Advocacy for Implementing a Consumption-Based Tax System
In the realm of taxation, Malaysia is grappling with various challenges, particularly in terms of revenue collection and combating tax evasion. The government's revenue streams, a crucial aspect of public spending, are bolstered by consumption-based taxes such as the Sales and Service Tax (SST), but high-income individuals and large corporations often exploit income tax loopholes to reduce or avoid their obligations.
One such loophole is the exemption of foreign-sourced income, allowing individuals to avoid local taxation by structuring their income as originating from abroad. This, coupled with tax planning techniques, transfer pricing, and the absence of wealth and capital gains taxes, places a heavy burden on wage earners and those subject to consumption taxes.
To address these issues, the government is turning to e-invoicing, a digital solution that promises to enhance transparency and oversight of business transactions. By creating a digital trail for all business transactions, e-invoicing makes it easier for authorities to track income, detect discrepancies, and cross-verify reported earnings with actual economic activity.
The automation of the invoicing process also minimises the risk of manual errors and intentional manipulation, as data can be transmitted directly to tax authorities in real time. This digital solution can significantly reduce tax loophole exploitation, supporting a fairer and more efficient tax system in Malaysia.
Corporate taxes, amounting to just over half of the government's revenue at RM98.5 billion, are the largest share. Under Budget 2025, the government has allocated RM421 billion for expenditure, a 3.3% increase over the previous budget. However, the under-declaration of income and over-declaration of expenditure, coupled with the failure to account for gig workers, results in a large deposit of potential revenue uncollected by the federal government.
To plug these leakages and restore public trust, it is more important for fiscal sustainability than introducing new taxes or expanding the scope of the SST. Basic goods and services should remain exempt or zero-rated under the SST to protect the poor, while enforcement should leverage digital tools and e-commerce tracking.
The SST, reintroduced in September 2018, has been expanded to cover more items, including luxury goods, entertainment, and certain lifestyle services. This expansion is expected to raise an additional RM10 billion annually. However, the SST's impact on inflation has been limited.
It is estimated that only an average of 17.8% to 19% of Malaysians in the workforce pay income tax. Proponents of a wealth tax argue that it is an effective way to raise revenue without burdening the middle and low-income groups. However, Malaysia lacks the enforcement infrastructure, reliable asset registries, and valuation capacity to administer a wealth tax effectively.
In conclusion, e-invoicing offers a promising solution to combat tax evasion and improve the fairness and efficiency of the tax system in Malaysia. While the SST expansion and potential wealth tax discussions continue, addressing under-declaration of income, over-claiming of expenses, and the inclusion of gig workers in tax reporting remain crucial to ensuring a sustainable fiscal future for the country.
- The government in Malaysia is faced with challenges in the realm of taxation, particularly in terms of revenue collection and combating tax evasion, which impact the spending budget.
- High-income individuals and large corporations often exploit income tax loopholes, such as the exemption of foreign-sourced income, to reduce or avoid their tax obligations.
- To address these issues, the government is implementing e-invoicing, a digital solution designed to enhance transparency and oversight of business transactions.
- E-invoicing, by creating a digital trail for all business transactions, can make it easier for authorities to track income, detect discrepancies, and support a fairer and more efficient tax system.
- Corporate taxes, amounting to just over half of the government's revenue, are the largest share and, under Budget 2025, the government has allocated RM421 billion for expenditure.
- Inflation has been limited by the SST's impact, but it is estimated that only an average of 17.8% to 19% of Malaysians pay income tax, leading some to argue for a wealth tax as an effective way to raise revenue.
- Addressing under-declaration of income, over-claiming of expenses, and the inclusion of gig workers in tax reporting remains crucial to ensuring a sustainable fiscal future for Malaysia.
