By CECILIA KOK
cecilia_kok@thestar.com.my
Deficits mean future tax increases, pure and simple US politician and 2012 Republican presidential candidate Ron Paul
DON'T worry, that's unlikely to be the case for Malaysia yet, at least not in Budget 2012.
It is just part of an annual ritual to put the country's tax system under scrutiny, as the budget season approaches. Tax, after all, is a constant struggle between the Government and its people and private businesses operating in its economy, as the Governments always seek to grow its income, and most of the time, it will be at the expense of the latter group.
With expectations running high for “populist” measures in the upcoming budget, the question in many people's mind is whether a reduction in income tax is in the offing. If not, what other goodies could the Government possibly offer vis-vis its need to raise revenue and cut expenses in order to trim its deficits?
Tax experts share their views with StarBizWeek on what is to be expected in the budget and what elements within the current tax system need to be revised.
Simplify, simplify, simplify
First things first simplifying the country's tax system should be a top priority of the Government, according to tax consultants. The purpose is to improve revenue collection.
“There is an urgent need to conduct a comprehensive review of existing tax laws with simplification of the legislation as the basic objective,” argues PricewaterhouseCoopers Taxation Services Sdn Bhd (PwC) tax leader and senior executive director Khoo Chuan Keat.
“Complex tax laws always lead to higher compliance costs. And the more complex the tax system, the higher the incentive for taxpayers to resort to tax-evasion schemes,” Khoo explains.
KPMG Tax Services Sdn Bhd executive director Nicholas Crist concurs. He says a simplification of the tax system would not only help reduce compliance costs, but also promote administrative efficiency, while allowing the Government to focus on enforcement activities to enhance revenue collection.
Among the areas that need to be simplified, according to Crist, are the criteria for corporations to qualify for group loss relief and capital allowances claim, and the filing of tax return by individuals.
Crist also thinks that it is timely for the Government to consider redrafting old tax legislations such as the Malaysian Stamp Act 1949.
“The language used when drafting the original legislation over 60 years ago may not be so relevant in today's context and may consequently lead to confusion in interpretation,” he explains.
BDO Malaysia head of tax advisory David Lai, on the other hand, hopes there will be a convergence of accounting and tax treatments.
“Currently, some companies have to deal with many adjustments in the tax computation as tax is calculated based on historical cost, while IFRS (International Financial Reporting Standards) require the application of fair value,” he says.
Malaysia's corporate tax rate currently stands at 25%, which is on the high side compared with Hong Kong's 16.5% and Singapore's 17%, but more competitive compared with the Philippines, Thailand, Australia and New Zealand's corporate tax rates of around 30%.
While a cut in corporate tax rate is desired to further enhance Malaysia's competitiveness, tax experts concur that such measure is unlikely to be introduced in the upcoming budget, given the Government's commitment to cut its fiscal deficit, amid an absence of new sources of revenue such as the goods and services tax (GST)
Corporate tax to remain status quo?
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| Lai hopes there will be a convergence of accounting and tax treatments. |
“Corporate tax represents over 30% of tax revenues. Any reduction will definitely have a significant impact if there were no new sources of income for the Government,” Lai explains.
Lai hopes there will be a convergence of accounting and tax treatments.
In such a scenario, Ernst & Young (E&Y) Malaysia partner and tax leader Yeo Eng Ping points out that the Government's coffers will come under tremendous pressure. Hence, any change in income tax, she argues, will only materialise when the Government implements the long-awaited GST.
All is not lost, however, if the Government could extend further incentives and reliefs to businesses to reduce their burden. And that could well turn out to be a win-win situation, as a “lower effective tax rate”, says Crist, will improve business competitiveness and encourage the private sector to continue investing in the economy.
Tax experts, nevertheless, emphasise that tax incentives given to businesses should be more focused on activities that can help Malaysia move towards a high-income and knowledge-based economy by 2020. These include key industries targeted in the National Key Economic Areas such as oil and gas, palm oil, financial services, tourism, communication, content and infrastructure, education and healthcare services.
