These reforms are aimed at streamlining tax policies, attract investment, enhance tax compliance 

by AUFA MARDHIAH & ANIS ZALANI / pic TMR

TAX reforms play a crucial role in shaping the economic landscape of a country, and Malaysia is no exception. Over the years, the government has implemented various tax reforms to improve its tax system, promote economic growth and ensure fair and equitable taxation. 

These reforms are aimed to streamline tax policies, attract investment, enhance tax compliance and align tax regulations with the changing economic and technological landscape. 

For now, all immediate bets are off for the mother of all tax reforms, the Goods and Services Tax (GST), making a comeback. Introduced in 2015, GST was a brave move in the realm of tax reforms. It aimed to replace the Sales and Service Tax (SST). However, effective from June 1, 2018, Malaysia abolished the GST and brought back SST. 

Then there is also the Digital Service Tax or service tax on digital services (SToDS) that was introduced in 2020. It aims to tax foreign service providers of digital services to ensure a level playing field between local and foreign businesses operating in the digital sphere. 

Achieving Fairer Tax System 

Tax reform must be built on fairness and the lowering of the overall tax burden, said tax expert Dr Veerinderjeet Singh, who is also the vice chairman of the Paris-based International Chamber of Commerce (ICC) Global Taxation Commission. 

How does that help? Once the tax regime fulfils the two requirements above, it can provide more incentives to work, save, invest and compete, international competitiveness for businesses. It will also encourage more investments in high technolog y and value-added sectors, create jobs and to raise economic growth potential ultimately. 

“Not only that, Malaysia needs to have effective, simpler and less complex tax administration to minimise compliance costs, reduce business costs as well as to discourage tax avoidance and evasion. 

“The complexity of the tax system and fiscal incentives/reliefs/allowances, in terms of qualifying and reporting requirements, increases costs, especially for the small and medium enterprises (SMEs) and revenue adequacy and sustainability to enable prudent spending and budget management while maintaining fiscal stability,” he said in his report titled “Developing a Modern Tax Framework for Malaysia”. 

In the report, he also mentioned that there are four pillars in achieving a fairer tax system which revolves around incentives, certainty in law, consistency and simplicity. 

He said the implementation needs to be fairer and non-discriminatory between the different sectors of the economy as an overly preferential tax treatment for one sector relative to others not only encourages rent-seeking behaviours, but also creates distortions (in terms of resource allocation) and could cause a bias in terms of investment choices among sectors or activities. 

“Globally, countries are stepping up to create efficient, balanced and effective tax systems. While globalisation and digitalisation facilitate freer capital flows, enhancing the mobility of skilled workers and deepening wider cross-border trade flows, they also increase the opportunities for tax avoidance and evasion — hence, putting competitive pressures on Malaysia to design a tax policy that is time-tested in the global marketplace and investment arena,” he stated. 

In formulating the proposed tax policy in a globalised and complex environment, he said Malaysia has to take into consideration the corporate income taxes that can influence the choice of investment location, a conducive business-friendly regime and a regulatory environment, supported by stable macroeconomic conditions. 

The high tax incidence, compliance and business costs can affect the cost of producing goods and services — hence, erode relative international competitiveness, as well as sales and other related taxes would impact tourism, e-commerce and cross-border shopping as they can influence tourists’ spending on domestic goods and services and the hospitality sector. 

“Personal income taxes can influence the mobility of labour, increase the supply of the domestic workforce and attract talented workers in the choice of the country in which they wish to work. 

“Taxes imposed on the input and the raw materials, cascading through the production process, can dampen production and investment, as well as penalise exports,” he added. 

In addition, he stated that excessive taxes, such as excise taxes on certain industries like alcohol and cigarettes, which are meant to discourage smoking and promote a healthy lifestyle while raising tax revenue, actually encourage the use of illegal goods and rampant smuggling, which costs the government billions of ringgit in lost tax revenue. 

Furthermore, he stated that the tax system also needs to avoid ambiguous interpretations, exemptions and loopholes that can distort investment decisions and consumer choices. 

