Narrow tax base piles burden on the rich

Income inequality and low wages for most Malaysian households have led to a disproportionately high contribution in income tax by the T20 group.

(FMT) – The disproportionately high contribution in personal income tax by the T20 group in 2022 is a reflection of the narrow tax base in Malaysia, according to an economist and a tax specialist.

Center for Market Education CEO Carmelo Ferlito and tax specialist Veerinderjeet Singh said the narrow tax base stems from the fact that a high number of people earn low wages in the informal economy or as micro-business owners, which exempts them from tax obligations.

“(As a result) the T20 individuals pay a bigger chunk of the taxes as they are formally employed with a taxable income falling into the higher percentages of taxation,” Ferlito told FMT Business.

Personal income tax rate for individuals is progressive, starting at 1% and gradually increasing to 28% as income increases.

“That’s why we end up with a lot more taxes being paid by the T20 because they are earning higher (salaries), which could be RM10,000 or RM100,000 a month. So, obviously they will pay a higher tax rate,” Veerinderjeet, who is Tricor Malaysia non-executive chairman, said.

The Inland Revenue Board said the T20 group contributed RM33.68 billion, or 85%, of the total income tax collection of RM39.26 billion last year.

Ranjeet Kaur, director of the board’s CEO’s office, said the M40 group contributed 13%, or RM5.38 billion, to personal income tax collected in 2022.

The T20 refers to the 20% of Malaysian households that earn RM10,960 or more a month. They account for 1.46 million households, according to the statistics department’s Household Income and Basic Amenities Survey 2019.

A total of 2.91 million households with monthly incomes of RM4,850 to RM10,959 make up the M40, the 40% middle-income earners.

The B40 group, or the remaining 40% at the bottom of the scale, also accounting for 2.91 million households, take home less than RM4,850 each a month.

Resident individuals in Malaysia whose incomes do not rise above RM5,000 do not have to pay taxes. For those who pay, the rate rises gradually, up to 28% for those whose taxable income is RM1 million or higher.

As such, Veerinderjeet said, one way to address the issue is by gradually raising the current minimum wage of RM1,500 to a more reasonable level.

“But that can only be done gradually as there would be strong opposition from business owners as Malaysian businesses have become overly reliant on low-wage foreign workers,” he added.

According to reports, only slightly more than 1.3 million out of a population of more than 33.5 million are individual taxpayers, representing a mere 4% of the total population.

Income tax contributes significantly to the federal government’s revenue, accounting for 50% to 56% of total annual revenue over the past five years.

In 2022, the government collected RM153.5 billion in direct taxes, accounting for 52% of its total revenue. Non-tax revenue came up to RM85.6 billion (29% of total revenue) and indirect tax revenue was RM55.3 billion (19%).

As for this year, the government projects its total revenue to increase to RM291.5 billion, of which RM164.1 billion will come through direct taxes, RM54.1 billion in indirect taxes and RM73.2 billion in non-tax revenue.

Ferlito advocates for broadening the narrow tax base through the implementation of special schemes for micro-businesses and the reintroduction of the goods and services tax (GST), among other measures.

The Najib Razak administration had introduced the GST back in 2015 but it was replaced by the sale and service tax in 2018 soon after Pakatan Harapan took over Putrajaya following the 14th general election.

Some economists and politicians have repeatedly called for the GST to be reintroduced owing to Malaysia’s narrow tax base and potentially unsustainable long-term fiscal position.