Navigating Malaysia’s tax landscape: lessons and solutions

 

From Dave Ananth

In the quest for fiscal stability, Malaysia faces the challenge of balancing taxation to ensure revenue growth without burdening its citizens and businesses. The saying “you can’t get blood from a stone” emphasises the limitations of taxing individuals and companies endlessly.

Malaysia has explored various avenues, such as timber taxes and mining royalties, to diversify its revenue sources.

However, the recent shift from the goods and services tax (GST) to the sales and services tax (SST) raises questions about the economic implications of political decisions.

Malaysia’s decision to reintroduce SST was a political move with economic consequences. SST applies to fewer companies than the GST, resulting in a significant drop in revenue.

In 2017, the government collected RM44 billion from the GST, whereas the SST generated only RM27.9 billion in 2021. This shift, driven by political considerations, highlights the challenges of making economic decisions based on short-term political gains.

In the aftermath of the Covid-19 pandemic, Malaysia was urged to accelerate growth to overcome its economic challenges compounded by global geopolitics. The International Monetary Fund emphasised the need for Malaysia to generate more revenue, positioning the country among the lowest in the region.

This imperative comes at a time when the country must carefully consider its taxation strategies for sustained economic development.

The introduction of the GST in 2015 faced challenges, including a lack of clear explanations to the public and unqualified political statements. The tax became unpopular, was blamed for rising prices, and marred by corruption and inefficiencies.

Despite its flaws, the GST offers valuable lessons for Malaysia if fine-tuned to suit local conditions. A consumption-based tax, like the GST, might be a more sustainable option if implemented with proper planning and enforcement.

Imposing new taxes requires careful consideration to avoid hampering businesses. Political leaders must understand that the wealthy did not accumulate their fortunes overnight. A hasty approach to taxing the rich may drive them away, impacting the country’s economic landscape.

Instead, a balance must be struck, with correct information and sufficient time for businesses to adapt to changes.

To address the revenue challenge, Malaysia could consider revisiting the GST with improvements based on past experiences. A higher threshold for compulsory registration, reduced compliance costs for small and medium businesses, and a moderate GST rate at the same rate of 6% could create a more balanced taxation system.

Additionally, revisiting pension schemes for MPs and encouraging contributions to the Employees Provident Fund might contribute to fiscal sustainability.

As Malaysia navigates its tax landscape, it must learn from past experiences, ensuring that economic decisions are driven by long-term benefits rather than short-term political gains.

A strategic approach to taxation, balancing the needs of the government, businesses, and citizens, is essential for sustained economic growth and prosperity. - FMT

Dave Ananth is a senior tax counsel based in New Zealand.

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