Malaysia Urgently Needs A More Comprehensive And Equitable Tax Structure


With the tabling of the new budget approaching – the second to be presented by the Pakatan Harapan (PH) government – PAS Central’s Economic, Real Estate and Entrepreneur Development Committee would like to urge the Government to seriously consider a strategic revamp of the country’s tax structure, to address the pending shortfall in revenue that is anticipated as a result of the SST implementation.

The government implemented the new Sales and Services Tax (SST) effective 1 September 2018 to replace Goods and Services Tax (GST). It comprises of two independent taxes, governed by separate legislation, namely the Sales Tax Act 2018 (Act 806) and the Service Tax Act 2018 (Act 807). While maintaining the salient features of the previous SST, the new SST incorporates enhancements designed to minimise its predecessor’s inherent weaknesses.

To recap, a sales tax is a single-stage tax that may be levied at any given stage of the value chain, be it at manufacturing, wholesale retail level. In Malaysia, the sales tax is only levied at the manufacturer’s level on manufactured taxable goods. Other than locally manufactured taxable goods, imported taxable goods are also subjected to the sales tax, which is charged at the point of import. This tax is levied at 5% or 10% of the sales value.

A Service Tax, meanwhile, is also a single-stage tax levied only on taxable services, as stipulated in Act 807 and prescribed under the Service Tax Regulation 2018. It is imposed on the provision of any taxable service in Malaysia by a registered person in the course of business, at a standard rate of 6%. At present, imported or exported services are not subjected to service tax.

Where the previous administration’s revenues accrued through GST averaged RM43 billion per annum in the years 2016 and 2017, the current government projects a SST collection of just RM22 billion for the year 2019, indicating a significant “fiscal gap” that needs to be filled.

This has contributed to a widening fiscal deficit of 3.9% and 3.7% in 2018 and 2019, higher than the government’s target of 3.7% and 3.4% respectively.

PAS through its “Dokumen Hijau” initiative, has in the past proposed a complete revamp of Malaysia’s tax structure towards a more comprehensive and equitable one, envisaging a fairer distribution of wealth among the rakyat, and for the country’s wealth to not be retained only within a selected elite. The document seeks to improve the standard of living of the lower income group through a strategic redistribution of wealth, and increasing the disposable income and purchasing power of the rakyat in general.

Key to this is a more comprehensive and dynamic tax structure that will tax the excess income of the rich, coupled with a fairer distribution of the country’s income from natural resources to the lower income group, and the abolishment of the monopoly of our core economic activities. This is our main economic objective, with the ultimate vision being for Malaysia to become a prosperous nation for all.

We anticipate that the increased wealth and disposable income in the hands of the lower and middle-income groups, which form the majority of the rakyat, will spur a diversification and acceleration of economic activity, and see an increased multiplier effect across the economic spectrum. This will in turn drive a more rapid expansion of commercial activities within the corporate sectors, as a result of the increase in demand for existing as well as new products and services.

Ultimately, it is hoped that this will reduce the government’s financial burden to provide direct financial support to the people, stabilise the government’s revenue against the backdrop of a global trade war and geo-political uncertainties, encourage social financial investments within the society and promote growth of the capital markets including new listings and capital issuances such as Sukuks, in order to accommodate corporate expansion.

To do this, we propose the following alternative tax structures:

• Capital Tax on Shares (CTS), consisting of two components:

o tax on the value of shares held for at least one year, based on the lowest value of shares in the preceding 12 months
o to discourage speculation, taxes are also levied on gains made if the shares are disposed of in less than one year.

A tax rate of 2.5% is proposed based on the Islamic Zakat principle. Comprehensive due diligence and communication will be carried out prior to implementation, to ensure clear instruction rooted in practicable procedures and to address any potential investor concerns.

• Tax on Corporate Saving (TCS), which may include Cash and Bank Balances and other classes of financial assets. Again, the tax rate proposed is 2.5% according to Islamic Zakat, based the lowest or average balance in a year, and

• Concurrently, a complete review of existing tax structures, where corporate and personal income tax will trend toward a lower rate and, where relevant, new taxes e.g. taxes on luxury items which will be levied in accordance with Islamic principles. This is intended to balance the impact on investors in view of the introduction of new taxes as stated above.

In implementing the above, considerations will be made and where relevant, exclusions be granted where necessary and specific tax reliefs, tax credits and/or annual tax allowance provided.

Both CTS and TCS are expected to bring about a more efficient distribution of capital in the country. In particular, the TCS will discourage what is commonly referred to as “lazy balance sheets”, where cash balances often remain idle, and are not invested to expand economic activities within the country, hence forgoing the opportunity to add to the country’s multiplier effect.

Based on our calculations, TCS can add RM12.5 billion to the government’s coffers, with CTS providing another RM47.5 billion. These potential revenues are already more than what SST can contribute to the government.

Crucially, PAS will ensure an open and thorough study of the country’s economic ecosystem to ensure its smooth adoption and implementation. This is also designed to mitigate any uncertainties and in turn push the economy to further growth, across a wider economic spectrum.

Above all, a holistic approach will be deployed to ensure that Malaysian markets will remain competitive, robust and attractive to investors.

Vice Chairman 2
PAS Central’s Economic, Real Estate and Entrepreneur Development Committee