Malaysia is considering implementing new taxes when the economy recovers. Gain insight on the options for tax reforms that should be implemented in this country.

With the announcements of Budget 2021 on November 6 and the passing of the budget at policy stage on Thursday (Nov 26), the RM322.5 billion budget was the largest ever tabled in Malaysia.

But along with the Budget being tabled, some suggestion coming from Malaysians regarding certain tax to be implemented in Malaysia. Among the suggestion of the type of tax to be introduced in order to add more revenue to our country:

  • Capital gains tax
  • Windfall tax
  • Inheritance tax
  • Goods and Service Tax (GST)

To implement these taxes, we must take into account what it would mean to our economy, whether it is good or bad. We listed some of the pros and cons of implementing the taxes in Malaysia.

Capital gains tax

Capital gains tax is on the gains on investment returns upon disposal of the investment. These capital gains take effect when the investment is sold and the gains realized.

Capital gains are not taxed in Malaysia, except for those that are derived from the disposal of real property or on the sale of shares in a real property company

Pros

According to Inland Revenue Board (IRB) CEO, Datuk Seri Sabin Samitah, Malaysia should consider to implement the capital gains tax. The tax would be a good way to ensuring equity and fairness in the tax system.

Wealthier people are more likely to have capital income and with the tax it can help to combat poverty and income inequality.

“In an effort to broaden the tax base and increase revenue, so that Malaysia can be on par with other countries in the region, the government may or should consider introducing the capital gains tax in the future,” – Datuk Sabin Samitah, CEO of IRB

Cons

The tax can produce more costs on the economy as they reduce returns on investment and can have some impact on the stock of capital, reallocation of capital and level of entrepreneurship.

Based on study of Fraser Institute about the economic impact of capital gains taxation, they will make the capital investments more costly and thus lead to less investment

Owners of capital will try to retain their current investments and economists refer this as the  “lock-in” effect. They wouldn’t budge even if more productive investment opportunities await. This can hinders any economic output as the investments are not reallocated.

Windfall tax

Windfall tax is levied by a country’s governments on companies in a particular industry or sector that has made high profits during a current economic condition.

Pros

The benefits of the tax is the revenue can be used by governments to increase funding for social programs and in times like this helped our country during the fight against Covid-19.

Perviously, Syed Saddiq had in debating the Budget 2021 proposed the windfall tax on glove makers, claiming that such companies have both a moral and legal responsibility to “return” money to the public by paying this tax to the government.

Cons

But, according to CGS-CIMB Research house, for the windfall tax to be imposed on the glove companies will be difficult to be execute due to the lack of standardized pricing of the gloves as they have different types, specifications and grades as well as their target markets.

The research house believes that if the tax is implemented, Malaysian glove companies may want to expand overseas and this could result to lower investment and loss of potential opportunity for the government.

Inheritance tax

Inheritance tax is imposed on the assets inherited upon a person’s passing on the beneficiary.

The inheritance tax were once implemented in Malaysia under the Estate Duty Enactment 1941. An estate of a deceased was required to pay a 5% tax if it was above RM2 million and 10%  if it was above RM4 million. But, this legislation discontinued in 1991.

There has been some talk to reintroduce the inheritance tax but no new laws have been introduced so far.

Pros

For the Consumers Association of Penang (CAP), the inheritance tax if implemented correctly can help provides important revenue for the country and state, with the revenue generated from the super rich and not from those in lower income group.

CAP acting president Mohideen Abdul Kader said, the tax can help lower the gap between the rich and lower income group. It can also be the best way to address wealth inequality by the use of taxation.

Cons

The Associated Chinese Chambers of Commerce of Industry Malaysia (ACCCIM) said that imposing inheritance tax would cause capital outflows and dampen the spirit of Malaysian entrepreneurs to create wealth and desire to innovate and prosper.

“It would also discourage capital formation and savings corporates and investors would likely move their assets and investments abroad to avoid these proposed taxes,” –  ACCCIM

This could result in non-conducive market environment that cannot attract local and foreign investment that essential for Malaysia’s economic growth and capital market development

Goods and Service Tax (GST)

GST is the value added tax in the supply of goods and services at each stage of the supply chain from the supplier to the retail stage of the distribution – Malaysia Customs Department

GST in Malaysia was first introduced on April 1, 2015 to ensure the coverage of all economic sectors and with the flexibility of 0% to 6%, depending on how much the sector can afford, especially for essential services and those that are most consumed by the lowest-income group in society

The tax was repealed on 31 August 2018 and a new sales and service tax (SST) applies from 1 September 2018

Pros

The Chairman of International Strategy Institute, Cheah Chyuan Yong said that in time of crises such as the one we are facing now, revenue from GST can help to afford our country fight to combat the pandemic.

“But, as we struggle financially now to keep the economy afloat, in retrospect a solid GST regime would have given us more fiscal space to save the economy from a free fall – Cheah Chyuan Yong, The Chairman of International Strategy Institute

Cons

GST can be a major liability if it doesn’t redistribute equally and the public will have greater interest on how the revenue is spent as every individual is hit by the tax. Questions and possibly critics can build up if the revenue is not spent for the welfare of the people.

The tax is complicated to implement and tedious preparation is needed before it can run smoothly and some countries are facing difficulties when handling the tax

The GST is also a burden to the consumer as the prices of goods will increase and thus lowers the purchasing power of consumers. For lower income groups, this will mean more money will need to be spent in order to afford things.

Overall

Even though people are more inclined for government to tax the rich and companies that are making more profits during the pandemic, several economic factors should be considered before it being implemented. More research and survey to be conducted by government to determine the short and long-term effect if each of the tax is to be implemented. Malaysia’s finance minister Tengku Zafrul has also stated that new taxes will only be introduced when the economy recovers.

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What tax do you think should be implemented in Malaysia?