Malaysia needs to step up tax and subsidy reforms, says IMF chief

NOVEMBER 14, 2012

KUALA LUMPUR, Nov 14 — Malaysia needs a faster overhaul of its tax and subsidy regimes to sustain economic growth, said Christine Lagarde, chief of the International Monetary Fund (IMF).

Lagarde said in an interview with The Edge that the Malaysian government not only needed to broaden its revenue base by introducing the goods and services tax (GST) but also needed to confine subsidies to the truly needy as well as eliminate tax incentives that were unproductive.

“The allocation of public resources could also be improved by the streamlining of untargeted subsidies and wasteful tax incentives and replacing them with targeted assistance to the truly needy,” she told The Edge.

Malaysia’s finances are regarded as among the weakest in Asia due to its high debt-to-revenue ratio and reliance on petroleum to finance its budget.

Approximately one-third of federal government income is from oil and gas alone, and only one-third from taxes paid by companies and individuals.

A paltry 1.7 million out of 12.8 million working adults paid income tax last year and only 130,000 companies out of 700,000 paid taxes.

The amount of taxes from individuals amounted to just RM14 billion last year while the total from companies came up to about RM40 billion.

Oil and gas, meanwhile, contributed about RM60 billion to government coffers.

GST is expected to give the federal government a wider scope to collect taxes as it is based on consumption rather than income, thus spreading the tax burden more evenly.

The Najib administration has said that the implementation of the GST will not happen until the public had been sufficiently educated on the new tax system and many observers expect GST to be introduced after the general election.

Lagarde (picture), however, commended the Economic Transformation Programme (ETP), which aims to lift the country to high income status by 2020, but noted that such as goal would require that Malaysia rebalance its economy away from a largely export oriented economy to one that was more domestically driven.

She also said that the US needed to provide clarity on how it would avoid falling off the so-called “fiscal cliff” at the end of this year when spending cuts and tax increases are scheduled to take place.

Lagarde forecast a growth of six per cent for the Asian region next year and said that deeper integration and good management could set the path for Asian economic leadership and contribute to global growth.