PETALING JAYA: There is a need for Malaysia to embrace indirect tax as a source of revenue in line with the trend of Organisation for Economic Cooperation and Development (OECD) countries, according to Inland Revenue Board Malaysia (LHDN) CEO Datuk Mohd Nizom Sairi.
He noted consumption tax is one of the most efficient means to widen the tax base by involving a larger segment of the population.
“On this issue, there are arguments on the equitable perspective, whether it is fair to tax those in different income brackets at the same rate among others,” Nizom said at Deloitte Taxmax’s virtual conversation ‘Taxation for nation building and sustainable growth’ yesterday.
“However, we can no longer deny that the trend is heading that way, as it will widen the tax net but it is also a more efficient way of collecting tax as there is less room for leakages.”
He revealed the data shows Malaysia’s tax structure relies heavily on direct income taxes, especially on corporate while indirect taxation is under-utilised.
In terms of direct tax to gross domestic product (GDP), the figure stood at 8.4% in 2020 against the OECD’s average of 11.2%, while indirect tax-to-GDP stood at 3.2% which is far below the OECD average of 10.9%.
“Based on these statistics, our tax structure is heavily reliant on direct taxes compared to indirect taxes,” said Nizom, pointing out the OECD’s average between the two taxes is about 50:50, while Malaysia’s direct tax contribution outweighs indirect tax at 75:25.
“Looking at these trends against how taxes are structured as a source of revenue in other parts of the world, we cannot deny there is a need to move towards this trend.”
During the conversation, Deloitte’s country tax leader Sim Kwang Gek also broached the subject of the one-off Prosperity Tax or Cukai Makmur which imposes a corporate tax rate of 33% for profits reported beyond the first RM100 million, introduced in Budget 2022.
She pointed out the tax came as no surprise as the World Bank and the International Monetary Fund (IMF) has advocated for a solidarity tax for businesses that are thriving during the pandemic.
With the one-off tax measure, Nizom stated Malaysia is not alone in the search for additional revenue in this trying time due to the challenges posed by the Covid-19 pandemic.
“For all countries, the race to recovery is important to ensure they don’t fall behind and not take too long to recover and the trend is to look at those who are getting the better end of the pandemic.”
He acknowledged the initial reaction to Cukai Makmur was not too good but there are also those who do not see it as a surprise, having seen it as one of the possible measures for the government to take considering the limited sources available.
“For the proposal, the government went through consultation with the public and LHDN was also involved in figuring out who the government can go to get this one-off additional revenue to help the country recover.”
Nizom stated the decision to tax those based on the size of the profits as opposed to those who have seen an increase in margins during the pandemic is because the two groups are nearly identical and the former is the simpler approach.
On the matter of taxation of foreign-sourced income introduced in the latest budget, he said that more detailed guidelines will be published prior to the implementation in 2022.
“There may be some exemptions considered in the future, but the main principle behind it is not to subject any income to double taxation, if you have been taxed in another jurisdiction and you can bring it here,” he said.
“As long as we don’t subject any income to additional taxation, the system is fair.”