Is it time for new taxes?
The business community is abuzz with news on the additional taxes that the government is introducing in the coming budget. But the concerns are likely unwarranted.
PAKATAN Harapan’s manifesto for the 14th General Election (GE14) holds a long list of election promises, of which “Promise 32” is an interesting proposition.
The coalition had pledged in its manifesto to introduce a tax system that is both people- and entrepreneur-friendly.
“Pakatan Harapan will end Umno and the Barisan Nasional’s extortion of the people through taxes,” it wrote.
While the coalition scrapped the unpopular goods and services tax (GST) within 100 days of its stunning victory in GE14, it has also planned to unveil new forms of taxes as soon as Nov 2 – during the tabling of Budget 2019.
The main objective is to raise higher revenue to repay the RM1 trillion national debt.
Dissenters describe the move as “ironic”, fearing a higher tax burden on the working population, of which half of them earn below RM2,160 per month.
Even for those with tertiary education, about 50% earn less than RM3,400 per month based on the data from the Statistics Department.
The fear is the new taxes could affect the low- and middle-income earners either directly or indirectly – even if they do not pay these taxes right out of their pockets.
Several economists remain sceptical of the potential new taxes, saying that “the timing may be wrong”, considering the slowing domestic economy and external vulnerabilities.
After all, with the budget for next year likely to be trimmed and public expenditure expected to be lower than before, the domestic economy needs to be stimulated. Higher taxes at such times could turn unfavourable for the population.
Speaking to StarBizWeek, Alliance Bank Malaysia Bhd chief economist Manokaran Mottain says the new taxes may be a double whammy for Malaysians and the market, as they increase the tax burden amid economic uncertainties.
“The introduction of new taxes should be done when the economy is growing strong.
“Also, there is no hurry to reduce the debt levels or to reduce the budget deficit level at the expense of introducing new taxes on the people,” he says.
No capital gains tax
The biggest fear is the implementation of a tax on gains made from the stock market. Known as the capita gains tax, it has become a subject of speculation although there is no indication from the government or any of the leaders whether such a move would take place.
However sources said that there is no intention to introduce capital gains tax in the upcoming budget.
“There are no plans for now,” sources say.
An economist says capital gains tax would create negative implications on the economy, if implemented.
He cites the capital gains tax, which is commonly imposed on gains made through equity transactions, as a potential risk to the stock market performance, given the recent trend globally.
“Already not many people are making money on the stock market,” says the economist.
The plan to introduce new taxes became the talking point after Prime Minister Tun Dr Mahathir Mohamad, Finance Minister Lim Guan Eng and Bank Negara governor Datuk Nor Shamsiah Mohd Yunus all spoke about it during the Malaysia: A New Dawn conference on Oct 9.
Incidentally, Bursa Malaysia saw a bloodbath the next day, with the FBM KLCI shedding 39 points and falling the most in nearly five months.
Some pointed to the potential new taxes as a cause for Bursa’s drop.
However, closer scrutiny reveals that news on the potential new taxes has already been talked about several times a month earlier.
As reported in StarBizWeek’s cover story on Aug 18, Nor Shamsiah had hinted on the plan to introduce new taxes to raise higher revenue for the government.
Two weeks later, Lim announced the formation of the Tax Reform Committee that will, among others, explore new sources of revenue, study the taxation of the digital economy and review various existing tax incentives.
So far, Lim has also said that the government has no plans to raise the individual or corporate tax. However, he did not mention whether several tax incentives or exemptions could be removed.
The introduction of new taxes is not bizarre, as in the words of American polymath Benjamin Franklin, “in this world nothing can be said to be certain, except death and taxes”.
Malaysia is currently in need of strengthening its revenue base and secure sustainable income sources, as it reduces its reliance on petroleum-related revenue.
After all, the government’s revenue has been falling over the last few years on the back of low crude oil prices.
Tax revenue on the decline
As a result, the national revenue as a share of the country’s economy size or gross domestic product (GDP) has dropped from about 20% of GDP in 2014 to 16.3% of GDP in 2017, according to preliminary esti- mates.
Tax revenue has fallen from 20% of GDP in 1997 to over 13% in 2016, as per the World Bank data.
Malaysia’s tax revenue from the individual income tax, which represented 17% of the country’s total revenue in 2017, has long been unsustainable.
Despite having a working population of nearly 15 million people, only 6.9 million filed their tax returns in 2016, of which, only 2.27 million individuals actually paid taxes after tax incentives.
The situation is further exacerbated by the country’s ageing population.
With Malaysia expected to be an aged country by 2030, where 15% of its population will comprise senior citizens, the government must find alternative sources of tax revenue to support the future needs of the country, such as social security, infrastructure expenditure and others.
AmBank Research chief econo-
mist Anthony Dass tells StarBizWeek that the government has “little choice” to deal with the large RM1 trillion public debt and the need to repay the GST and income tax refunds worth RM35.3bil.
“By introducing new taxes, it in one way allows the government not to raise taxes in the more traditional areas such as the individual and corporate taxes that can have a more adverse impact, or in areas where the collection from additional taxes may not be significant enough to help cushion some level of the deficit,” he says.
When asked whether a tax on the digital economy could be regressive on the low and middle-income population, Dass believes that it is likely to be so.
“By introducing online taxes, there will be some knock-on effects on the households in the bottom 40% and middle 40% of the population. But the adverse impact may not be that severe,” he says.
The International Monetary Fund has stated previously that a well-designed tax policy can help spur economic growth, if the revenue is utilised to finance governments’ economic development policies and stimulate the development of private-sector activities.
With the Pakatan government fixated on reducing the national debt while cutting expenditure, it remains to be seen how the new taxes will benefit the overall population, moving forward.
The introduction of new taxes should be done when the economy is growing strong. Also there is no hurry to reduce debt levels or to reduce the budget deficit level at the expense of introducing new taxes.
Manokaran Mottain