Govt ‘walking tightrope’ without tax increase, say experts

 

PwC Malaysia tax leader Jagdev Singh said the last time Malaysia saw a broad-based increase in the service tax rate was when it rose from 5% to 6% in 2011. (Bernama pic)

PETALING JAYA: An expert has warned that the country may have to hold back on development expenditure if it does not increase additional revenue through taxes.

PwC Malaysia tax leader Jagdev Singh said with its targeted budget deficit of 4.3%, the government would be “walking a tightrope” if no significant new source of revenue is introduced.

At the same time, he said, the government was obliged to step up social assistance programmes to improve the overall standard of living and deal with a widening income gap and inflationary pressures.

“Many countries have had to grapple with income inequality as the world emerged from Covid. Quite a number of them, including our neighbour Singapore, are giving cash aid to low-income earners.

Jagdev Singh.

“The projected RM3.45 billion from the increased 2% service tax coupled with various other measures such as subsidy rationalisation will help to fund these initiatives,” he told FMT.

Jagdev said presently, the country’s tax-to-GDP ratio is in the region of 12%, lower than many other countries.

He said the government relies heavily on corporate income taxes, which makes its revenue stream vulnerable to fluctuations in their profits.

“In recent times, neighbouring countries have increased the size of their budgets, and this is usually accompanied by an increase in consumption taxes or introduction of indirect taxes in specific areas.

“Singapore raised its goods and services tax (GST) rate by 2% and Indonesia’s value-added tax rate will move up to 12%. India has increased its GST rates for a specific area (sub-contracting) from 12% to 18%.

“In Malaysia, the last time we saw a broad-based increase in the service tax rate was when it rose from 5% to 6% in 2011,” he said.

Jagdev said the service tax increase is not perfect, and there will be issues that need to be ironed out. This includes technical refinements on its scope and cascading effect.

“Until we are prepared to adopt a broader-based tax, the government will need to find ways within the existing tax system.

“A broad and multi-stage tax such as GST, which is transparent across each stage of the supply chain, remains the better alternative to deliver a sustained source of revenue and balance the country’s over-reliance on corporate income tax,” he said.

Lim Tan Chin.

Universiti Sains Malaysia’s Lim Tan Chin said the country’s debt hit 60% of its gross domestic product (GDP) following the pandemic, and that a lot of money will be required to service it.

She said the government would struggle to service its debt and pay for the development expenditure to sustain growth.

“It is like a credit card bill. If we end up defaulting (or do not) pay the full amount and interest, we can go bankrupt.

“Similarly, while our country’s financials are still solid and although the country is far from bankruptcy, we need to raise revenue through taxes and foreign investment,” she said.

In Dec 2023, government debt was at 64.3% of GDP, which reflects the full extent of the country’s income last year, a mere 0.2% lower than the all-time high hit in March 2021.

Malaysia’s lowest-ever debt-to-GDP ratio was recorded at 49.3%, 10 years earlier, in September 2011, according to CEIC Data.

The total government debt as of December last year stood at RM1.17 trillion. It grew by 8.6% in 2023, lower than the 10.2% growth rate recorded in 2022.

At RM1.14 trillion, domestic debt comprised 97.5% of government debt, with offshore loans making up the remaining RM29.8 billion. - FMT