“Most importantly, domestic companies and foreign multinational enterprises are attracted to a stable and predictable tax system, which is administered in an efficient and transparent manner. Based on recent global developments, data points to the need to shift away from taxing employment and business activity and towards taxing ownership and consumption,” he said. 

Corporate Tax 

On corporate tax rate, Veerinderjeet said, lowering its rate will be difficult given the current state of the economy if Malaysia does not have any other sources of tax collection. 

For instance, he used European countries for this context, noting that their GST systems are developed and their tax rates are often higher. 

“As part of a strategic move to draw foreign direct investment and remain competitive, Malaysia too needs to move similarly with probably a 1% annual cut in the corporate tax rate and widening the scope of its consumption taxes. 

“As such, the government does face some serious constraints and the issue of tax evasion and the under-reporting of income is also an area that needs substantial research, as the hidden and informal sectors can generate substantial tax revenue,” he said. 

Nevertheless, Veerinderjeet added that a robust fiscal framework to outline the way forward is what the country needs. 

Tax Administration 

On the tax administration front, he suggested that the government improve the country’s institutional and execution capability in the area of tax administration — on which the government has stated its commitment to improve the efficiency and effectiveness of public sector service delivery in order to deliver high-quality services and foster a welcoming business environment. 

“Various measures have been taken over the years to create such an environment and improve service delivery. While these initiatives have produced positive results in some areas, the government needs to intensify its efforts to further enhance the public service delivery system, aiming to increase Malaysia’s competitiveness and appeal to investors,” he said. 

Tax System to Stimulate Investment

He also stated that the tax system plays a crucial role in this endeavour as it serves as a key driver for stimulating investment activity. 

To achieve an efficient tax system, he said it is essential to have an effective tax administration structure, saying, “Even a well-designed tax system can lead to injustice if poorly administered.” 

Recognising the significance of taxation for economic funding, he added that many countries have implemented substantive reforms in tax administration. 

He added that one notable reform measure is the introduction of self-assessment, which places the responsibility of determining tax liability on taxpayers themselves, while the tax authority conducts random audits to verify the accuracy of the declared information in tax returns.

“An income tax system relies on the voluntary willingness of citizens to fulfil their tax obligations. Therefore, it is crucial for the tax agency to adopt a philosophy of engaging in outreach and educational programmes to promote voluntary compliance,” he said. 

On the other hand, another report by The Malaysian Institute of Certified Public Accountants (MICPA) with Deloitte titled “Tax Reforms — The Way Forward for the Malaysian Tax System” mentioned that one of the key reforms as rightly pointed out by the World Bank Group is to raise more revenue and improve spending efficiency. 

“Similar to most economies across the world, Malaysia has been severely affected by Covid-19 and Malaysia faces not only a global pandemic and a worldwide recession but also a looming international debt crisis, a heightened risk of a resurgence in trade disputes, the potential unravelling of global value chains, as well as the impact of disruptive technologies that could change the socio-economic dynamics of nations,” it said. 

The report further added that tax policy, therefore, will be one of the longer-term levers that the government can use to generate revenue to manage increased levels of national debt. 

Adding more, it said the government and relevant stakeholders need to pay greater attention to the spillovers from their tax policies and step-up support for a fair and efficient system of taxation, including efforts to fight tax evasion and tax avoidance. 

In conclusion, experts have emphasised the importance of fairness, simplicity, consistency and certainty in tax reform efforts as they argue for the need to lower the overall tax burden, provide incentives for work, savings and investment, as well as create a business-friendly environment. 

Effective and efficient tax administration is crucial to minimise compliance costs, discourage tax avoidance and evasion, as well as attract domestic and foreign investments. 

To remain competitive in the global marketplace and attract foreign direct investment, Malaysia may need to gradually consider lowering corporate tax rates and broadening the scope of consumption taxes, as demonstrated by successful examples from other countries. 

Overall, Malaysia’s ongoing pursuit of tax reforms seeks to create a fair, efficient and business-friendly tax system that fosters economic growth, attracts investment and strengthens the country’s competitiveness globally.

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