This article first appeared in The Edge Malaysia Weekly on October 22, 2018 - October 28, 2018

THE recent mid-term review of the 11th Malaysia Plan provides some hints of what Budget 2019 will contain. New taxes are anticipated, and it seems even more likely now that certain taxes will be increased in the near future to boost the country’s coffers.

The report indicates that the Pakatan Harapan government will be looking to diversify the revenue base by raising indirect tax contribution, as well as exploring a tax on online transactions, or a digital tax.

Such a tax is fairly new globally. Although the European Commission (EC) has came up with a digital tax proposal, many tax consultants believe a lot needs to be sorted out before it can be implemented.

In its report on Global Tax Policy and Controversy Briefing, Ernst & Young says digital taxes are about the division of tax rights among countries which consider that their citizens contribute to the profits made by some digitally focused companies, even if they do so via unconventional means.

The EC proposal sets the tax at an “interim” 3% of gross revenue derived from activities in which users are deemed to play a major role in value creation.

Companies subject to the digital tax would include those with total annual worldwide revenues of €750 million (RM3.58 billion) or more and those that have annual EU taxable revenues of €50 million or more.

At present, EU member countries  are divided on the implementation of digital tax, and it can only come into force if all 28 of them unanimously agree.

At present, Malaysia’s tax revenue — consisting of direct and indirect taxes — makes up 80% of federal government revenue, while the remaining 20% largely comprises non-tax revenue.

Direct taxes contribute 53.1% to total revenue, and indirect taxes, 26.9%. Revised 2017 estimates of federal government revenue indicate indirect taxes total RM60.5 billion.

Indirect taxes consist of several key items: export duty, import duty, excise duty, Goods and Services Tax (GST), Sales and Services Tax (SST) as well as other miscellaneous taxes.

Of these, in the 2017 revised estimates, GST was the largest contributor at RM41.5 billion or 41.5%. Excise duty was the second largest, but contributed only RM11.71 billion.

As GST has been replaced by SST, the latter should end up as the largest revenue contributor to indirect taxes, albeit at an estimated RM24 billion.

In terms of excise duty, motor vehicles contributed the most at RM5.93 billion, according to the 2017 revised estimates.

Any mention of increasing contributions from indirect tax is sure to set alarm bells ringing among alcohol and tobacco players as they appear to be the easiest targets in an excise duty hike.

CGS-CIMB Research believes there is a medium likelihood the two sectors will see a hike in excise duty, particularly if the increase is presented as incentivising a healthier lifestyle.

“But there are presently relatively high taxes and duties already imposed on cigarettes and tobacco products,” the research house observes in a report. It points out that enforcement is an issue, given that an estimated RM4 billion to RM5 billion per annum in tax revenue is lost from illicit cigarettes.

The mid-term review also reveals plans to increase non-tax revenue contribution from licences, permits, fees and rentals.

Based on 2017 revised estimates, licences and permits made up 30% or RM12.74 billion of non-tax revenue while service fees totalled RM1.73 billion, or 4.1%. Rentals contributed RM291 million, or 0.7% of non-tax revenue.

Interest and investment returns provided 54% or RM22.67 billion of non-tax revenue, putting the segment right at the top.

Apart from raising revenue contribution, additional initiatives will be undertaken to improve tax compliance to ensure that collection is maximised from both direct and indirect taxes.

The review also explicitly states that non-tax revenue will be enhanced by maximising the cost recovery of government assets as more agencies will be empowered to improve asset utilisation rates.

Essentially, the new administration recognises that the diversification of revenue is necessary to reduce the country’s dependency on petroleum-related revenue, given oil price volatility.

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