The Ministry of Finance has invited various stakeholders to provide inputs into the drafting of the national budget for 2018. They usually do this around this time every year, and they have been doing the same for quite a few years now. It is great that the government has opened up the budgeting processes for suggestions from the public.
At IDEAS we have submitted our inputs too. This time we made five suggestions, all focusing on financial governance of the country.
The first proposal is for the government to focus on improving the business climate in Malaysia because the country at risk of sliding down in the World Bank Ease of Doing Business Index. This is an internationally respected index and our government uses it to measure their performance on yearly basis.
In order to do better in the index, we believe a low hanging fruit is to reduce the tax burden faced by businesses. For 2018, we urge the government to examine closely two taxes that are in force today. The first is withholding tax, which is the tax charged by the government on all amount paid to non-resident contractors or service providers to a Malaysia-based business entity. This tax is burdensome because it increases the cost companies need to pay if they want to tap into the global talent pool. The second tax that needs to be reduced is excise duties especially in cases where illicit economic activity is driving out formal investors. The excise duty charged on tobacco products is one clear example. Tobacco products in Malaysia are taxed at a ridiculously high rate, such that the illicit cigarette industry in Malaysia is booming. If the rates are increased higher, the government would be directly helping the illicit traders enjoy a better life.
The second proposal is for the role of our GLCs to be reduced, and any GLC set up by the government must be governed according to international standards. The Malaysian economy is dominated by large GLCs and this creates a risk that true entrepreneurs are crowded out. If we want to see Malaysia becoming an entrepreneurial country, we need to take steps to reduce the role of GLCs in our economy. And all the GLCs must be run using internationally accepted standards, such as the one issued by the Organisation for Economic Cooperation and Development (OECD). Debacles like 1MDB must never be allowed to happen again.
The third proposal is around improving Malaysia’s competitiveness. We believe that from Budget 2018, the government must invest more in our education system including in technical and vocational streams, so that we can create a larger pool of people with those skills. At the same time, to address the talent requirement in the country, we also need to make it easier for companies to hire and keep foreign talents.
Fourth, although the government is already taking good steps to include public opinion in the drafting of Budget 2018, we believe more can be done to improve the processes. We conducted a full study on this topic and we believe steps can be taken to enhance public access to budgetary documents, and the government can also make the implementation more accountable by producing a mid-year review as well as a more comprehensive year-end report.
And lastly, we also urged the government to make public procurement more transparent and competitive. Whenever contracts are awarded, information about the recipient and the amount should be made available for public scrutiny. Of course this would be easier if we have a Freedom of Information Act. But until that Act is introduced, every Ministry should publish detailed information about the contracts they issue.
Let me elaborate a bit more about our first proposal, the one on taxation. If we want to be a competitive nation, we must get our tax rate right. We must position ourselves so that we can compete with the likes of Singapore and Hong Kong. This is why in our latest policy paper, we looked specifically into the issue of business taxation in Malaysia. And based on the study, we proposed that our personal income tax as well as our corporation tax rates should be reduced to 15 percent from the rate charged today.
We commissioned the study to Dr Dan Mitchell, an expert on fiscal policy based in the Washington D.C. His analysis suggested that a lower tax rate would boost our economic growth as well as attract more capital from abroad. The study is published in a paper entitled “Malaysia’s tax system: Friend or Foe?” that can be downloaded freely on our website.
To be clear, our current personal income and corporate tax rates are not very bad. But we are stuck in the middle, being not as good as zero-tax havens like Cayman Islands or Monaco, and also not good enough to compete with neighbours Hong Kong and Singapore. We clearly have the potential to improve.