Shadow economy should be addressed in tax implementation

Introduction of Tax Identification Number needs to be coupled with adoption of digital tools by tax administration


THE government should look into ways to tackle the shadow economy, which accounts for 18.2% of GDP or almost RM100 billion in 2019, Deloitte Malaysia tax leader Sim Kwang Gek said.

Sim said the introduction of the Tax Identification Number for all Malaysians aged 18 and above is a step towards ensuring more taxpayers are captured in the tax net.

She believes this needs to be coupled with the adoption of digital tools by the tax administration and enhanced collaboration with relevant agencies such as the Inland Revenue Board of Malaysia, Royal Malaysian Customs Department, Companies Commission of Malaysia and financial institutions to identify tax evasion.

“There have been talks about introducing capital gains tax, but careful considerations must be given before we embark on this new tax and we applaud the government’s efforts in soliciting views from relevant stakeholders on this matter.

“Considerations such as the impact on our capital markets, foreign direct investments and mergers and acquisitions activities in Malaysia must be given weight,” she told The Malaysian Reserve.

Former Finance Minister Lim Guan Eng said over the weekend that he rejected the capital gains tax — although Pakatan Harapan (PH) had proposed it before — saying that it will make Malaysia “less competitive”.

“This proposal on capital gains tax and inheritance tax was mooted by PH when I was the finance minister.

“But I rejected them as it will make Malaysia less competitive, especially as we have one of the highest corporate tax rates among the 60 biggest economies of the world,” he said in a press statement.

Former Prime Minister Datuk Seri Mohd Najib Razak recently urged the government to reinstate the Goods and Services Tax (GST) as soon as the country recovers from the Covid-19 pandemic.

“GST could also target people in the ‘shadow economy’, which has an estimated turnover of RM300 billion a year, and (those) who had previously escaped paying taxes. GST had caused the shadow economy to shrink from 25% to 10% of the normal economy,” he said.

Sim, however, stressed that any introduction of new taxes requires careful study before implementation to provide ample time for businesses to prepare and adjust. Its impact on economic development should also be considered.

“As tax collection represents more than 50% of the government’s total revenue and the aim is to achieve a fiscal deficit of 3% to 3.5% of GDP by 2025, we can expect new taxes to be introduced, albeit not immediately.

“However, we (were not expecting) to see the GST announced in the Budget 2022, as the government is likely to wait for the economy to recover before making such a significant reform,” she added.

It is possible that the government may review the scope of the existing indirect taxes, for example Sales and Service Tax, Customs and excise, and expand the scope of those taxes.

“We could see a more targeted approach focused on goods and services that are more likely to be acquired by the T20 (top 20%) category of people.

“We (expected) greater details to be shared in the Budget 2022 on the Special Programme for Voluntary Disclosure for indirect taxes that was mentioned in the Pre-Budget Statement,” she said.

If GST is to be brought back, Sim opined that the rate can be reduced to 4% or 5% instead of the previous 6%, so that it is more palatable to the rakyat and businesses.

“The rate can be increased gradually when the economy improves. It is also important to reduce our corporate and personal income tax rates when GST is introduced to lighten the tax burden of taxpayers.

“In addition, a robust GST refund mechanism must be put in place to ensure timely refunds for eligible taxpayers, while enforcement should be stepped up to curb tax evasion.”

Sim said new taxes are never popular, but can be managed with proper education and showcasing tangible results on how the revenue collected is channelled to those who are deserving of assistance and allocated to projects that benefit the nation as a whole.

“The one-off tax mulled by the government is not something new. The International Monetary Fund and United Nations proposed a solidarity tax on high earners who made money and businesses that were highly profitable during the pandemic.

“This is on the premise that the rich should share the burden in financing the enormous cost of tackling the Covid-19 pandemic and addressing rising inequality caused by the pandemic,” she said.

The one-off tax, if considered, has to be on a temporary basis for a certain period of time and the targeted sectors as well as revenue thresholds must be carefully thought through.