PETALING JAYA: An economic adviser to Prime Minister Datuk Seri Anwar Ibrahim has called Malaysia’s declining tax revenue-to-gross domestic product (GDP) as “strange”, considering the fairly strong economic growth enjoyed by the country.
Part of the problem can be attributed to Malaysia’s large black economy and the fact that only 15% of the labour force pays tax to the Inland Revenue Board (LHDN), says Nurhisham Hussein.
Nurhisham is the senior director of economics and finance in the Prime Minister’s office.
“It is the government’s priority to find out why and how the tax revenue-to-GDP reduces, and also to address it,” he said during a panel discussion in the Malaysian Bond and Sukuk Conference organised by the Malaysian Rating Corp Bhd.
In its Fiscal Outlook 2024 report, the Finance Ministry expected that the tax revenue-to-GDP in 2024 will marginally fall to 12.3% as compared to 12.4% in 2023.
Runchana Pongsaparn, principal economist of the Asean+3 Macroeconomic Research Office, said that Malaysia’s tax revenue-to-GDP is lower than most countries in the region.
“What makes it worse is that the ratio is declining, down from 14.6% in 2011,” she said, although she noted that China, Vietnam and Thailand are also facing a decline.
Another cause of concern is low contribution from Malaysia’s consumption tax such as the sales and service tax.
“Only 2.8% of GDP is actually from consumption tax, which is definitely the lowest among Asean peers.
“The Goods and Services Tax (GST) is one way to improve the consumption tax revenue,” according to Runchana.
Nurhisham, meanwhile, said that GST is not the only solution that can help widen the government’s tax revenue base.
“We can make the income tax regime more progressive and review the incentives provided over the years to the corporate sector,” he said.
Echoing a similar view with Nurhisham, Runchana said the country should enhance its personal income tax regime.
“This is because revenue from personal income tax is relatively low at 2.4% of GDP, compared to emerging markets’ average of 3%.”
It was previously reported that the Top 20% or T20 group of income earners in the country contributed 85%, or RM33.68bil, of the personal income tax collected in 2022.
The middle 40% or M40 group contributed 13%, or RM5.38bil.
If the government intends to reintroduce GST to shore up its tax revenue base, Runchana said a number of issues must first be fixed.
“For example, on the administrative side, we must ensure that it is ready for implementation.
“The good news is that with the implementation of e-invoicing, it will help on the administrative front as well,” she said.
The first phase of e-invoice implementation in Malaysia began on Aug 1, but it is only applicable to companies with annual turnover or revenue exceeding RM100mil.
As for micro, small and medium enterprises, the implementation will begin on July 1, 2025.
Nurhisham said e-invoicing is a precondition to the GST.
“However, regardless of whether we bring back the GST or not, e-invoice will still help to ensure tax compliance amid the black economy.”
On another note, Nurhisham pointed out that there has not been any official decision on the parameters to kickstart the targeted RON95 petrol subsidy.
“It is under active discussion within the government. At this moment, I cannot give any solid indications on how or when we will start RON95 subsidy rationalisation,” he added.
The targeted diesel subsidy system was implemented beginning June 10, as the Anwar Ibrahim administration aimed to save RM4bil annually.
The change to a targeted subsidy mechanism was unavoidable as Malaysia’s diesel subsidy bill alone surged 10-fold from RM1.4bil in 2019 to RM14.3bil in 2023.
While the decision to rationalise diesel subsidy was not without criticism, Nurhisham opined that the measure has been widely accepted.
Its impact on businesses also appears to be manageable, he said.
Nurhisham pointed out that the economic argument to wind down fuel subsidies is “very strong”.
“The latest estimate by the International Monetary Fund is that total fossil fuel use in Malaysia cost the economy RM220bil a year, of which direct cost is RM40bil.
“Congestion, environmental damage and climate change have a much greater impact on the economy than the direct cost,” he said.
The government’s ability to implement subsidy rationalisation as promised would help to improve investor sentiment, not just in the capital markets but also on the ringgit.
So far this year, the ringgit has been the best performing Asian currency against the US dollar.
Another speaker on the panel discussion, Manulife Insurance Bhd head of investment Amar Ramachandran opined that the ringgit’s strengthening trend would continue.
This is likely on the back of the anticipated reduction in US interest rates by the Federal Reserve in the remaining months of this year.
“In addition, the strengthening of the financial markets will likely take place as long as the market anticipates a positive upside for the ringgit and then, probably it will taper off,” Amar said.
Meanwhile, Runchana said the government’s fiscal discipline and other factors will continue to support the momentum of the ringgit.
“Interest rate differentials, market sentiment, economic growth performance, political and institutional factors and policies also support the ringgit,” she said.
