Not the right time for tax reform now

Govt has to make sure it diversifies considering the narrow revenue base tax in Malaysia


MALAYSIA is not ready for tax reform now as it is still facing unprecedented challenges from Covid-19 pandemic, said Minister in Prime Minister’s Department (Economic Affairs) Datuk Seri Mustapa Mohamed (picture).

However, the government has begun looking at reform in some tax systems, such as tax to GDP ratio which is quite low in Malaysia compared to other countries.

“We have to make sure we diversify considering the narrow revenue base tax in Malaysia. Tax is important to finance development, promote efficiency and competition.

“There are numerous ideas on the table including Goods and Services Tax and corporate tax. Now is not the time, but there will be a time for that,” he told reporters after the launch of the Organisation for Economic Cooperation and Development (OECD) Economic Survey of Malaysia 2021 yesterday.

Considering the efficiency of tax collection and the need to raise revenue, OECD said the government could consider reintroducing the GST in the medium term, while enhancing overall social protection, including through social transfers targeted at low-income and vulnerable households.

Mustapa agreed that this is something policymakers should consider in the future.

The OECD also suggested for Malaysia to introduce a carbon tax and gradually increase its rate over time, while at the same time, mitigating its impact on vulnerable households.

On OECD’s projection the Malaysian economy to grow by 4.3% in 2021 and 6.1% in 2022, Mustapa described it as a big improvement for the country.

“This unprecedented pandemic has forced us to revisit a number of our strategies. Above all, the crisis has highlighted the need for reform.

“The 12th Malaysia Plan (12MP) is a key opportunity for us to put in place the foundations of these reforms,” he said.

Mustapa said the 12MP, which will be presented to Parliament at the end of September, will set out a clear strategic direction to place the country’s economy post-pandemic.

Meanwhile, OECD secretary general Mathias Cormann said it is crucial to reduce public debt and the contingent liabilities of the government more effectively in the medium term.

“Considering the low level of tax revenue, this would require a comprehensive fiscal consolidation planning that strongly underpins revenue enhancing measures, in addition to spending reprioritisation and sustainable debt management.

“In the meantime, because significant downside risks remain, targeted policy support remains essential. Moreover, if the economic situation worsens, the government should be ready to expand its fiscal space, temporarily adjusting the debt ceiling during the pandemic,” he said.

In this regard, an integrated fiscal framework with medium-term targets would give the government more flexibility and discipline, and provide more confidence to markets.

In the medium term, in addition to improving spending efficiency, strengthening the revenue base will be essential.

Cormann said Malaysia’s social protection system mostly relies on the government, including for universal health insurance, not social security schemes.

“Social spending is funded mostly by the tax revenue of the federal government. In this regard, some countries not adopting broader social security schemes, such as Australia and New Zealand, have a stronger tax base to fund social spending, which is a contrast to Malaysia.

“Since social spending is expected to increase rapidly, the revenue base needs to be expanded,” he said.

Mustapa said Malaysia will deliberate on some of the OECD’s recommendations, and where suitable, will incorporate them into the medium term and long term economic policies.