionary budget.

The projected increase in tax revenue in 2022 assumes a 6% increase over the 2021 tax collection. Total tax revenue is expected to increase from RM162 billion in 2021 to RM171 billion in 2022. The increased collection seems premised on the forecast economic growth. However, operating expenditure is projected to grow a little above 6% as well and one wonders why this has to be, given that we managed to lower the operating expenditure for 2021.

Shouldn’t limited government funds be focused on those whose income has been ravaged by the pandemic and recession? Shouldn’t those who had to draw on their retirement funds be assisted so that their savings can be reinstated? Our expenditure management has to be critically reviewed. Just because we are moving out of the pandemic is no reason to bring operating expenditure back to the previous levels. Cost containment must be applied to the civil service where no one lost their job and no one faced a salary cut.

A surprise was the imposition of a one-off prosperity tax on businesses that generate a high profit in the year of assessment 2022, wherein taxable profit exceeding RM100 million will be subject to tax at 33%. Although this is just a one-off imposition, on grounds of fairness and equity, this one-off prosperity tax is a rather off-tangent initiative. It is just a measure to raise some revenue as we are in dire straits.

Another surprising change was that Malaysia will now revert to the previous income tax scope, which taxed income derived in Malaysia as well as income earned from overseas and received in Malaysia. Why is this necessary? Just stating that we are complying with international standards/best practices (due to Malaysia being placed on the EU’s grey list for having such a tax system, as did Hong Kong) is not good enough. We will now see many not remitting their earnings to Malaysia. If we need to tax foreign income, make it a focused measure to limit it based on various economic substance criteria.

Budget 2022 was short on outlining initiatives to enable Malaysia to build a sustainable tax revenue base. The review of the tax incentives regime has yet to be finalised. As such, we expect Budget 2023 to outline a more structured reform of the tax system which we hope can assist in moving the country to high-income status. Malaysia needs to, in the medium term, broaden the scope of the SST and ultimately make it a broad-based consumption tax with added features such as tax invoicing and others similar to a value-added tax. We need to think hard about a more inclusive capital gains tax and move quickly on an efficient integrated national tax agency.

A sustainable tax structure for the future is probably in the pipeline, though such matters can be excruciatingly slow in coming to fruition due to the lack of political will and vested interests. We cannot keep on borrowing and servicing debt. We must remove all unnecessary exemptions and deductions and simplify things for all to be part of the tax net and push forward towards a reliance on consumption taxes. It is all about balancing revenue and expenditure. The evidence in the Auditor-General’s report shows time and time again the need to curb losses and waste in the public sector.

Increasing and widening personal tax relief seems to be well utilised in the Budget despite knowing that this only impacts about 15% of the workforce. It may be that too much is being given out and it makes tax administration more difficult with so many forms of tax relief. Instead, lowering the tax rate for some categories of the M40 (middle 40% income group) could have been easier. Alternatively, granting a special relief for 2021 and 2022 may have sufficed.

Nevertheless, the introduction of the Fiscal Responsibility Act in 2022, the Tax Expenditure Statement in future budgets, the need for a Tax Compliance Certificate for government tender projects and the implementation of the Tax Identification Number are welcome measures and these appear to be a precursor to the much-talked-about tax reforms that have been bandied about over the past few years. But there was a lack of details on these measures.

This pandemic has shown how the global community is heavily interconnected and vulnerable. The government will need to reconsider the list of strategic goods for which there is a requirement for domestic production, or impose new sourcing constraints on businesses. It must also revisit the procurement practices, consider the trade and investment policy environment that can best support resilience like digital infrastructure to improve productivity or improvements to trade facilitation practices to minimise the scope for disruptions.

Finally, the tax net can be widened by tracking down those who should be within the tax net. That means curtailing tax evasion, curtailing smuggling, registering those who should be registered as taxpayers and devising strategies using the tons of data that various agencies accumulate to ensure that all who should be taxable are indeed taxed. Greater accountability on where our tax ringgit goes and how it is utilised is essential to further narrow the trust deficit that exists, and which is one factor why some try to not pay their taxes.

All in all, Budget 2022 had a lot of allocations and grants like previous Budgets. The challenge will be in the effective and efficient distribution of funds. Effective governance is absolutely crucial. An annual report card on the financial performance of each ministry should be made public.

Dr Veerinderjeet Singh is president of the Malaysian Institute of Accountants and the Malaysian Institute of Certified Public Accountants. He is an adjunct professor at Monash University Malaysia.

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