Consumption tax most effective to widen country’s tax base

It is a more efficient way of collecting taxes with less room for leakages, IRB CEO says


CONSUMPTION taxes are one of the most effective ways to widen the country’s tax base and Malaysia needs to move towards the trend to increase its revenue.

Inland Revenue Board (IRB) CEO Datuk Mohd Nizom Sairi (picture) said Malaysia’s tax system will need to embrace consumption-based taxes and not be heavily reliant on direct taxes for income.

“We cannot deny that our tax system will have to move towards the current trend which is widening the base, and as we know consumption tax is actually one of the most efficient ways to do so,” he said during the Deloitte Malaysia 2022 National Budget webinar yesterday.

“Not only will it widen the tax net but I think we can agree it is a more efficient way of collecting taxes with less room for leakages.

“This is also important in our effort to ensure the tax system is more equitable compared to direct taxes,” said Mohd Nizom.

He, however, stated that now it is not the right time to implement more consumption taxes as the country is still recovering from the impact of the Covid-19 pandemic.

“However, we cannot ignore it forever,” he added.

The Ministry of Finance (MoF) has previously stated in its 2022 fiscal policy outlook that the federal government revenue for this year is projected to register a lower collection of RM221 billion compared to RM225.1 billion collected in 2020, mainly due to the fall in proceeds from non-tax revenue as a result of lower investment income.

Direct tax is expected to turn around by 6.7% to RM120 billion mainly contributed by higher companies’ income tax collection of RM60.6 billion, while indirect tax collection is estimated to decline by 0.3% to RM41.8 billion due to lower collection from Sales and Service Tax and excise duties this year.

For 2022, MoF projected for the government to register total revenue of RM234.01 billion of which direct tax will contribute RM127.33 billion followed by indirect tax and non-tax revenue of RM44.04 billion and RM62.64 billion, respectively.

On the issues of Cukai Makmur, or prosperity tax, Mohd Nizom noted that although the initial reaction to the tax was not good, it did not come off as a surprise because talk was rife on the possible measures the government would take to gain additional revenue.

“The government went through several processes of consultations with the public. We were definitely involved to see what is the best way and the appropriate group the government can target to get the one-off additional revenue to help us recover,” he said.

He added that if Putrajaya was to implement the tax on companies that have profited during two years of the pandemic instead of those that will rake in profits next year, the “targeted” group would still contain the same companies.

Companies with taxable income of up to the first RM100 million will be subject to income tax at the rate of 24% and the prosperity tax is collected on the remaining taxable income that will be subject to a tax rate of 33% for the year of assessment 2022.

“In terms of its implementation, it looks forward because it is based on the size of profit next year rather than during the pandemic itself.

“At the end of the day, the group that will be involved or become the target for this prosperity tax remains the same,” he added.