This article first appeared in Forum, The Edge Malaysia Weekly on October 5, 2026 - October 11, 2026

Malaysia’s fiscal position is improving, although pressure on the nation’s finances remains considerable.

The federal fiscal deficit narrowed from 4.1% of gross domestic product (GDP) in 2024 to 3.7% in 2025, while federal government revenue increased to RM336.1 billion. Further consolidation is planned under Budget 2027, with the deficit projected at 3.5% of GDP.

This progress is necessary. Federal debt-servicing charges were RM53.7 billion in 2025, equivalent to 16.2% of government revenue.

In practical terms, about one ringgit out of every six collected by the federal government is required simply to service debt before funding healthcare, education, infrastructure or development programmes. This only accounts for the cost of servicing the debt, excluding the debt principal.

So, Malaysia needs a stronger and more sustainable revenue base. The question is how this can be done. Should we raise more revenue by increasing tax rates and broadening the tax base, or should we first focus on collecting existing taxes more effectively and improving the design of the current system?

There is no single answer. Two priorities, however, deserve greater attention.

First, there remains considerable upside in strengthening tax administration through data, technology and compliance measures. Second, there is a need to address inherent inefficiencies within the existing sales and service tax (SST) framework that may impact Malaysia’s competitiveness as an investment destination.

One of the strongest arguments for accelerating the reform of tax administration is the potential scale of revenue gains.

A 2023 International Monetary Fund study found that countries undertaking sustained tax administration reforms achieved revenue improvements of between 2% and 3% of GDP. Applied to Malaysia’s current economic size, this would translate into tens of billions of ringgit in additional revenue annually. At 3% of Malaysia’s 2025 GDP, potential additional revenue of RM60.9 billion is broadly comparable to Malaysia’s annual SST collection.

These figures should not be interpreted as projections for Malaysia. Rather, they illustrate that well-implemented improvements in tax administration can have a meaningful fiscal impact without necessarily increasing tax rates.

The ongoing digitalisation of the tax system, particularly through e-invoicing, demonstrates its potential. In April, the Inland Revenue Board (IRB) reported that reviews of e-invoicing data resulted in tens of thousands of taxpayers voluntarily declaring previously unreported income, generating more than RM1 billion in additional tax payable within a relatively short period.

The early results suggest that e-invoicing can become a powerful compliance tool. However, its long-term success depends not only on technology, but also on practical implementation.

For e-invoicing to deliver its full potential, compliance must be as simple and seamless as possible, especially for smaller businesses with limited technological and financial resources. The objective should be compliance by design: making the correct tax treatment easy to adopt, mistakes straightforward to correct and enforcement efforts focused on higher-risk transactions rather than routine compliance. Relevant stakeholders must also stay the course and continue the path to full implementation.

Continuous refinements, taxpayer support and targeted incentives for smaller enterprises could further improve participation while lowering compliance costs for legitimate businesses. Better data quality would, in turn, strengthen risk-based enforcement and revenue collection.

While revenue generation remains important, Malaysia must consider the impact of tax policy on investment attractiveness.

Most of Malaysia’s major Asean competitors operate value-added tax (VAT) or goods and services tax (GST) systems that generally allow businesses to recover qualifying input tax incurred on business purchases. As a result, the tax is generally intended to apply to the final consumer.

Malaysia’s SST operates differently. Although various exemptions and types of relief exist, there is no broad input-tax-credit mechanism. Consequently, tax paid on business inputs can become a permanent cost within the supply chain, creating what is commonly known as tax cascading.

This issue becomes particularly relevant in today’s digital economy.

Consider a multinational evaluating whether to establish a regional headquarters or global capability centre in Malaysia or Singapore. Such operations typically rely on significant spending on cloud computing, software subscriptions, cybersecurity, telecommunications and digital infrastructure.

Under a GST system, qualifying input tax is generally recoverable. Under Malaysia’s SST regime, service tax incurred on certain imported or digital services may become an additional operating cost where no exemption applies.

Even if overall costs in Malaysia remain competitive, unrecoverable indirect taxes can narrow that advantage for technology-intensive and knowledge-based operations.

Investment decisions today are influenced by a combination of factors, including tax competitiveness, compliance complexity, talent availability, infrastructure and regulatory certainty. As competition for high-value investment intensifies across Asean, even incremental differences can influence where multinationals choose to locate their regional operations.

Asean has become one of the world’s most important destinations for foreign direct investment. Malaysia has benefited from this trend and recently improved its position in the 2026 IMD World Competitiveness Ranking. However, maintaining and improving competitiveness requires constant attention.

It is therefore encouraging that the government is studying a possible hybrid model incorporating elements of both SST and GST.

A carefully designed approach could preserve the strengths of SST while introducing targeted relief for taxes incurred on genuine business inputs, particularly in areas such as cloud computing, software, cybersecurity and digital infrastructure. Such measures could reduce tax cascading without requiring an immediate return to a full GST regime.

At the same time, policymakers should remain mindful of enhancing simplicity. A hybrid model that combines multiple exemptions, special treatments and partial credits could create compliance burdens without fully delivering the efficiency and neutrality associated with a VAT or GST system.

Any reform should seek to balance simplicity, competitiveness and revenue collection. Early and extensive consultation, coupled with the identification and resolution of industry-specific nuances, is key.

Malaysia needs adequate and sustainable revenue, but the way that revenue is raised matters.

The immediate priority should be to strengthen tax administration through e-invoice data, analytics and risk-based enforcement while continuing efforts to improve voluntary compliance.

At the same time, reforms should focus on reducing unnecessary inefficiencies in the tax system, particularly those that increase the cost of productive business activity and create distractions for entrepreneurs and management.

This approach does not avoid difficult fiscal decisions. Instead, it places emphasis on lower-cost and potentially higher-yield reforms before imposing additional burdens on compliant taxpayers.

Before taxing more, Malaysia should continue to strengthen collections and refine tax design so that the system supports productivity, investment and long-term economic growth.

The principle is simple: collect what is legally due, spend it responsibly and remove avoidable distortions before asking taxpayers to contribute more.

That is how Malaysia can strengthen fiscal resilience while remaining competitive in an increasingly competitive investment landscape.

Amarjeet Singh is EY Asean tax leader and partner at Ernst & Young Tax Consultants Sdn Bhd

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