M.Shanmugam
of The Star (12 Oct 2019) was of the view that the state of the tax system is appalling.
According to his report 62.4% or 780,742 companies are registered with the IRB.
This is out of a total 1.25 million companies. But had he discounted the
dormant and defunct ones?
On
personal income tax, only 16.5% or less than 2.5 million people are subjected
to tax (out of 15 million in the work force).
Malaysia’s
tax revenue is 13.8% of GDP, compared to South Korea (17.4%) and 14.2% for
Singapore and Thailand. We are above Indonesia which is only at 3.4% of GDP.
Hence,
the argument for GST. But there is no marked difference, on average, between
GST and SST collected. Around RM30 billion collected each year.
What
is a fair system? Opinions about a good tax system will vary but five
conditions are key:
(i)
equity; everybody should pay a fair share of taxes. Horizontal equity means
taxpayers in similar financial condition should pay similar amounts in taxes. Vertical
equity suggests taxpayers who are better off pay at least the same proportion
as those who are less well off. Vertical equity requires classifying taxes as
regressive, proportional or progressive – A sales tax could be viewed as
regressive as lower income people pay a higher share of their incomes for
essential items. Proportional is like property taxes while progressive is
higher income people can afford and should be expected to meet their share for
public services. So the Democrats in the U.S., like Alexandria Ocasio-Cortez
are for 70% tax rate for higher income individuals or corporates.
(ii)
adequacy; taxes levied must provide enough revenue to meet basic needs of
society.
(iii)
simplicity; this reduces costs of compliance.
(iv)
transparency; information on the tax system is easily available and how tax
revenue is used to fund the system. Details on who pays and who benefits are
other aspects of transparency.
(v)
administrative ease; tax system is not complicated or costly for taxpayers to comply.
This should be small in relation to amount collected.
The
recent Budget 2020 was not impressive on this area. It only had an increase of
tax rate of 28% to 30% for individuals earning RM2 million or more in a year.
The Finance Minister could have improved the graduated scale for corporates and
individuals. It is pointless to “race to the bottom” on corporate taxes with
the likes of Hong Kong or Singapore. And again, the informal and “gig” economy
were not accounted for. Perhaps, he could review taxes with an expert panel (or
commission) before suggesting any new ones.
Reference:
1.
The appalling state of the tax system, 12 Oct 2019, The Star
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