Adopting a holistic approach to enhance the personal tax system is essential in striking a balance between efficient collection and maintaining an equitable system.
EFFECTIVE tax policies are crucial to ensure equity in taxation and promote tax compliance in our rapidly evolving economic landscape.
As the government strives to increase tax revenue, several key areas present unique challenges while offering significant opportunities for improvement in the personal tax system, which can be considered in the upcoming budget.
> Rationalising personal tax reliefs.
Personal tax relief is a crucial component of our personal tax system, providing taxpayers with deductions for eligible expenses incurred to lower their taxable income.
While we have a comprehensive list of personal tax reliefs and rebates, navigating the myriad of deductions, caps and exclusions can be daunting.
One solution is to streamline and consolidate personal tax reliefs into broader categories.
For example, the contribution to Employees Provident Fund, as well as life and medical insurance, can be grouped into one single category, giving taxpayers the flexibility to claim the relief within the limits.
In addition, the lifestyle and sports equipment reliefs can be streamlined and broadened to include energy saving equipment/appliances to support the national environmental, social and governance agenda.
Rationalising tax relief will make it simpler for individuals to understand and claim their reliefs.
A more inclusive and flexible approach will allow taxpayers to plan their spending according to their needs, improving compliance and accessibility to all eligible individuals.
The government will also benefit from a more streamlined approach, potentially being able to automate and pre-populate such claims in the tax return, upon full implementation of e-Invoicing.
This will reduce the need for manual record-keeping, minimise errors and decrease administrative burdens.
It will also enhance transparency and compliance, contributing to better tax system integrity and improved taxpayer satisfaction.
> Widening tax band for M40.
The middle 40% income group (M40), comprising 3.16 million households with monthly incomes between RM5,250 and RM11,819, faces unique financial challenges.
Unlike the bottom 40% (B40), the M40 generally does not qualify for financial aid or targeted subsidies, despite contending with rising living costs.
Concurrently, many M40 households are pushed into higher tax brackets as their income increases.
Under the current tax structure, individuals with annual taxable income below RM70,000 are taxed progressively up to 11%.
However, those with taxable income between RM70,001 and RM100,000 face a steep increase to a 19% tax rate, with most of the M40 affected.
Higher earners within the group, those with income above RM100,000, are taxed at 25%.
To alleviate this burden, a review of the income bands and the related tax rate in tandem with the B40, M40 and top 20% (T20) income classification can be considered.
Alternatively, extending the RM400 tax rebate for individuals earning up to RM35,000 to include a larger segment of the M40 can help reduce their overall tax liability, without affecting the tax liability of the T20.
With these changes, middle-income earners will be able to retain more of their earnings, resulting in higher disposable income and increased consumer spending.
These will help reduce financial pressure on middle-income households and support overall economic stability.
> Tightening tax collection for remote workers and foreign nationals.
The rise of remote working presents unique challenges for tax authorities.
Similarly, foreign nationals performing services in Malaysia for their home country employers under a short-term assignment can complicate tax collection.
Ensuring tax collection from remote workers and foreign employees requires a combination of regulatory measures, international cooperation and technological solutions.
The government can consider mandating all local employer sponsors to report the earnings of foreign nationals, including those on short-term assignment or professional visit pass.
Payment of salary and wages will only be eligible for deduction if employees have a tax identification number.
Collaboration with immigration authorities is essential to track the entry and exit of foreign nationals via data sharing platforms.
> Tailoring tax system for gig economy.
The gig economy is rapidly expanding, encompassing freelancers, independent contractors and platform-based workers.
Traditional tax systems, which are designed around salaried employment, may be inadequate to fully capture this new economic model.
A more holistic tax system tailored to the gig economy and freelancers is necessary to ensure fair and efficient collection.
For example, ride-sharing and freelancing platforms can be required to submit detailed income reports for their independent contractors to tax authorities.
Tax policies can be adjusted to offer specific deductions or credits tailored to gig workers.
Recognising the unique expenses these workers incur, such as home office costs and equipment, can help create a fairer tax environment.
Additionally, offering simplified tax withholding or final tax options for gig workers can encourage compliance and reduce administrative burdens.
> Enhancing tax audits process to promote compliance.
Enhanced tax audits are essential in promoting compliance and ensuring that all taxpayers fulfil their obligations.
Tightening tax audits can deter tax evasion and underreporting, increasing the overall efficiency of the tax system.
With the expiry of the Special Voluntary Disclosure Programme 2.0, increased audits will be inevitable.
The tax authorities should enhance the tax audit processes through the use of advanced data analytics and machine learning in order to identify potential non-compliance cases more accurately.
By focusing audit resources on these cases, compliance rates can be improved without overburdening compliant taxpayers.
Additionally, increasing transparency and communication during the audit process can help taxpayers understand their obligations better and reduce disputes.
Providing clear guidelines and support can encourage voluntary compliance, making the tax system more effective and equitable.
Adopting a holistic approach to enhance the personal tax system is essential in striking a balance between efficient collection and maintaining an equitable system.
The aim is to build a tax system that meets today’s needs and is resilient enough to adapt to tomorrow’s demands.
Ultimately, our goal is to contribute to a more just and prosperous society, where everyone pays their fair share of taxes while alleviating financial pressure on lower and middle-income households.
Michelle Chuo is a tax director at PwC Malaysia. The views expressed here are the writer’s own.
