Posted on 27 October 2013 - 05:46pm
Last updated on 27 October 2013 - 05:58pm
Dr. Veerinderjeet Singh
Taxand Malaysia Sdn Bhd
Budget 2014 was an interesting one in the sense that there were very high expectations that certain tax measures would be announced. The prime minister did not disappoint in terms of announcing a goods and services tax (GST) package and an increase in the real property gains tax rates.
There were essentially no substantive tax rate cuts or special reliefs other than the GST and the related promise of an income tax rate and corporate tax rate cut in 2015 and 2016 respectively.
The GST was announced at a rate of 6%, higher than what was promised earlier, and so this is no longer a revenue neutral rate but a rate that perhaps is expected to generate around 50% more than what is currently obtained from the sales tax and service tax.
Perhaps that was the reason why the prime minister promised an income tax rate reduction in 2015 for certain income bands and a widening of the income band before an individual pays the highest income tax rate as well as a corporate income tax rate cut in 2016 to 24% (and small companies to 19%).
This is a rather bold step as the GST system will only take hold on April Fool's Day in 2015 and the government seems overly optimistic that it will collect more revenue from GST in 2015 than the tax revenue lost by the income tax rate cuts.
In theory, a relatively complicated tax like the GST would need around two years to three years to stabilise (in terms of clearing teething issues, interpretation issues, etc) and then one can judge if it is an effective tax in terms of fiscal adequacy, that is, being able to generate what is expected. Only then would one move to cut income tax rates.
The other prominent tax measure was the re-introduction of the RPGT rates to what it was prior to April 2007. This is a welcomed measure and no-one should be surprised as the rates were what were always there in the legislation except for the exemption and then lower rates introduced in 2007 till 2013 so as to give the property sector a fillip.
However, the holding period within which a particular tax rate applies has been increased by a year, for example, a disposal of real property within three years is subject to a 30% rate on the gain whereas previously it was a two-year period. The RPGT is necessary to curtail speculative activities and in that sense the announcement is appropriate. This should not affect the launch of new property development projects. Obviously the secondary market would be affected somewhat but this should not cause us undue concern.
The measure to do away with filing of tax returns by individuals (subject to conditions) and treating the monthly tax deductions from salaries as being the final tax is a good step towards a more efficient tax administration.
Besides the above, there were some minor tax initiatives and some mention of subsidy rationalisation though one was hoping for a clear timeline for the rationalisation initiative. Only the sugar subsidy was affected but what next?
Other than this, overall the budget seemed like a balanced one which took into account all the various sectors and strata of society. But one cannot help feel that, given the recent Fitch Ratings downgrade, the government seemed to be not overly concerned to do more to bring about substantive fiscal reforms other than announce a timetable for the implementation of the GST and take some small steps forward on other matters.
What did not happen in the budget, you may ask. Well we need to revamp the tax incentives legislation to remove certain incentives that have not been attractive, curtail certain incentives and review the type of incentives as the same type of incentive may not apply equally to different types of industries. We need to start a roll-back of incentives which are no longer useful and incentives which have been in place for too long. That will also widen the tax base. When will we start on this?
In terms of rewarding risk taking and entrepreneurship, we need to enhance the current group relief provisions to allow a transfer of 100% of current business losses to companies within a group. The need for selective incentives only for the desired sectors need to be looked into.
Given the 2020 target, isn't it appropriate to review the tax system holistically and develop one which is sustainable and effective? We have failed to do this all this while and have resorted to tinkering with the system on an ad hoc basis so much so that there are leakages, abuse and misperceptions. The tax revenue to GDP ratio is low, around say 15-16% and advanced economies have around 26%.
We need to focus on tax compliance as being a way of life and a national duty. Continuous education cannot be limited to media advertisements by the tax agencies. In fact there is a need to have a tax file number for everyone; to widen scope of withholding taxes to payments among residents; have effective consultation with all stakeholders and not just pay lip service; as well as knowledge and access to information.
We need to review the income tax legislative framework holistically to simplify current provisions and to remove archaic ones. In doing this, the private sector must be consulted to provide its input and assistance.
We must keep tabs on improvements in the tax legislation in the region and other parts of the world. We must make proactive suggestions to reform and enhance the current structure so that we are in step with worldwide developments.
So all in, a one year plan can only take us so far. We need a five year plan at least to outline the fiscal policy direction for the nation and we need to be bold in our outlook. This includes changing the mindset of the citizens, having consistent application of rules across the nation as well as enforcing and monitoring effectively.
One cannot take a populist approach in everything. At times, we have to bite the bullet and endure some pain so that our resilience and ability to respond is up to the mark!