A tax roadmap will aid private sector to make informed investment decisions

New taxes’ introduction will encourage economic activity of the private sector

– by NUR HANANI AZMAN / Pic by TMR FILE PIX

THE government should introduce a “tax roadmap” framework that includes potential taxes, consultation timeline, as well as the rationale for the introduction to aid investors to make informed investment decisions, Ernst & Young Tax Consultants Sdn Bhd Malaysia tax markets leader Farah Rosley said.

“New taxes introduced should encourage the economic activity of the private sector. The government should also be sensitive to the position of the small and medium enterprises (SMEs) and ensure this sector is not directly or indirectly impacted by new taxes, especially during the recovery period post-Covid-19 pandemic.

SMEs contribute to economic activity, growth and employment. Overall, the introduction of new taxes will need to ensure the balance of achieving tax revenue collection, attracting investments into the country and not resulting in businesses moving to informal sectors or ceasing operations in Malaysia,”

she told The Malaysian Reserve (TMR).

In the year 2020, despite the impact of pandemic and lower estimated average crude oil price of US$40 (RM166.80) per barrel, tax collections continue to be the major contributor to the federal government’s revenue with an approximate collection of RM153.3 billion or 67.4% of total revenue.

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Direct tax, which accounts for 50.6% of total revenue, is expected to decrease by 14.6% to RM115.1 billion (2019: RM134.7 billion).

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Collections from all direct tax components are projected to decline primarily due to weak economic activities which affected businesses and individuals’ incomes.

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The estimated tax revenue collection target for 2021 is RM162.1 billion, made up of direct taxes of RM120 billion and indirect taxes of RM42.1 billion.

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According to Farah, introducing a windfall tax which is a special tax that the government imposes on companies making a large, unexpected profit during a specific period or due to economic conditions will need to be considered carefully.

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She believed that any windfall tax should only be introduced with appropriate rationale and for a limited period, and should not discourage re-investment by businesses — reinvestment will lead to growth, which in turn will lead to higher future tax collections.

“The intended utilisation of the tax should also be transparent, as taxpayers would want to know that the taxes are being utilise for a good cause. For example, the taxes should be used for economic and social purposes and channelled towards education, health, infrastructure and other development needs.

The government could also introduce carbon taxes to minimise negative environmental impact, which will send a clear message that there is a price to be paid for pollution. Pollution results in costs to the country, including rehabilitation costs, possible healthcare concerns, social or lifestyle costs and business disruptions, for example, due to water pollution and the resulting disruption of water supply,”

she added.

Meanwhile, KPMG Tax Services Sdn Bhd corporate tax ED Lim Wai Yin foresees that an introduction of a windfall tax may be more likely as compared to capital gains tax (CGT) as the latter may trigger negative reaction from investors and further dampen the equity market.

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She said CGT could also trigger an outflow of foreign funds, which would counteract the measures implemented by the government in last year’s budget to increase foreign direct investments (FDI) through the granting of incentives to encourage foreign investments into Malaysia.

“Windfall tax, on the other hand, is a one-off tax which could provide immediate relief to the government but has a lesser adverse impact on the broader economy as it is more narrow and sector specific.

“There are, however, merits to the introduction of a broader base CGT in the longer term, as Malaysia’s existing CGT regime is limited to real property gains tax (RPGT) which was introduced back in 1976,”

she told TMR.

Currently, the RPGT provision and mechanics on the disposal of shares in real property companies are complex and often difficult to administer in practice. A more progressive CGT on disposal of shares with simpler mechanics and clear provisions would be welcomed.

“However, there would be the question of the treatment of losses from the disposal of shares and how this should be treated if the intention is to tax the gains. Certain CGT exemptions may also need to be considered for retail investors and individuals who are in the lower income group,”

she added.

She opined that it is not the right time to re-introduce Goods and Services Tax (GST), as the Covid-19 pandemic has already caused major disruptions to the economy and businesses.

“The reintroduction of GST would require businesses to incur additional cost to be GST compliant and could result in price increases in the short term. As it will take time for the economy to recover and return to pre-pandemic growth rates, a reintroduction of such a broad-base consumption tax should be deferred.

The government may, nevertheless, consider to provide clarity on the specific timeframe as to when GST 2.0 will be reintroduced, and take this time to have consultation with stakeholders on the mechanics and rate of GST to be implemented, so that the lessons learnt from the previous GST regime and issues can be addressed,”

she added.

Malaysian Association of Tax Accountants deputy secretary general Dr Mohd Fairuz A Razak said any new taxes would be very tough for implementation at the moment — windfall tax and CGT tax would deter FDI further.

“We need FDI to drive our economy further and the business could survive and prosper. The best possible route will reintroduce GST or value-added tax (VAT) at a lower rate with a reduction of personal tax or giving more relief.

With the reintroduction of GST or VAT, the government will earn good revenue and plug all the leakage or shadow economy. All the businesses would have good compliance to the tax as it is using a computerised system, not manually. We will also have data on the company and individuals to help them in future,”

he told TMR.

He said GST or VAT is the most efficient tax system for government revenue, especially to plug the leakage and identify the shadow economy in the design and collection.

“Currently, our direct tax is not collecting as it used to be because of the pandemics, and business is slowing down or closing down permanently. The reintroduction of GST or VAT compliance on the tax and the collection of it would benefit the country in the long run.

“To reintroduce at a lower rate would be welcome, but all the mechanisms and enforcement should be beefed up so that no one else can take advantage of the reintroduction,”

he reckoned.

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