As part of its attempts to revive the economy, the Malaysian government, in its latest economic stimulus package (Penjana), is giving tax exemptions such as waiving stamp duties and allowing exemptions from real property gains tax to revive the property sector. This sector is seen as an important one as many downstream sectors are dependent on it, such as cement, sand, steel, etc.
However, these tax exemptions benefit only a small segment of the population – what is there for the ordinary folk, ie, the tax payers?
We have to be honest about the current economic situation that is affecting not just Malaysia but the entire world as a result of the Covid-19 pandemic. The International Monetary Fund has predicted a global recession in 2020, and Bank Negara Malaysia has estimated that Malaysian GDP could contract by 2.0% in 2020. It has also been reported in local media that many big companies are reducing their headcount and many smaller and medium-sized companies have closed down.
In the face of all these challenges, the average Ahmad, Muthu and Ah Lee would probably put off any large acquisitions such as cars and property until the economic outlook is more certain. In fact, they would probably want to reduce unnecessary expenses as much as possible. However, there is one expense that they can never reduce no matter how much they try, and that is personal income tax. They can try to eat less or take the bus to work instead of driving to save more money. But every month, the same amount of their income goes to pay income tax.
Reduce personal income tax
What the government can do to truly help all of the people is to grant an income tax waiver or offer at least a reduction of 50% (from the current scale rate) for the first RM100,000 in chargeable income for the next two years.
We chose RM100,000 because this amount was used as the threshold to decide who receives the RM30 e-wallet support in Budget 2020 and the RM50 under the ePenjana initiative.
Based on chargeable income of RM100,000 and the tax rate for 2020, the 50% tax reduction will translate to annual tax savings of RM5,450, or additional disposable income of RM454 per month, which would greatly help monthly cash flow and result in a boost to retail spending that could uplift the economy.
However, this 50% tax reduction should not be restricted to those earning below RM100,000 but should be applicable to the first RM100,000, meaning anyone earning more than RM100,000 would also be able to enjoy the reduction.
Many people who earn more than RM100,000 a year are salaried employees who are in the “sandwich” group (supporting elderly parents and having young children) and they are pleading with the government to understand that the economic slowdown due to Covid-19 affects everyone and not just those in the B40 (low income) group.
Based on the Fiscal Outlook and Federal Government Revenue Estimates 2020 report, personal income tax amounted to 13.4% of the federal government’s revenue in 2019. We will assume that our proposed tax exemption will result in a fall of up to 50% in personal income tax collected. (Note that we believe that the actual fall would be much less than 50%.) This would amount to a loss of revenue of about 6.7%, which seems manageable as this is money that would be injected back into the local economy to possibly generate more economic activity that could offset the reduction in government revenue.
This was said in an article in May by an Inland Revenue Board (LHDN) official ("Timely reminder of need to reconsider tax framework"): “IRB chief executive officer Datuk Seri Dr Sabin Samitah conceded that the Covid-19 pandemic would put a dent in the government’s tax revenue this year. However, he claimed the impact would be minimal, as the country had a strong revenue base to offset the shortfall in tax collection.”
Look at corporate tax
Similarly, the one expense that companies cannot reduce is corporate income tax. Companies can reduce the number of employees to cut costs but just like our Ahmad, Muthu and Ah Lee, they have to pay corporate income tax so long as they record a taxable profit.
To begin with, the government should consider tax relief for small and medium enterprises (SMEs). SMEs are currently taxed at 17% for the first RM600,000 in taxable income and the balance at 24%. The government could consider giving a 100% tax relief on the first RM1mil in taxable income and allow the balance to be taxed at 24% for the next three years. However, this tax relief should come with a string attached: SMEs benefiting from this relief cannot retrench local employees during the three-year period.
For large corporations, the government should consider tax relief in the form of lower tax rates for the next three years, say from the current 24% to 17%. This will result in substantial savings of about 29% for these corporations.
In 2019, corporate income tax amounted to 26.9% of federal government revenue; granting a tax relief could result in loss of revenue of about 8.1%, which is slightly more than the 6.7% loss in revenue from lower personal income tax. However, the relief for corporations could potentially mean that these companies have more funds to sustain their operations and would not need to reduce as many staff and could even have funds to reinvest into the company to increase production. As a safeguard, the reduced corporate income tax could come with covenants such as limiting the retrenchment of local employees.
A waiver for or reduction in personal and corporate tax would be far more far reaching compared with tax exemptions for the purchase of properties. And it would have an immediate impact on the economy at large. The average citizen will have more disposable income to put into the economy and businesses will have more cash flow to sustain operations.
We need to go into sustainability and recovery mode for the next two years and ensuring ordinary people as well as businesses have sufficient cash is a key to success.
How about a windfall tax?
It is said that in every crisis, there will be the lucky few who benefit and indeed it has been reported that there are a few sectors and companies in Malaysia that have by chance “benefited” from the Covid-19 pandemic, such as those in healthcare and in the manufacturing of latex gloves and personal protective equipment (PPE). In fact, it has been reported that some of the owners of these companies have become billionaires overnight.
To offset the loss of revenue from granting tax exemptions as we have proposed above, the government could impose a “windfall tax” for the next two years on companies and sectors that somehow “benefited” from this crisis.
This windfall tax would be similar to that imposed on sales of CPO (crude palm oil) in the past when the price was very high.
A “prosper thy neighbours” policy is most apt in these times.
Check on digital tax
The government must also push ahead with the implementation and execution of the digital tax as more and more businesses move online to cut costs and also due to the pandemic.
Technology giants have been known to use various innovative methods to move their goods and services worldwide to avoid paying tax. The government must ensure that all providers of online goods and services that are used by consumers in Malaysia pay the required taxes so that our government does not lose out on much needed revenue during these challenging times.
To ease the burden of this pandemic, banks have given their customers a six-month moratorium on loan repayments, and, as was announced recently, there will be a further three-month extension giving targeted assistance. So we urge the government to show similar compassion to the rakyat across the board to ease their burden by granting a temporary tax (income) holiday.
DATUK CHANG KIM LOONG
Honorary Secretary-General, National House Buyers Association (HBA)
Note: The National House Buyers Association is a non-governmental and not-for-profit organisation run by volunteers.