Can We Make Private Sector Bonuses Tax-Free?

 

The writer Ganeshwaran Kana (The Star, Insight, 21 September 2024) requested the taxman not to tax bonuses. (This is largely an excerpt of that article)

With Budget 2025 to be unveiled soon, the administration of Datuk Seri Anwar Ibrahim should strongly consider exempting tax on bonuses received by the bottom 40% (B40) and middle 40% (M40) income earners. 

For ease of identification, the exemption could cover anyone earning below RM100,000 per year. This was the threshold used last year for the RM100 e-wallet incentive under Ekonomi Madani. The tax exemption is an easy way to put more cash into the rakyat’s pockets.

 

Source: Investopedia

 A person would take home about 69% of his or her bonus. For example, for a bonus of RM10,000, the person would take home about RM6,900 (because of tax and EPF). Of course, taxpayers may get a refund upon filing their tax return, but this depends on the deduction and credits they qualify for. 

Since it is a common practice for businesses in Malaysia to give out bonuses at the year-end, a tax exemption would be useful for parents with school-going children. Tax-free bonuses are not a new concept in Malaysia. The Anwar administration had in January 2023 announced that bonuses given by state governments to civil servants will no longer be taxed. 

The bulk of personal income tax collection is contributed by the top 20% (T20) income earners. T20 employees in the country contributed 85%, or RM33.68bil, of the personal income tax collected in 2022. The M40 group contributed 13%, or RM5.38bil. The B40, on the other hand, only represents about 2% of the personal income tax collection. Collectively, the B40 and M40 groups contribute 15% of personal income tax proceeds. 

The low share of income tax collection from B40 and M40 groups is, however, not entirely surprising. Based on the data provided by the Statistics Department, the income share of a T20 household in 2022 was 46.3%. In other words, out of a RM1 income generated in Malaysia, 46.3 sen goes to a T20 household.

This was almost consistent across all three major ethnic groups, namely bumiputra (45.1%), Chinese (46.7%) and Indians (46.8%). Meanwhile, the income share of M40 was 37.6% and B40 was merely 16.1%, disproportionate to their population size. 

One can understand the government’s possible hesitation in extending the tax-free benefit on bonuses to the private sector. Malaysia continues to have a low tax revenue base, which is about 11.2% of the gross domestic product (GDP). In comparison, the tax-to-GDP ratio of neighbouring countries like Singapore and Thailand stood at 12.6% and 16.4%, respectively.

A huge part of this low tax base problem is due to Malaysia’s large size of shadow economy (about 20% of GDP), tax evasion including via illicit financial flows, the lack of a more comprehensive consumption tax, as well as the low number of companies paying tax. Notably, less than 29% of registered companies in Malaysia pay tax. There are other ways to raise taxes and these should reduce our inequalities. 

The Inland Revenue Board (IRB) will be expected to collect more revenue in 2024 than the projected RM197bil. In 2023, IRB saw a record-high tax collection of RM183.34bil. 

Preferential tax treatment on bonuses, or known as 13th month pay in some countries, has been practised in some form or another for years across many jurisdictions. In the event exemption is not feasible, the FM could consider a lower tax rate for bonuses?

 

Reference:

Make private sector bonuses tax-free, please, Ganeshwaran Kana, The Star, Insight, 21 September 2024