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How indirect tax reform aids in economic recovery.
In brief
- Improving indirect tax collections will prevent leakages.
- Streamlining the Sales and Services Tax (SST) could mitigate price. pressures for essential goods and services.
The Prime Minister, Datuk Seri Anwar Ibrahim, who is also the finance minister, will present a revised 2023 Budget in Parliament on 24 February 2023. It has been widely reported that the Government will seek to address the country’s rising sovereign debt levels and high living costs, in the Budget. Thus, the revised 2023 Budget announcement may include certain tax measures to improve the country’s revenue collections, as well as proposals to mitigate leakages and provide targeted assistance to the rakyat, to boost the country’s fiscal position and address the high cost of living.
As one of the Budget proposals, the Government may consider a strategic reform of the current indirect tax landscape with a view to lead the country towards economic recovery and to drive increased and more sustainable Government revenue. This may not necessarily mean introducing a new tax. Instead, targeted and well-thought-out policy and administrative changes can help enhance the current tax system and increase enforcement efficiency.
Improving indirect tax collections and mitigating leakages
With the advancement of the digital economy, consumers can now acquire goods and services online from overseas suppliers with the click of a button. Since overseas supplies may not be subject to Malaysian taxes, this can result in local businesses becoming less competitive. To ensure a level playing field, the Government has introduced the Sales Tax on Low Value Goods, Service Tax on Digital Services, and Tourism Tax on Digital Platform Service Providers, to collect indirect taxes from overseas suppliers selling goods and services into Malaysia via digital platforms. To further improve tax collection from this space, the Government needs to address the challenge of effectively enforcing the relevant tax filing and payment obligations on suppliers who are outside Malaysia.
For example, the Government may consider expanding the Automatic Exchange of Information Framework, which currently generally applies to direct taxes, to cover the exchange of information and enhance administrative co-operation with other tax jurisdictions with respect to indirect taxes.
On a related note, while the indirect tax Voluntary Disclosure and Amnesty Programme (VA Programme) was only set in place from 1 January 2022 to 30 September 2022, it raised additional revenue for the Government and provided taxpayers with the opportunity to regularize their indirect tax positions and move forward with a clean slate. The Government, via the Royal Malaysian Customs Department (RMCD), could consider launching an extended VA Programme or, better yet, embed a voluntary disclosure mechanism into the relevant indirect tax legislations. The VA Programme proved to be effective in improving the level of indirect tax compliance as many businesses welcomed the opportunity to voluntarily disclose their underpaid indirect taxes to the RMCD. Continuing the VA programme would promote a higher level of compliance among taxpayers, instead of allowing them to adopt a “wait-and-see” approach until they are subjected to audit.
The RMCD should also perform continuous education programs to build indirect tax awareness and foster compliance by taxpayers. Educating taxpayers and addressing their technical or administrative concerns will surely encourage voluntary compliance and in turn, contribute to an improved administration of the current indirect tax system.
It is also anticipated that the RMCD will increase its enforcement initiatives by conducting stricter audits with less leniency and penalty waivers. To ensure effective and transparent enforcement during these stricter audits, it is hoped that the audits will be conducted in a structured manner, with a general policy and scope of coverage produced for the reference and knowledge of taxpayers and tax consultants. This will contribute to expediting and facilitating liaison and the effective sharing of information between the taxpayers and RMCD during audits and will also help build taxpayer trust and confidence.
Further, greater enhancement to the indirect tax compliance process through the use of technology would be welcomed. Even a simple tweaking of the electronic filling/declaration process, online payment of all taxes and fees, the structured submission of forms/documents via an online portal can go a long way in creating a simpler compliance process and enhancing the administration of indirect taxes. Such measures would not only reduce costs and increase efficiency on the part of the RMCD and taxpayers but would also be an effective tool for data-matching and enforcement.
Addressing the rising cost of living in the country
In view of the increasing price pressures on Malaysian households, there are expectations for the tax burden of the rakyat to be reduced, particularly among the low and middle-income groups.
From an indirect tax standpoint, the Government can consider streamlining the Sales and Service Tax (SST) system by ensuring exemptions are provided for essential goods and services, to help mitigate the price pressures for those items.
The coverage of the business-to-business (B2B) exemption facility under the Service Tax regime could be expanded to other services, to further mitigate the tax-cascading effect of said tax which the end-consumers would eventually bear.
Conceptually, under a multi-stage consumption tax system, it can be expected that there will be a relative reduction in prices due to the availability of the input tax credit mechanism. Businesses would be able to recover the tax incurred on their acquisitions, through input tax refunds, which will reduce the cost of doing business and ease the administrative process – benefiting both business and end-consumers. In addition, the Government will need to ensure that input tax refunds are provided to taxpayers on a timely basis to alleviate any additional business cost.
In fact, the World Bank had indicated earlier this month that Malaysia needs to enhance its consumption tax framework, with a goods and services tax (GST) system discussed as a potential solution. However, the reintroduction of a multi-stage consumption tax system such as GST may not yet be on the horizon. Nevertheless, if a similar facility as the input tax credit mechanism can be put in place under the current SST regime, this will help address the issue of rising prices. Prior to any such move being implemented, an in-depth study on the feasibility and implications (including the impact on indirect tax collections) of such a facility being embedded within the current SST regime should be undertaken.
At the end of the day, any manner or form of strategic indirect tax reform to achieve the intended goal – be it a new regime, or an enhancement to the current system– should be carefully evaluated, with ample consultation with the relevant stakeholders to ensure its effectiveness and sustainability, while being viewed positively and being well-received by the public and business community.
Summary
Any form of indirect tax reform must be properly done with enough consultation with the relevant stakeholders to ensure effectiveness and sustainability.
