PETALING JAYA: The Center for Market Education (CME) has urged the government to holistically think about a tax reform that can support government revenues without undermining growth or discouraging private investment, in response to the government’s move to consider a windfall tax and a capital gains tax to support federal revenues in a moment of difficulty.
“In particular, a tax reform needs to be the least distortionary and discouraging as possible for economic activity; it has to nudge in favour of a saving-oriented mentality; and it has to keep the investment pace from both overheating and depressing,” CME CEO Dr Carmelo Ferlito said in a statement.
The think tank believes the tax reform should be supported by a reduction on income tax and a shift towards consumption tax with private investment as the key driver for growth. It suggests the government should spur such investment through a moderate income tax as a signal of its commitment.
At the same time, CME advocated for a shift towards indirect taxation via a goods and services tax (GST) that should be accompanied by higher standards of enforcement and a reduction of unnecessary government expenditures. It added that the reduction of income tax should be partially replaced by a consumption tax as it could have the possibility to stimulate household savings in Malaysia, which is burdened by a high household debt.
To allay the potential regressive effects of the consumption tax, CME has proposed several measures for the implementation of the GST; the exemption for basic goods such as rice, a low rate of 3% for key development items such as culture and education related goods, a high rate of 10% for luxury goods and a middle rate of 6% for all goods not identifiable with the other categories. It believes the return to GST can be a testbed for a higher degree of tax devolution, with the involvement of state government in tax collection to enable for a more direct access to funds, in which it retains 20% of the tax collected.
CME also proposed for the support of microbusiness exiting the shadow economy via a special accounting and tax system, whereby a flat and low tax is applied on the self-declared turnover, while most of the accounting and reporting burdens are waived.
In light of the substantial increase in fiscal deficit due to allocations for the Covid-19 pandemic, it had proposed a temporary two-year special purpose tax of 5% (SPT) on taxable profits of corporations above a specified threshold.
“The limited temporal framework needs to be clearly defined as part of a sort of new social pact between the state and its citizens: the state demands special effort from some of its tax-payers but it commits to fighting Covid-19 with these additional revenues and allowing businesses to operate without additional lockdowns.”
The think tank explained the SPT would be channeled to enhance medical resources and capacity to manage the huge number of cases being reported and it would have a clear start and end date to alleviate concerns over a permanent increase.
It also urged the government to consider a progressive capital gains tax to support a healthy growth of the economy guided by a two-sided countercyclical strategy. Under the progressive tax system, a lower returns would translate to a lower tax rate which would fuel conservative behaviour.
“Overall, we would see a shift in the behaviour away from highly speculative investments promising a high rate of return because some investors will lose interest due to the increased tax burden. Furthermore, the government would increase its tax receipts above average in boom times due to the rising tax rates and could, theoretically, use the money to support the economy in times when it nevertheless falls through the corridor.”