“Incentives and reliefs should be extended to research and development activities and acquisition of intellectual property, for instance, as well as to multinational corporations to set up businesses in our country as that would help expand our skilled workforce and facilitate the transfer of knowledge,” Lai says.
“Revamping our tax incentive regime by curtailing incentives given to lower value-added activities would generate additional tax revenue, while promoting high value-added activities that would create profound economic spin-offs and eventually result in higher tax revenue for the Government,” Deloitte KassimChan Tax Services Sdn Bhd managing director Yee Wing Peng says.
Less burden on individuals?
Even as the Government has promised a budget that will help reduce the financial burden of the rakyat, tax experts do not think it signals a significant change to the progressive tax rates on individual income.
The highest income bracket group, though, would likely see its tax rate reduced from the present 26% to 25% to be in line with the prevailing corporate tax rate in the country.
Over time, Malaysia's individual income tax structure still needs to be revised.
PwC's Khoo laments that the current structure has narrow tax bands and steep increases between each progressive rate. “The increase in each tax rate should be more gradual and the band should be considerably broadened to make our personal taxes more competitive in attracting talents,” he argues.
While any significant change in the personal income tax rate is not expected to take place, tax experts believe the Government would compensate individual taxpayers through higher reliefs.
“From the perspective of the man on the street, the expansion of individual tax reliefs will be heartening news as that could help alleviate the burden of rising living costs,” Crist says.
Experts argue that increasing individual tax reliefs is justified as the current allowances have generally failed to keep pace with rising inflation in the country.
“Inflation has over the years eroded the disposable income of taxpayers, yet personal reliefs have not changed much. So, I think it's high time for personal reliefs to be automatically index-linked to take into account the average inflation of the country each year,” PwC's Khoo argues.
Deloitte's Yee concurs, saying: “With the rising cost of living, an increase in personal relief, for one, from the present RM9,000 to, say, RM10,000, can make a difference.”
Indeed, the list of individual tax reliefs that need to be revised is long. From the amount allowable per child to personal expenditure on education and healthcare to purchases of IT gadgets and sports/fitness equipment and expenses incurred on domestic helper, all measures will help the rakyat and ultimately benefit the country's economy directly or indirectly.
For instance, a relief for the purchase of a personal computer, Crist explains, could promote IT literacy, while that for sports/fitness equipment could promote better health among Malaysians.
Yee, on the hand, thinks relief for expenses incurred to hire a maid will encourage more women to participate in the workforce and hence improve productivity of the country.
Go GST
There's consensus among tax experts that GST should be introduced in Malaysia to broaden the tax regime and increase the Government's revenue, which has remained pretty stagnant over the last few years.
Direct taxes, comprising mainly corporate tax, individual income tax and petroleum income tax, represent the biggest contributor to the Government's revenue each year at around 50%. To understand the weakness of the system, the Government recently revealed that for personal income tax, only 1.7 million of the 12 million country's workforce is actually paying tax.
“The Government has to diversify its revenue stream by introducing GST, which is a fairer tax system on a simple logic that the rich consume more, particularly on pricier items and will have to pay more tax, while many essential goods and services consumed by the lower income group will be GST-exempt. It is also more efficient with less inclination for tax evasion, as businesses merely levy GST on their supply to customers and collect tax on behalf of the Government,” Yee says.
While GST is an eventuality, it is unlikely to be announced in the upcoming budget, with an impending general election. GST, being an extremely unpopular (although beneficial over the long run) measure, will likely be announced only after the general election based on indications given by the Government so far.
“Efforts are already under way to create awareness among the rakyat on GST implementation and that has been a challenging move,” E&Y's Yeo says.
“At present, the primary concern of governments around the world is whether taxes collected are sufficient to fund their nation's expenditure and development amid the current global economic uncertainty. Many governments are already considering increasing tax rates to boost revenue. Malaysia needs to address the same issue as well, and the introduction of new taxes such as GST has to be considered,” she explains.
GST is widely seen as the key towards a more sustainable and efficient system for revenue collection by the Government. It is only with GST, that the Government can have room to cut corporate and personal income tax.
