Budget 2025: taxing issues facing Anwar

 

Budget 2025 will be a fine balancing act for the government which on one side needs to raise revenue but on the other needs to ease the cost of living and the burden of taxes.

So far the Prime Minister has steadfastly and rightly resisted groundhog-day calls for a reintroduction of the goods and services tax (GST). Businesses like the GST because they reclaim the costs and so do not pay it but it is still a huge increase in the tax burden and is highly regressive, hitting the poor more than the rich.

The government is keeping the tax burden low by avoiding the GST. Even with the new taxes and tax hikes so far, the overall tax burden is lower than it would be with GST.

In Budget 2024 the estimate for Sales and Services Tax (SST) was RM35.8 billion which includes an extra RM5.5 billion from the service tax rise from 6% to 8%. These extra taxes, including capital gains tax and the low-value goods tax, raise around RM2.4 billion.

So the total will be RM38.3 billion, or RM1,250 for every Malaysian citizen, compared to the massive tax burden of GST estimated at around RM59.8 billion, or RM1,950 per person. In other words the GST costs every Malaysian citizen RM700 or 56% more than the current system.

At the same time the government is looking for alternative ways of improving tax collection through e-invoicing and better procedures at LHDN to raise revenue without returning to the regressive GST regime, and this must continue.

Despite this there is a need to broaden the tax base to raise revenue for health, education and social protection, but the government cannot do this with its existing portfolio of taxes.

Income taxes are narrowly focused on the very rich who pay 85% of personal income tax, corporate taxes burden businesses – especially SMEs – and costs are passed on to consumers, consumption taxes are inefficient and GST would be worse, while the recent ad-hoc taxes do not raise significant revenue for redistribution.

The risk of relying on old-style taxes is that they reach a limit very quickly and distort the market. This is a legacy problem, not the fault of the unity government, which is why they should abandon it and look at tax policy afresh.

A new approach to taxation can mean that even income tax below the T20 level and corporation tax for SMEs could be abolished to make Malaysia an attractive low-tax, low-regulation country.

The e-payments tax (EPT) is a simple way of moving to a low-tax, low-regulation system which still raises significant revenue and allows ad-hoc taxes to be abolished.

Individual income-tax for everyone below the T20 threshold can be abolished and still leave RM8-9 billion for extra spending on health, education and social protection with a 1% EPT, which would raise RM14.3 billion.

A 2.25% EPT, added to existing SST, can raise the same revenue as reintroducing GST. A simple 3% EPT would raise RM43 billion, enough for zero income tax below T20 levels and full abolition of SST.

While it might be too optimistic to expect an EPT next week, Budget 2025 should at least signal a move away from old-style taxes such as GST and SST and towards alternatives, especially since spending and earning patterns are changing with new technologies, e-commerce, e-invoicing and the gig-economy for example.

With strong economic growth, low inflation, stable interest rates, a strong ringgit and well managed monetary policy from Bank Negara, now is the window of opportunity for the government to begin a significant, bold tax reform agenda in Budget 2025. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.