Despite this there is a need to broaden the tax base to raise revenue for health, education and social protection, but the government cannot do this with its existing portfolio of taxes.
Income taxes are narrowly focused on the very rich who pay 85% of personal income tax, corporate taxes burden businesses especially SMEs and costs are passed on to consumers, consumption taxes are inefficient and GST would be worse, while the recent ad-hoc taxes do not raise significant revenue for redistribution.
The risk of relying on old-style taxes is that they reach a limit very quickly and distort the market. This is a legacy problem, not the fault of the unity government, which is why they should abandon it and look at tax policy afresh.
A new approach to taxation can mean that even income tax below the T20 level and corporation tax for SMEs could be abolished to make Malaysia an attractive low-tax, low-regulation country.
The e-payments tax (EPT) is a simple way of moving to a low-tax, low-regulation system which still raises significant revenue and allows ad-hoc taxes to be abolished.
Individual income-tax for everyone below the T20 threshold can be abolished and still leave RM8-9 billion for extra spending on health, education and social protection with a 1% EPT, which would raise RM14.3 billion.
A 2.25% EPT, added to existing SST, can raise the same revenue as reintroducing GST. A simple 3% EPT would raise RM43 billion, enough for zero income tax below T20 levels and full abolition of SST.
While it might be too optimistic to expect an EPT next week, Budget 2025 should at least signal a move away from old-style taxes such as GST and SST and towards alternatives, especially since spending and earning patterns are changing with new technologies, e-commerce, e-invoicing and the gig-economy for example.
With strong economic growth, low inflation, stable interest rates, a strong ringgit and well managed monetary policy from Bank Negara, now is the window of opportunity for the government to begin a significant, bold tax reform agenda in Budget 2025.
The views expressed are those of the writer and do not necessarily reflect those of FMT.