No time to introduce new taxes

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THE has been the subject of much discussion about introducing new taxes or increasing tax revenues by tightening tax administration. The new taxes we have talked about are the capital gains tax, transaction taxes, the reintroduction of the tax on products and services, wealth tax, inheritance tax, tax on windfall, etc.

While the intention is noble to try to increase government revenue to fund unforeseen spending incurred to support the economy during the Covid pandemic in 2020, 2021 and possibly 2022; is this the right approach?

Now that global immunization has reached nearly 90% of the adult population, the economy is starting to open up and businesses are in the early stages of mobilization. Many companies have run out of cash trying to stay afloat.

Don’t kill the goose that lays the golden eggs

Companies are in a nascent state of recovery and must draw on their resources or resort to external financing to restart their activities.

Imposing new taxes on businesses or stepping up monitoring or increasing compliance burdens on existing taxpayers would be counterproductive and structurally damaging to the economy.

At this point, companies should be allowed to generate profits and use them to reinvest in working capital or new investments to give them the opportunity to grow and then pay taxes.

Allow taxpayers to pay past taxes

Companies may have made profits in the past, and it is also possible that taxes were underreported for technical reasons or out of sheer ignorance.

Tax audits and investigations have been carried out by the two tax authorities (Inland Revenue Board and Royal Malaysian Customs Department) in recent years and large invoices are collected. Both agencies may be right to increase tax bills, however, companies may have depleted funds and therefore may not be able to pay past taxes. In such situations, both agencies should seriously consider postponing collection for perhaps another 18 months to two years until we recover from this pandemic or endemic Covid.

Not a good time to reintroduce the GST

Businesses would prefer the GST because it is tax neutral for most of them, as opposed to the current OHS where they might end up bearing some of the tax burden. However, the reintroduction of the GST will make things worse for the consumer. With elections slated for 2023, it can be suicidal for any government to reintroduce the GST now. Unfortunately, history has proven that the governments that introduced the GST have fallen.

What choice does the government have?

Raising taxes, whether it’s new taxes or stepping up audit activities to raise taxes, is not the solution as it will affect business cash flow. Instead of increasing tax revenue, the government should seek other sources such as covering the deficit with external financing that the government is already considering by raising the debt ceiling from 60% to 65%, reducing spending public or by selling public assets.

The other choice is to create new income through a “targeted attack” aimed at digging up the underground economy (Rs 250 billion) in the formal economy. The past records of revenue agencies to bring them to light have not been exemplary. A complete overhaul is needed with contributions from external sources rather than looking for ideas within government agencies.

Exceptions

If the government is determined to step up tax collection or introduce new taxes, then this should be limited to companies that have made superprofits during this pandemic time, or to the super rich who can afford to pay the tax since their wealth increases “rain or shine”. The introduction of an exceptional tax on superprofits or a wealth tax on the super rich will not be perceived negatively by the rakyat.

This article was written by Managing Director SM Thanneermalai of Thannees Tax Consulting Services Sdn Bhd.

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