KUALA LUMPUR (Oct 10): Reforming the personal income tax framework (PIT) is a crucial step towards achieving a more efficient and progressive direct tax system that will help boost public revenues, according to the World Bank.

In its report titled Raising the Tide, Lifting All Boats, the World Bank explains that PIT is the backbone of direct taxation in most high-income countries, while progressive rate structures from PIT are key contributors to the progressivity of the overall tax burden.

“This starkly contrasts with Malaysia where PIT revenue collection is far more limited. It has stood below 3% of gross domestic product (GDP) over the past decades and below 2% in recent years, well below most high-income comparators,” said the World Bank.

Between 2012 and 2022, Malaysia’s revenue share of GDP declined by 4.6 percentage points, one of the sharpest revenue declines in the world, due to the sharp decline in petroleum-related revenues and the low collection of PIT and the consumption tax.

According to the report, PIT revenues are expected to be 1.9% of GDP in 2023, up from 1.8% of GDP last year.

Measures recommended by the World Bank include lowering the chargeable income thresholds at the upper-income tax brackets to broaden the base of high-income earners.

“For instance, a taxpayer's income must be more than 50 times the average wage before entering the highest income bracket of RM2 million and above, subject to the top PIT rate of 30%.

“By contrast, in most Organisation for Economic Co-operation and Development (OECD) countries, a higher maximum PIT rate is applied to taxpayers whose incomes are less than 10 times the average wage. Similarly, the top PIT rates are higher and are applied to lower chargeable income thresholds in most Asean comparators, except Singapore (at a lower top rate) and Indonesia (at a higher income threshold),” said the World Bank.

Apart from that, the country could expand the scope of the PIT base, considering the inclusion of income categories, such as investment income, pensions, gratuities, and foreign income, it said.

“In terms of investment income, interest earned on bank deposits and securities is tax-exempt. Dividends paid to shareholders of resident companies are also not taxable as Malaysia only taxes corporate profits at the company level. Including these interests and dividends earned, even at a lower rate, would help broaden the PIT base,” the report added.