What should come first: Better tax collection or higher taxes?

Amarjeet Singh explores how stronger tax administration and SST reform can improve revenue while supporting Malaysia’s competitiveness.

In brief:

• Malaysia’s fiscal position is improving but strengthening tax administration may generate significant revenue without increasing tax rates.
• Early e-Invoicing results highlight the potential of data-driven compliance, provided implementation remains practical and accessible.
• Reviewing SST inefficiencies could support investment competitiveness while helping create a more sustainable tax system.

Malaysia’s fiscal challenge: Tax better before taxing more

Malaysia’s fiscal position is improving, although pressure on the nation’s finances remains considerable.

The federal fiscal deficit narrowed from 4.1% of gross domestic product (GDP) in 2024 to 3.7% in 2025, while federal government revenue increased to RM336.1 billion. Further consolidation is planned under Budget 2027, with the deficit projected at 3.5% of GDP.

This progress is necessary. Federal debt-service charges were RM53.7 billion in 2025¹, equivalent to 16.2% of government revenue.

In practical terms, about one ringgit out of every six collected by the federal government is required simply to service debt before funding healthcare, education, infrastructure or development programs. This only accounts for the cost of servicing the debt, excluding debt principle.

So, Malaysia needs a stronger and more sustainable revenue base. The question is how this can be done. Should we raise more revenue by increasing tax rates and broadening the tax base or should we first focus on collecting existing taxes more effectively and improving the design of the current system?

There is no single answer, however two priorities deserve greater attention. First, there remains considerable upside in strengthening tax administration through data, technology and compliance measures.

Second, there is a need to address inherent inefficiencies within the existing Sales Tax and Service Tax (SST) framework that may impact Malaysia’s competitiveness as an investment destination.

Compliance by design

One of the strongest arguments for accelerating the reform of tax administration is the potential scale of revenue gains.

A 2023 International Monetary Fund study found that countries undertaking sustained tax-administration reforms achieved revenue improvements of between 2% and 3% of GDP. Applied to Malaysia’s current economic size, this would translate into tens of billions of ringgit in additional revenue annually. At 3% of Malaysia’s 2025 GDP, potential additional revenue of RM60.9 billion is broadly comparable to Malaysia’s annual SST collection.

These figures should not be interpreted as projections for Malaysia. Rather, they illustrate that well-implemented improvements in tax administration can have a meaningful fiscal impact without necessarily increasing tax rates.

The ongoing digitalization of the tax system, particularly through e-Invoicing, demonstrates its potential. In April 2026, the Inland Revenue Board of Malaysia (IRBM) reported that reviews of e-Invoice data resulted in tens of thousands of taxpayers voluntarily declaring previously unreported income, generating more than RM1 billion in additional tax payable within a relatively short period.

The early results suggest that e-Invoicing can become a powerful compliance tool. However, its long-term success depends not only on technology, but also on practical implementation.

For e-Invoicing to deliver its full potential, compliance must be as simple and seamless as possible, especially for smaller businesses with limited technological and financial resources. The objective should be compliance by design: making the correct tax treatment easy to adopt, mistakes straightforward to correct and enforcement efforts focused on higher-risk transactions rather than routine compliance. Relevant stakeholders must also stay the course and continue the path to full implementation.

Continuous refinements, taxpayer support and targeted incentives for smaller enterprises could further improve participation while lowering compliance costs for legitimate businesses. Better data quality would, in turn, strengthen risk-based enforcement and revenue collection.

Revenue and competitiveness must go hand in hand

While revenue generation remains important, Malaysia must consider the impact of tax policy on investment attractiveness.

Most of Malaysia’s major ASEAN competitors operate value-added tax (VAT) or goods and services tax (GST) systems that generally allow businesses to recover qualifying input tax incurred on business purchases. As a result, the tax is generally intended to apply to the final consumer.

Malaysia’s SST operates differently. Although various exemptions and reliefs exist, there is no broad input-tax-credit mechanism. Consequently, tax paid on business inputs can become a permanent cost within the supply chain, creating what is commonly known as tax cascading.

This issue becomes particularly relevant in today’s digital economy.

Consider a multinational evaluating whether to establish a regional headquarters or global capability center in Malaysia or Singapore. Such operations typically rely on significant spending on cloud computing, software subscriptions, cybersecurity, telecommunications and digital infrastructure.

Under a GST system, qualifying input tax is generally recoverable. Under Malaysia’s SST regime, service tax incurred on certain imported or digital services may become an additional operating cost where no exemption applies.

Even if overall costs in Malaysia remain competitive, unrecoverable indirect taxes can narrow that advantage for technology-intensive and knowledge-based operations.

Investment decisions today are influenced by a combination of factors, including tax competitiveness, compliance complexity, talent availability, infrastructure and regulatory certainty. As competition for high-value investment intensifies across ASEAN, even incremental differences can influence where multinationals choose to locate their regional operations.

Summary

Malaysia’s improving fiscal position creates an opportunity to focus on higher-yield reforms before introducing additional tax burdens. Amarjeet examines how e-Invoicing, stronger compliance measures and more effective tax administration can enhance revenue collection. He also highlights the need to address inefficiencies within the SST framework to support investment, competitiveness and long-term economic growth.