This article first appeared in The Edge Malaysia Weekly on October 8, 2018 - October 14, 2018

THE five-month-old Pakatan Harapan government is rightly looking at tax reform and fiscal consolidation alongside economic growth and the people’s well-being. A right balance of taxes will boost investments, encourage productive work and retain talent whilst filling the nation’s coffers for the benefit of the people.

As the global population ages in a fast-changing economic landscape, Malaysia is not the only country seeking to defend and expand its revenue base.

Apart from monetising non-core assets and minimising tax leakages, new taxes being looked at include a soda tax as well as taxes on the globalised digital economy. Rising income inequality has sparked a global discussion on taxing the rich, giving rise to inheritance taxes, capital gains tax on profits from share investments and higher Real Property Gains Tax (RPGT) on high-end properties. The idea is to channel more funds and resources to those who require aid.

Yet, imposing new taxes is easier said than done, especially when economic growth is weak and grouses over the high cost of living are growing. Talent and smart money continue to be attracted by tax-friendly countries, unless better value presents itself elsewhere.

Even Singapore, with reserves of more than S$1 trillion, early this year said it might need to raise the Goods and Services Tax (GST) to 9% from 7% by 2021 to fund increased spending on healthcare, infrastructure and security. Just as some experts argue that Singapore should draw down its kitty and not increase GST, there are people who want Norway to spend more from its US$1 trillion oil fund instead of saving it for the generations to come.

If only Malaysia had that luxury of choice, instead of a RM1 trillion debt. About 13% of every ringgit the country earned went to servicing interest payments — more than the 10% for subsidies and social assistance — last year (see Infographic on Page 81).

Malaysia has also chosen to replace the broad-based consumption tax, GST, with an enhanced Sales and Services Tax, which Finance Minister Lim Guan Eng said “returns” RM23 billion to the people. While the “missing”

RM19.2 billion GST refunds and RM16.05 billion unreturned excess income tax and RPGT indicate that the government revenue had previously been overstated, there is a need to replenish income lost to give Malaysia greater fiscal flexibility.

According to statistics from the Ministry of Finance, RPGT formed less than 1% of federal government revenue between 2011 and 2017, while stamp duty contributed less than 3%.

Global discussions on taxing the rich amid rising house prices, for instance, have led to talk of “vacancy” taxes on (unoccupied) higher-end real estate to help fund affordable housing. The UK is reportedly considering a 1% to 3% tax on higher-end real estate purchases by foreigners. If Malaysia imposes higher real estate taxes and duties on foreigners, it would only join many other countries where foreign buyers have been blamed for pushing home prices beyond the reach of the average citizen.

Higher global crude oil prices give a tad more room to deal with the “missing” monies exposed by Lim.

As every dollar increase in oil prices adds about RM300 million to the government’s coffers, a US$25 rise — from US$55 to US$80 per barrel — works out to a boost of RM7.5 billion. At the time of writing, Brent crude prices hovered at around US$85 per barrel.

Whether or not oil prices will see US$100 a barrel again, Malaysia’s annual budget should not be dependent on them staying high.

Some 80% of federal government revenue came from direct and indirect taxes in 2016 and 2017, up from 73% from 2011 to 2013 and 75% in 2014 and 2015 — largely due to oil-related revenues being high from 2011 to 2014 as well as the availability of GST income in 2015 when oil prices fell.

Dividends from national oil company Petroliam Nasional Bhd — once the largest non-tax income for the federal government — ranged from RM26 billion to RM30 billion a year between 2011 and 2015, compared with RM16 billion in 2016 and 2017.

Company tax is the largest revenue source for the country, contributing 30% to federal government income last year. Individual income tax, meanwhile, contributed RM30.1 billion or 13.4% to federal government income — although fewer than three million people pay it.

A 1% cut in the corporate tax rate from 24% to 23% could shave roughly RM2.8 billion or 4% off the RM67.8 billion collected last year, assuming there is no change in the earnings base, a back-of-the-envelope calculation shows.

Still, economists are not holding their breaths to see a corporate or individual income tax cut, although there is room to make these taxes more competitive regionally.

Singapore, whose taxes are among the lowest in the region, has reportedly had discussions on raising the tax rates for corporations and top income earners as the city-state looks to increase its social spending. It is understandably treading very carefully.

On this side of the Causeway, zero-based budgeting is rightly being implemented to minimise wastage. Economists are waiting to see if Budget 2019, to be tabled in parliament on Nov 2, is able to show cuts in unproductive spending and channel more money towards boosting economic growth.

The nation’s coffers can also be replenished as the government has pledged that the sale of non-strategic assets and public land will be done via open tender to get the best price for the country and not a select few. Proceeds from government land sale did not significantly boost federal government revenue for the annual national budget between 2011 and 2017, despite news reports of sizeable land deals.

New taxes are also needed, for example, to plug leakages created by the new economy. It is not so much about getting e-hailing drivers to pay income tax, but more about ensuring that foreign digital businesses that are competing with physical businesses locally pay their fair share of taxes.

The European Commission, for instance, is said to expect to raise €5 billion a year (possibly from early 2020) via a digital tax on European revenues of tech companies such as Facebook, Google and Amazon. Tax revenue lost to offshore tax havens is also being targeted by tax-hungry jurisdictions, with global corporations such as Starbucks being accused of tax avoidance in the UK.

Perhaps the desire to pay down debt and deliver a better quality of life for all will drive Malaysia to be among the leaders in these areas. In any case, better enforcement is necessary to ensure that those operating in the black market do not benefit.

For now, what we know is that the Tax Reform Committee is tasked with reviewing the overall tax system to make it more efficient, neutral and progressive to help spur high-quality economic growth without being burdensome.

Whatever the ongoing tax reform entails, the pain from introducing new taxes and tweaking existing ones will be in vain if the income is not spent wisely.

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