Federal Government Revenue: Scope for Improvement?

Federal Government revenue in 2022 has been projected to increase significantly by 22% to RM285.2 billion or 16.7% of GDP contributed by both tax and non-tax revenue. Tax revenue remains as the major contributor at 69.5% of total revenue or 11.6% of GDP, driven by strong economic recovery and higher commodity prices. Non-tax revenue collection is expected to increase its share of total revenue from 25.7% in 2021 to 30.5% in 2022 on account of higher dividend payment.

Tax revenue is projected to grow by 14.1% to RM198.2 billion with both direct tax and indirect tax are estimated to register double-digit growth. Direct tax collection is forecast to grow by 13.1% to RM147.2 billion, contributed mainly by higher companies income tax (CITA) collection at RM84.8 billion resulting from higher corporate earnings following the strong economic recovery.

Non-tax revenue is expected to surge by 44.9% to RM87 billion, largely contributed by higher proceeds from interest and return on investments. The bulk of the proceeds is from PETRONAS dividend totalling RM50 billion, of which RM25 billion is an additional dividend resulting from better profitability, while dividend from Bank Negara Malaysia amounted to RM5 billion.

For 2023, Malaysia’s expected economic growth between 4% to 5% coupled with the anticipated moderation in global commodity prices, will result in a slower growth of the Federal Government’s tax revenue at 3.7% amounting to RM205.6 billion or 11.3% of GDP. However, non-tax revenue is estimated to decline to RM67 billion or 3.7% of GDP, offsetting the increase in tax revenue. Consequently, the Federal Government’s revenue is projected to decline by 4.4% to RM272.6 billion. Direct tax is estimated to increase by 3.5% to RM152.4 billion, representing 74.1% of total tax revenue. The bulk of the increase is attributed to better collection.

Indirect tax is estimated to increase by 4.3% to RM53.2 billion in tandem with steady consumption and trade growth. SST is forecast to record RM32 billion or about 1.8% of GDP.

Non-tax revenue is estimated to decline by 23% to RM67 billion or 3.7% of GDP. The lower collection is due to lower proceeds from investment income, particularly dividend from PETRONAS which is projected to be lower at RM35 billion.

Although our total revenue to GDP is above 15% over last three years, our tax revenue to GDP ratio is below 12%.

According to research conducted by the International Monetary Fund, countries should have a tax-to-GDP ratio of at least 12% in order to experience accelerated economic growth. The countries that are part of the Organisation for Economic Co-operation and Development (OECD) all meet that threshold, with an average tax-to-GDP ratio of 33.8%.

Our ratio of tax revenue to GDP is well below that of a more developed nation. There is scope to improve tax revenue not by way of GST but through new and progressive taxation.

References:

Section 2, Federal Government Revenue, Fiscal Outlook 2003, Ministry of Finance

Tax-to-GDP Ratio – comparing tax systems among OECD countries, www.visualcapitalist.com