Economic Report 2021/2022: Government to consider consumption-based tax in order to reduce reliance on direct taxes

KUALA LUMPUR (Oct 29): The government is currently considering options to reduce the reliance on direct taxes and widen the revenue base by shifting to consumption-based tax under the Medium-Term Revenue Strategy (MTRS) framework.

A box article on the MTRS in the 2022 Fiscal Outlook report issued by the Ministry of Finance (MoF) rationalises that the consumption-based tax can be further improved by reviewing the taxation and tax rate scope of the existing sales and service tax (SST) or by adopting a “more reliable consumption tax base” such as a value-added tax (VAT).

“The VAT will be able to mitigate the tax-cascading impact of SST, manage the cost of doing business and enhance compliance and transparency,” said the report.

According to the article, the MTRS will provide the opportunity for the government to further reduce its dependency on petroleum-related revenue and introduce revenue initiatives that support sustainable development agenda. 

Notably, the government is formulating a revenue framework, dubbed the MTRS, which seeks to adopt and adapt international best practices in modernising Malaysia’s tax system and administration.

The introduction of the MTRS is timely to address the current issues relating to federal government revenue, that is the narrow tax base, ineffective tax incentives, tax avoidance and tax evasion as well as the untapped informal sectors, according to the report.

It pointed out how the total revenue as a percentage to gross domestic product (GDP) has declined from 21.4% in 2012 to 15.9% in 2020, which is relatively low compared to peer countries.

Furthermore, it highlighted how the reliance on direct tax, which makes up half of total revenue, makes federal revenue collection susceptible to economic growth and business cycles.

“Through the MTRS, Malaysia stands to gain not only in enhancing the potential of revenue collection but, more importantly, in having a more transparent and accountable tax system,” said the report.

Besides sustainable revenue generation, the formulation of the MTRS will also focus on tax administration reforms where emphasis is placed on achieving higher compliance, minimising tax avoidance and tax evasion with minimum cost to taxpayers and authorities and managing tax incentives to optimise private investment.

The MTRS will also see the tax legislative framework being reviewed and improved upon regularly to ensure that provisions in the tax law and guidelines on processes and procedures are simplified, consistent and in line with international best practices. 

The report added that the MTRS will be aligned with the 12th Malaysia Plan, particularly to ensure sufficient revenue generation to finance expenditure needs under the plan. It will also consider the recommendations made in the previous studies conducted by the Tax Reform Committee that was set up in 2018.

Moving forward, it said, Malaysia will also extend the scope of the MTRS to non-tax revenue in the next phase of its implementation to further widen the revenue base.

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