There has been much speculation over the budget in the last few days, particularly on which new taxes might be announced following the prime minister’s comment that sacrifices will be needed.
But the question shouldn’t be “which tax?”; it should be “why tax?”
At IDEAS, we believe there are five things the government should do in the federal budget 2018-19 instead of increasing taxes.
First, the government should rationalise spending. Malaysian government spending remains persistently high compared to other rates in Asia. We believe there is significant scope and merit in reducing government programmes and subsidies.
Second, we believe there is significant scope within the network of GLCs and government assets to achieve this. The finance minister has already talked about divesting from equities, and also a huge number of unlisted companies. IDEAS fellow Terence Gomez has shown how the complex web of GLCs operates and thrives at all levels of government, and across the political spectrum.
Third, address revenue leakage through enforcement gaps and illicit trade. Last year, IDEAS came up with a rough estimate of RM8 billion in revenue leakage. But this is likely a significant under-estimate, with the true amount possibly running to tens of billions. The government needs a clear strategy to tackle this. It is good to see the recent emphasis against counterfeit goods under the domestic trade and consumer affairs ministry. However, illicit trade is not a ministerial problem. It’s a problem of wider economic management and it is therefore important to develop a more coherent strategy on this.
Fourth, cancel bad projects. Of course the government has done this. But this has to be balanced with legal responsibilities to contractors and the maintenance of business confidence. The government should come up with a policy guideline on the review of mega projects so that investors can gain more confidence. We trust that the current review mechanism is robust, but it probably needs to be more transparent. In this regard, it is heartening to hear that the finance minister has committed to a shift from direct negotiation of public tenders to competitive and open bidding.
Fifth, the government should send a clear message about its economic strategy for the future to give businesses and investors confidence. This means specific policies on Malaysia’s structural challenges: government role, labour productivity, business environment and trade. We understand that a lot of this will come from the Pakatan Harapan manifesto, which is a well-researched and grounded document. However, except for the foreign and economic affairs ministries, no ministry appears to have carried out internal alignment exercises to achieve harmony between resource utilisation and achievement of goals.
We also see several challenges in the discussion on new taxes.
New proposals floated so far include a digital tax and soda tax, both of which are problematic and limited in scope. In a recent paper, IDEAS showed that a direct tax on digital transactions imposed on users of digital services can be harmful, especially for Malaysian start-up companies. It is the nature of these IT start-ups that achievement of a break-even point will be a time-consuming process, hence any direct tax, including a turn-over tax, will have the potential to curb the growth of innovation in the IT sector. However, the government may consider an indirect tax on digital products, mainly to bring domestic service providers and international companies not based in Malaysia on par in terms of tax liabilities.
A soda tax is appealing to many, but the government should encourage market-based measures. For example, beverage companies routinely come up with zero-sugar products, which can be encouraged.
Transition to the SST will continue to occupy implementation resources. After spending significant amounts of time and resources, Malaysian businesses successfully graduated from the SST to the GST back in 2015, which was a welcome move to evolve a more robust tax mechanism. As the SST is now back, it will take another round of efforts on behalf of the government to prepare taxpayers and the system.
It’s good to know that the government has already softened its earlier intentions to introduce capital gains tax and inheritance tax. In my view, capital gains tax is a double tax. Someone who has made capital gains will already pay a higher income tax as his income would increase. Malaysia does have an existing real property gains tax, levied in 2010, but no capital gains tax in case of equities. This can continue, but income tax provision in this context should be carefully reviewed.
The inheritance tax is an immoral idea, and according to my opinion, it is also un-Islamic. The government cannot become heir to the property of an individual except in extreme cases where there are no heirs. It is immoral as it means you are taxing me after my death, while you have taxed me throughout my life.
The upcoming federal budget will be a major milestone for the new government. It will afford the new government a great opportunity to translate some of its goals into reality, and provide a space to clear the debate on future economic policies, which are still replete with inconsistencies and uncertainties.
First published in FMT Online, 1st November 2018.