The digital revolution, particularly with the internet of things, is transforming tax administrations around the world.
In brief
- Today, the tax administration systems place a heavy reliance on voluntary compliance.
- There are technology options now that provide opportunities for tax authorities to integrate the taxation processes into the systems used by taxpayers as part of their daily lives and businesses.
- The future in tax administration systems is in increasingly embedding compliance by design outcomes as well as possible step-change reductions in compliance costs for taxpayers.
Since the start of the COVID-19 pandemic, Malaysia, as with many other nations, has had to spend billions on stimulus measures to save lives and livelihoods. There is now the need to increase the nation’s revenue to fund these measures, and one obvious option is tax.
There are many views on the best methods to increase tax revenue. In Malaysia, some of the widely mentioned and sometimes hotly debated options are the introduction of capital gains tax, moving to a worldwide scope of taxation (as opposed to our existing mainly territorial regime, where foreign-sourced income is generally tax-exempt), or reinstating other taxes such as the goods and services tax (GST) and inheritance tax. Each of these options has its pros and cons.
The bigger opportunity, in my view, is not so much in introducing new taxes, rather it is in rethinking and redesigning the tax administration systems.
Today, the tax administration systems place a heavy reliance on voluntary compliance. While tax is not voluntary, the term “voluntary compliance” recognizes that in many aspects of the current tax system, taxpayers make their own choices on the reporting, calculation and payment of tax. As long as these voluntary compliance choices remain, some of the choices made will inevitably result in certain amounts of tax not being paid. This could be deliberate, or due to a lack of reasonable care or genuine mistakes made on the part of the taxpayer.
In Malaysia, it is estimated that the shadow economy accounted for 18% of our gross domestic product (GDP) in 2019. In today’s terms, this roughly translates to RM250 billion. Malaysia’s shadow economy is largely formed by non-registered businesses, the under-reporting of business income, unreported sources of income and illicit trafficking. Imagine the increase in tax revenue if we could bring these activities into the tax fold.
With the digital revolution, there are now technology options that provide opportunities for the authorities to integrate the taxation processes into the systems used by taxpayers as part of their daily lives and businesses, i.e., making tax just happen.
The bigger opportunity, in my view, is not so much in introducing new taxes, rather it is in rethinking and redesigning the tax administration systems.
To use an analogy from the OECD Tax Administration 3.0 report, this would be akin to the development of automated, self-driving cars. Today, car safety is a combination of set requirements, such as vision standards, driving tests, traffic rules and speed limits, coupled with enforcement processes such as the installation of cameras to detect speeding and other moving violations, patrolling by the traffic police and the imposition of parking fines. Despite these set conditions and controls, in essence, there is still an expectation that drivers will voluntarily exhibit responsible behavior and comply with the relevant rules.
In a world of driverless cars, however, the vehicle is an integral part of a wider system which builds-in safety through the use of algorithms and features for the vehicle to make complex decisions such as sensors picking up information from road conditions and other cars. As such, driving will be largely based on compliance by-design systems with drivers freed-up to undertake other activities.
Similarly, the future in tax administration systems is in increasingly embedding compliance by design outcomes as well as possible step-change reductions in compliance costs for taxpayers.
The core features of digital tax administration systems are:
1. Tax will be embedded within taxpayer natural systems, such that paying taxes will become a more seamless and automated experience over time, integrated into daily life and business activities
2. Many digital platforms will become “agents” of the tax authorities carrying out tax administration processes within their systems, and
3. Tax authorities will no longer be the single point of data processing and tax assessment. Instead, tax administration is conducted within a resilient network of seamlessly interacting trusted actors without one single point of reliance. The tax administration processes will therefore be increasingly in real-time or close to real-time
The use of technology has the potential to address various areas and identify players within the shadow economy, therefore creating the opportunity to recover lost tax revenue, improve taxpayer morale, and restore trust in the system. At full capacity, technology solutions can significantly drive down the level of informal activity and revolutionize the operations and organization of the tax authorities, and their interaction and relationships with taxpayers. Mandatory e-invoicing and the increase in the use of electronic payments are just two digitization options that can help to curb the loss of tax revenue arising from the shadow economy.
What has been described above is not an imaginary future state. It is already taking place. The digital revolution, particularly with the internet of things, is already transforming tax administrations around the world. In Russia, data from many checkout terminals feeds directly into the country’s Federal Tax Service. The Russian tax authorities have a comprehensive view of the entire Russian economy. With minimal human involvement, their system tracks and matches transaction data from buyers and sellers across the country. They receive the receipts of every transaction in Russia within 90 seconds. The information has exposed errors, evasion and fraud in the collection of its consumption tax, VAT, which has allowed the Government to raise revenues more quickly than the general Russian economic performance.
Russia is just one example, and perhaps the most advanced. Many other jurisdictions such as Mexico, India, Brazil, to name just a few, have also gone digital. These countries have all introduced some form of digital tax administration, such as e-invoicing, that results in transactional data being posted to the tax authorities almost in real-time.
This is the future of tax administration — digital, in real-time and with probably no tax returns even needing to be submitted. In other words, remove the “voluntary” aspects and make tax just happen.
Summary
There are many views on the best methods to increase tax revenue. The bigger opportunity is not so much in introducing new taxes, rather it is in rethinking and redesigning the tax administration systems. In Malaysia, it is estimated that the shadow economy accounted for 18% of our gross domestic product (GDP) in 2019. In today’s terms, this roughly translates to RM250 billion. The use of technology has the potential to address various areas and identify players within the shadow economy, therefore creating the opportunity to recover lost tax revenue, improve taxpayer morale, and restore trust in the system.
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