Debt Dependency or Better Taxation?

Statistics from the Inland Revenue Board (IRB) reveals that less than 20% of Malaysians are subjected to income tax. According to data that was provided in the ministry’s Fiscal Outlook Report 2020, as at end-2017, 62.4% out of 1.25 million companies that were registered with IRB, only 7.8% are subjected to tax. The report further added that only 16.5% of 15 million workforce were subjected to individual income tax. With Malaysians too suffering a loss of income due to Covid-19, the 2020 national median income has now dropped to just RM2,062 per month, according to the Statistics Department.

Clearly, half of the population is not being taxed at all as the current threshold for individuals to be taxed starts at only RM3,141 per month, based on monthly net remuneration for a taxpayer with a single status.

This amount alone is 52% higher than the median salary of Malaysians in 2020. Even then, the tax collection is nothing as just RM1 is deducted for taxation purposes based on the Monthly Tax Deduction Schedule 2018.

This suggests a person with a net salary of RM3,141 per month effectively only pays 0.4% of his annual income as taxes, which is barely the cost of a cup of coffee at Starbucks.

No wonder Malaysia’s tax collections are in dire straits when measured with the nation’s economic output.

Pankaj C Kumar provided Chart 1 and Table 1 below in an article on debt dependency in Starbizweek, 9 October 2021.

Malaysia has been running a fiscal deficit since the Asian Financial Crisis in 1998 and will likely do so right up to at least 2025, as the government now projects a fiscal deficit of 3%-3.5% by then, based on the recently released 12MP.

Under the 12MP, the government is also expected to spend a massive amount of RM400bil in development expenditure to take the Malaysian economy to the next level with a projected nominal GDP of RM2.021 trillion by 2025.

Malaysia also expects average monthly household income to increase from RM7,160 to RM10,065 by the end of the 12MP, a CAGR of 8.1%, while Compensation to Employees is expected to jump to 40% by 2025 from the 37.2% achieved in 2020.

Seems to be a tall order considering that Malaysia is stuck at the low wage structure for a long time, mainly due to the failure to address income inequality and very low minimum wages of just RM1,200 per month in urban areas.

Malaysia will likely continue to borrow to run its economy, at least for the next four years.

This will raise the federal government’s total debt, from an estimated figure of RM984bil this year, as seen in Table 1, to as much as RM1.32 trillion by 2025, leading to a debt-to-GDP ratio of approximately 65%. This fiscal gap remains a concern and if not addressed properly, will lead to greater deterioration in time to come.

Based on Chart 1 and Table 1, Malaysia is stuck in a low tax collection environment and rising debts. While the new statutory debt ceiling of 65% will likely be sustained into the future, Malaysia needs to address the issue related to fiscal debt management and taxes urgently to bring the country back to a sustainable path.

For a start, the government should target to raise tax revenue as a percentage of GDP to 15% by 2025 and to 20% by 2030 to ensure sustainable and responsible fiscal management. Based on nominal GDP of RM2.021 trillion in 2025, taxes collected then will be about RM303.1bil, which is almost double what was collected in 2020 amounting to RM154.4bil.

However, of the RM148.7bil increase, only about RM58.1bil or 39% comes from tax enhancement strategies and new taxes, while the balance RM90.6bil or 61% is generated via organic growth of the economy once the tax strategies are in place.

There is need for better tax collection and retaining good staff within the IRB including its CEO. In addition, the Government needs to introduce three new taxes/adjustments:

1. Higher graduated tax regime for those earning RM1 million p.a. or above. The current maximum tax bracket is 30%. This has to be revised to 40% for the very top;
2. Windfall tax (Excess Profit Tax – to widen the coverage to include pharmaceuticals, glove manufacturing, banking, energy companies and others; and
3. “Obesity” tax of 15% on all products by fast food chains and fizzy drink manufacturers (Kerala State in India imposes a 14.5% tax on “junk” food and drinks.
4. Forex transaction tax of 0.01% of each transaction.

Other possibilities like wealth tax, inheritance tax, capital gains tax and GST be deferred to 2025 or later when we have reached the developed nation status.

Reference: 

Debt dependency: A ticking time bomb, Pankaj C Kumar, Inside Insights, Starbizweek, 9 October 2021