One of the most asked questions about the upcoming Budget 2017 is whether the Government will increase tax rates to boost its revenue collection. Suggestions and speculations include the introduction of an inheritance tax, increase in tax rates for the top income brackets, reintroduction of the capital gain tax and taxes on luxury goods.

According to Deloitte’s managing director for tax, the Top 20 (T20) already pay a relatively high proportion of the country’s taxes and any more taxes imposed on this group may lead to them putting their money elsewhere, which may stifle investment. The head of ASEAN economics at RHB Research Institute pointed out that the last increase from 26% to 28% only expected to raise RM500m, which is insufficient to cover the revenue shortfall. As personal tax contribution reduced due to lower bonuses paid out, it is obvious that changes in broad-based tax rates are not advisable. However, the Government can consider targeted tax relief, for example, deduction allowances for Employee Provident Fund and insurance.

Corporate tax contracted 2% in the first half of 2016 (it was projected to grow 9% YOY in 2016) and it is unlikely that there will be a reduction in corporate tax rates. At 24%, the corporate tax rate combined with tax exemptions and reinvestment allowances allow Malaysia to be competitive with other countries in the region. However, it should be noted that a lower tax rate means that companies are less likely to avoid or evade, which may be beneficial in the long run.

The Government has also aggressively taxed tobacco and alcohol products in the past year and any increase may drive the black market activity. According to PwC Taxation Services Malaysia’s head of indirect tax, the Government could increase taxes on the gaming industry. However, it must be done with caution as it may drive business to the black market.

One method that the Government may employ to increase revenue is by reversing the zero-rating or taxexempt status for certain items under GST, especially those that do not benefit the B40 and M40 much.

Source: The Edge Malaysia, 3 October 2016