How simplifying tax administration may encourage higher tax collection

Good tax administration can raise the level of tax compliance and provide better awareness, trust and confidence in the taxation system.

One of the main sources of revenue for many countries is taxation. According to a study conducted by the International Centre for Tax and Development, 80% of government revenue is derived from taxation in approximately half of the countries around the world. In many other countries, around half of government revenue comes from tax collections. Based on the 2020 Malaysia Budget, 63.9% of the Government’s revenue is from taxation, i.e. corporate income tax, personal income tax, indirect tax and other taxes.

Given the reliance on tax revenues to fund government expenditure, the administration of the tax system is vital. On the other side of the coin, businesses too need to manage their tax affairs carefully to optimize their tax position while managing risks and understanding the impact that tax will have on cash flow. This is particularly important during these challenging times.

Improving tax administration

Improving voluntary tax compliance is a key goal of tax authorities. There are various factors that may influence voluntary tax compliance. One of them is the ease of understanding and meeting one’s tax obligations, which can be facilitated by a tax system that is transparent, easy to understand and simple to implement.

Some of the shortfalls in tax administration which can negatively impact tax collections include:

• Unregistered taxpayers
• Non-filing of tax returns (i.e. registered taxpayers who fail to file due to various reasons)
• Under-reporting of taxes or delinquent taxpayers (declaring lesser taxes or not reporting income)
• Tax evaders
• Lack of clarity in tax rules and regulations

Good tax administration can undeniably raise the level of tax compliance and this will provide better awareness, trust and confidence in the taxation system.

Simplifying the tax system

The COVID-19 pandemic has severely disrupted business and the economy. In such an environment, businesses need to continue to be nimble to navigate these challenges and uncertainties. Having a tax system that is easy to understand and transparent will go a long way towards supporting businesses in meeting their tax compliance obligations in such an environment.

A simpler tax administration and system have many advantages. For one, it could mean a reduction in taxpayers’ burden in terms of cost, time savings and effort taken to understand and comply with the requirements. It could also allow taxpayers to better understand and adhere to their tax obligations and reduce the opportunity and motivation for non-compliance or tax evasion. In making the tax system simpler, it will also give the perception of a fairer tax system.

Any new tax legislations introduced should take into consideration the way business is organized and the impact to different industries, as well as provide clarity on tax treatments. Hence, the simplification of the tax system should cover all aspects, from computation of the tax liability, filing of the tax returns, payments of taxes to record-keeping requirements for future tax audits or queries by the tax authorities.

Taxing the shadow economy

The shadow economy does not only refer to illegal trade; it may include all manner of economic activities, including legal production activities or provision of goods or services, which are hidden from the authorities with the intention of avoiding regulatory requirements, administrative procedures or taxes.

In this respect, alongside the complexity of legislation and efforts to simplify compliance requirements, improvements can be made to identify and tax the shadow economy. This means that a whole new category of taxpayers will need to start contributing to the nation’s tax collection.