Income tax waivers more meaningful than 'overboard' exemptions

Prime Minister Tan Sri Muhyiddin Yassin had said ‘no Malaysian shall be left out under Covid-19 stimulus package’ when he addressed Parliament in the current sitting which commenced on July 13, 2020.

If our PM is true to his clarion call, then the government should consider wholesome waiver or at the least offer 50% rebate on Personal and Corporate Income Tax for the next two years rather than to grant stamp duty waivers to entice buyers of high-end overhang unsold residential property.

In an attempt to revive the economy, the government’s PENJANA economic recovery scheme vis-à-vis housing segment gives tax exemptions, namely waiver of stamp duties and exemption of real property gains tax (RPGT) to revive the property sector considering that many downstream businesses are dependent on this sector.

These merely benefit a meagre segment of the population and the question is: What is there for the ordinary folks or the tax payers?

Waive or offer rebates on Personal Income Tax

We have to be honest about the current economic situation not just in Malaysia but the entire world as a result of Covid-19. The International Monetary Fund has predicted that there will be a global recession in 2020 and Bank Negara Malaysia has estimated that the Malaysian GDP could contract by 2% in 2020. Many large companies are reducing their headcount while some smaller and medium-sized companies have closed down. 

In the wake of all these challenges, the average Rakyat such as Ahmad would be prudent to put off large chunky acquisitions such as cars and properties until the economic outlook is more certain. Ahmad’s priority is to put food on the table for his family and reduce unnecessary expenses.

While Ahmad can try to eat less or even take the bus to work to save money, there is one expense that Ahmad cannot reduce and that is the portion of his income that goes to pay his Personal Income Tax.

If the government is really serious and sincere about wanting to ease the burden of the Rakyat across the board, it can do so by granting an income tax ‘wholesome’ waiver or at least a reduction of 50% (from the current scale rate) for the first RM100,000 in chargeable income over the next two years. This means anyone earning more than RM100,000 would also be able to enjoy this proposed tax reduction.

We chose RM100,000 because this amount was used as the threshold to receive the RM30 e-wallet in Budget 2020 and also the RM50 under the ePenjana initiative. Based on chargeable income of RM100,000 and the tax rate for 2020, the 50% tax reduction will translate to annual tax savings of RM5,450 or additional disposable income of RM454 per month which will greatly add to monthly cash flow, boost retail spending and uplift the economy.

Many people who earn more than RM100,000 per year are salaried employees who are in the ‘sandwich’ group (supporting elderly parents and young children) and consider themselves ‘middle income’ although they may fall under the so-called M40 group.

The government must understand that the economic slowdown due to Covid-19 affects everyone and not just those in the official B40 Group.

Taking a look at the figures

1 Personal Income Tax

Based on the Fiscal Outlook and Federal Government Revenue Estimates 2020 report, personal income tax amounted to 13.4% of Federal Government Revenue for 2019. 

As we do not have the inside knowledge of the breakdown of Personal Income Tax collections, we cannot ascertain the full impact of a tax exemption. However, let’s assume that our proposed tax exemption will result in a fall of up to 50% in personal income tax collected. (Note that we believe that the actual fall would be much lower than 50%).

The 50% fall would amount to loss of revenue of about 6.7%, which seems manageable as this money would be injected back into the local economy and possibly generate more economic activities to offset the reduction in government revenue.

Furthermore, Inland Revenue Board CEO Datuk Seri Dr Sabin Samitah was quoted in a news report recently, saying:

“The impact (Covid-19 pandemic) would be minimal as the country had a strong revenue base to offset the shortfall in tax collection”.

2 Corporate Income Tax

Similarly, the expense that companies cannot reduce is Corporate Income Tax. Companies can reduce headcount to cut cost but just like Ahmad, they have to pay Corporate Income Tax so long as they record a taxable profit.

The government should consider giving tax reliefs to the small-and-medium sized industries (SME) which are currently taxed at 17% for the first RM600,000 in taxable income and the balance at 24%. We propose that the government give a 100% tax relief on the first RM1.0 million in taxable income and the balance to be taxed at 24% for the next three years. However, this tax relief should come with some strings attached for instance the said SME should not retrench any local employees during the tax relief period.

For large corporations, tax reliefs could be in the form of lower tax rates for the next three years, say from the current 24% to 17%. This will result in substantial savings of about 29% to these companies.

For 2019, Corporate Income Tax amounted to 26.9% of Federal Government Revenue. Granting a tax relief could result in loss of revenue of about 8.1%. However, the exemption could potentially mean that these companies would have more funds to sustain their operations and will not need to retrench or reduce headcount. They could even have more funds to reinvest back into the company and into the economy to generate more economic activities.

As a safeguard, the reduced Corporate Income Tax could come with certain covenants such as limiting the retrenchment of local employees.

The income tax waiver or reduction for both personal and corporates would be more far- reaching than generous tax exemptions for purchase of properties and would have an immediate impact to the economy at large.

The average Rakyat will have more disposable income to spend and corporates will have more cash flow to sustain their operations. The mode for the next two years will be sustainability and recovery hence ensuring that the Rakyat and corporates have sufficient cash to do so is the key to success.

3 Windfall Tax

It is said that for every crisis, there will be those who benefit and indeed it has been reported that there are a few sectors and companies in Malaysia that have “benefited” from Covid-19 such as those in healthcare and manufacturing of latex gloves

To offset the loss of revenue from the proposed tax exemptions, the government could implement a Windfall Tax for the next two years on companies and sectors that somehow “benefited” from Covid-19. This Covid-19 Windfall Tax would be similar to the Windfall Tax that was imposed on Crude Palm Oil (CPO) producers in the past when the price of CPO was very high. The monies from the Covid-19 windfall tax could help to offset the loss of revenue from granting the personal and corporate income tax exemptions.

4 Digital Tax

The government must also push ahead with the implementation and execution of the Digital Tax as increasingly more businesses move online to cut cost and also due to Covid-19. Technology giants have been known to use various innovative methods as they move their goods and services worldwide in order to avoid paying taxes. The government must ensure that all providers of online goods and services that are used by consumers in Malaysia pay the required taxes so that our government does not lose out on much needed revenue during these challenging times.

To help ease the burden of Covid-19 and we would urge the government to show more compassion to our Rakyat and our companies to ease their suffering by granting a temporary tax holiday.

Datuk Chang Kim Loong is the Hon. Secretary-General of the National House Buyers Association (HBA).
HBA can be contacted at: Email: [email protected]
Website: www.hba.org.my
Tel: +6012 334 5676

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This story first appeared in the EdgeProp.my e-Pub on Aug  7, 2020. You can access back issues here.