Can We Re-Balance Taxes?

 

The Federal Government’s tax revenue is expected to drop to RM227.3 billion in 2020 compared to RM264.4 billion in 2019, a 14% drop. The expectation for 2021 is RM236.9 billion or 15% of GDP, that’s assuming conditions improve.

Lee Heng Guie in Starbiz (Wednesday, 31 March) report suggested a re-balancing of tax from direct to indirect.

Direct Taxes constituted RM115.1 billion in 2020 and is expected to improve to RM131.9 billion in 2021 or 56% of total revenue.

Indirect Taxes, largely SST, totalled RM38.15 billion in 2020 and is expected to improve to RM42.5 billion or 18% of total revenue. 

Non-Tax Revenue, which is basically investment income, was over RM66 billion in 2020 and is expected to drop to RM54.5 billion in 2021. This drop is due to decline of Petronas dividend. Total non-tax revenue constitutes 23% of total revenue.

Non-revenue is largely other receipts, refunds and so forth which was RM7.7 billion in 2020 and is expected to increase to RM8 billion in 2021. It forms only about 3% of total revenue.

Lee Heng Guie’s thesis is for a shift from taxing employment and business activity to taxing consumption and to re-introduce GST instead of SST. To compensate, many SMEs and low-income households are to be zero-rated under Heng Guie’s suggestion. In addition, he cautions against imposing taxes on wealth accumulation and income.

There is a fundamental issue here. Is Malaysia’s income distribution fair? Our Gini coefficient has been stubbornly above or close to 0.4. Once that ratio is closer to 0.3 or below, it is feasible to consider indirect taxes over direct taxes. Why? Indirect taxes, like GST, are inherently regressive – it hits the poor more than the rich. Zero-rated is a facade initially which political masters will duly forget. And if you want domestic consumption to improve and “cost-push” inflationary forces to be mute, then reflect on direct taxes not indirect taxes.

Many have observed extraordinary gains enjoyed by the palm oil, glove/ pharmaceutical and (sometimes) the petroleum sector. It is time that the “super-profits” tax be “tweaked” for those industries that enjoy exceptional gains from Covid (or such other development). Then we have huge dividend pay outs (above RM100 million) to shareholders of certain sectors (like banking). Surely, we could arrive at a reasonable tax for such extraordinary gains based on a suitable threshold (say, RM10 million of all dividend pay outs).

Let us not go back to GST at this stage of our economic development but focus on a fairer distribution of income and wealth.

 

Reference:

1.     Lee Heng Guie, Shifting the balance from direct to indirect taxes, 31 March 2021, Starbiz

2.     Malaysia Federal Government Revenue & Expenditure 2020 & 2021, Ecovis Malaysia

3.     Syahirah Syed Jaafar, Public revenue to shrink to RM227.3b in 2020 amid lower tax collection, 6 Nov 2020, The Edge

4.     Su Wei Ho, 7 revenue streams the government receives through taxes, 30 March 2021, Free Malaysia Today