The government, via the Royal Malaysian Customs Department, could consider launching an extended VA Programme or, better yet, embed a voluntary disclosure mechanism into the relevant indirect tax legislations.
PRIME Minister Datuk Seri Anwar Ibrahim, who is also the Finance Minister, will present a revised Budget 2023 in Parliament on Feb 24, 2023.
It has been widely reported that the government will seek to address the country’s rising sovereign debt levels and high living costs in the budget.
Thus, the revised 2023 budget announcement may include certain tax measures to improve the country’s revenue collection, as well as proposals to mitigate leakages and provide targeted assistance to the rakyat, to boost the country’s fiscal position and address the high cost of living.
As one of the budget proposals, the government may consider a strategic reform of the current indirect tax landscape with a view to lead the country towards economic recovery and to drive increased and more sustainable government revenue.
This may not necessarily mean introducing a new tax.
Instead, targeted and well-thought-out policy and administrative changes can help enhance the current tax system and increase enforcement efficiency.
Improving indirect tax collections and mitigating leakages
With the advancement of the digital economy, consumers can now acquire goods and services online from overseas suppliers at the click of a button.
Since overseas supplies may not be subject to Malaysian taxes, this can result in local businesses becoming less competitive.
To ensure a level playing field, the government has introduced the Sales Tax on Low Value Goods, Service Tax on Digital Services, and Tourism Tax on Digital Platform Service Providers, to collect indirect taxes from overseas suppliers selling goods and services into Malaysia via digital platforms.
To further improve tax collection from this space, the government needs to address the challenge of effectively enforcing the relevant tax filing and payment obligations on suppliers who are outside Malaysia.
For example, the government may consider expanding the Automatic Exchange of Information Framework, which currently generally applies to direct taxes, to cover the exchange of information and enhance administrative co-operation with other tax jurisdictions with respect to indirect taxes.
On a related note, while the indirect tax Voluntary Disclosure and Amnesty Programme (VA Programme) was only set in place from Jan 1, 2022 to Sept 30, 2022, it raised additional revenue for the government and provided taxpayers with the opportunity to regularise their indirect tax positions and move forward on a clean slate.
The government, via the Royal Malaysian Customs Department (RMCD), could consider launching an extended VA Programme or, better yet, embed a voluntary disclosure mechanism into the relevant indirect tax legislations.
The VA Programme proved to be effective in improving the level of indirect tax compliance, as many businesses welcomed the opportunity to voluntarily disclose their underpaid indirect taxes to the RMCD.
Continuing the VA programme would promote a higher level of compliance among taxpayers, instead of allowing them to adopt a “wait-and-see” approach until they are subjected to audit.
The RMCD should also perform continuous education programmes to build indirect tax awareness and foster compliance by taxpayers.
Educating taxpayers and addressing their technical or administrative concerns will surely encourage voluntary compliance and, in turn, contribute to an improved administration of the current indirect tax system.
It is also anticipated that the RMCD will increase its enforcement initiatives by conducting stricter audits with less leniency and penalty waivers.
To ensure effective and transparent enforcement during these stricter audits, it is hoped that the audits will be conducted in a structured manner, with a general policy and scope of coverage produced for the reference and knowledge of taxpayers and tax consultants.
This will contribute to expediting and facilitating liaison and the effective sharing of information between the taxpayers and RMCD during audits and will also help build taxpayer trust and confidence.
Further, greater enhancement to the indirect tax compliance process through the use of technology would be welcomed.
Even a simple tweaking of the electronic filling/declaration process, online payment of all taxes and fees, the structured submission of forms/documents via an online portal can go a long way in creating a simpler compliance process and enhancing the administration of indirect taxes.
Such measures would not only reduce costs and increase efficiency on the part of the RMCD and taxpayers but would also be an effective tool for data-matching and enforcement.
Addressing the rising cost of living in the country
In view of the increasing price pressures on Malaysian households, there are expectations for the tax burden of the rakyat to be reduced, particularly among the low and middle-income groups.
From an indirect tax standpoint, the government can consider streamlining the sales and service tax (SST) system by ensuring exemptions are provided for essential goods and services, to help mitigate the price pressures for those items.
The coverage of the business-to-business or B2B exemption facility under the Service Tax regime could be expanded to other services, to further mitigate the tax-cascading effect of the said tax which the end-consumers would eventually bear.
Conceptually, under a multi-stage consumption tax system, it can be expected that there will be a relative reduction in prices due to the availability of the input tax credit mechanism.
Businesses would be able to recover the tax incurred on their acquisitions, through input tax refunds, which will reduce the cost of doing business and ease the administrative process – benefiting both business and end-consumers.
In addition, the government will need to ensure that input tax refunds are provided to taxpayers on a timely basis to alleviate any additional business cost.
In fact, the World Bank had indicated earlier this month that Malaysia needs to enhance its consumption tax framework, with a goods and services tax (GST) system discussed as a potential solution.
However, the reintroduction of a multi-stage consumption tax system such as the GST may not yet be on the horizon.
Nevertheless, if a similar facility as the input tax credit mechanism can be put in place under the current SST regime, this will help address the issue of rising prices.
Prior to any such move being implemented, an in-depth study on the feasibility and implications (including the impact on indirect tax collections) of such a facility being embedded within the current SST regime should be undertaken.
At the end of the day, any manner or form of strategic indirect tax reform to achieve the intended goal – be it a new regime or an enhancement to the current system – should be carefully evaluated, with ample consultation with the relevant stakeholders to ensure its effectiveness and sustainability, while being viewed positively and being well-received by the public and business community.
Jalbir Singh Riar is partner at Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writer’s own.
