Income tax waiver from the tax payers’ perspective

By Chang Kim Loong

In an attempt to revive the economy, the government in its Penjana economic recovery scheme vis-à-vis the housing segment is giving tax exemptions such as waiver of stamp duties and exemption of real property gains tax to revive the property sector. 

Waive or at the least offer 50% rebate on personal income tax across the board

We have to be honest about the current economic situation that is affecting not just Malaysia but the entire world as a result of Covid-19. 

The International Monetary Fund has predicted that there will be a global recession in 2020 and Bank Negara Malaysia has estimated that Malaysia’s gross domestic product could contract by 2% in 2020. 

In the wake of all these challenges, the average rakyat such as Ahmad would be prudent to put off any chunky acquisitions such as cars and properties until the economic outlook is more certain. However, in the meantime, Ahmad still has to put food on the table for his family and reduce unnecessary expenses as much as possible. 

However, there is one expense that Ahmad can never reduce no matter how much he tries and that expense is called personal income tax. Ahmad can try to eat less or even take the bus to work to save more money. But every month, the same amount of Ahmad’s income goes to paying income tax. 

If the government is really serious and sincere about wanting to ease the burden of the rakyat, the government can do so by granting an income tax “wholesome” waiver or at least a reduction of 50% (from the current scale rate) for the first RM100,000 in chargeable income for the next two years. 

We chose RM100,000 because this amount was used as the threshold to receive the RM30 e-wallet in Budget 2020 and also the RM50 under the ePenjana initiative. 

The income tax payable for the first RM100,000 in chargeable income based on Budget 2020 are as follows: 

Chargeable Income BracketIncome Tax payableCumulative Chargeable Income BracketCumulative Income Tax payable
First RM5,000RM0RM5,000RM0
Next RM5,000RM 50RM10,000RM50
Next RM10,000RM 100RM20,000RM150
Next RM15,000RM 450RM35,000RM600
Next RM15,000RM 1,200RM50,000RM1,800
Next RM20,000RM 2,800RM70,000RM4,600
Next RM30,000 RM 6,300RM100,000RM10,900

Based on chargeable income of RM100,000 and the tax rate for 2020, the income tax payable is RM10,900 or about RM908 per month. Our proposal for a 50% tax reduction / waiver will translate to annual tax savings of RM5,450 or additional disposable income of RM454 per month which will greatly add to the monthly cash flow and result in a boost to retail spending and uplift the economy. 

However, this 50% income tax reduction should not be restricted to those earning below RM100,000 but applicable to the first RM100,000, meaning anyone earning more than RM100,000 would also be able to enjoy this proposed temporary tax reduction / waiver. 

Many people who supposedly earn more than RM100,000 a year are just salaried employees who are in the “sandwich” group (supporting elderly parents and young children) and consider themselves to still be “middle income” although they may fall under the so-called M40 group or even T20 group. 

We must also admit that Covid-19 and the side effects thereof has impacted the entire country; from small business to multinational corporations and from the manual workers to even executives at management level. 

This so-called middle income group is pleading to the government to understand that the economic slowdown due to Covid-19 affects everyone and not just those in the official B40 group. 

In addition, it is important to look at this tax waiver from the correct perspective. This proposal is not asking for the government to give “handouts” or cash assistance but for it to acknowledge that the middle income segment is also affected by the Covid-19 and to give a temporary tax relief over this difficult period.

 Let’s look at the figures – personal and corporate income tax 

Based on the fiscal outlook and federal government revenue estimates 2020 report, personal income tax amounted to 13.4% of the federal government revenue for 2019. 

As we do not have the inside knowledge of the breakdown of the personal income tax collection, we cannot ascertain the full impact of the proposed tax exemption. However, assuming that this tax exemption will result in a fall of up to 50% in personal income tax collected. Note that we believe that the actual fall would be much less than 50%. 

The fall of up to maximum 50% would amount to loss of revenue of about 6.7% which seems manageable as this money would be injected back into the local economy and possibly generate more economic activities which can offset the reduction in government revenue. 

There will definitely be a multiplier effect when the monies from the tax relief is being injected back into the economy through spending and can quicken the economic recovery of the country. 

Inland Revenue Board CEO Datuk Seri Dr Sabin Samitah had said ‘that the impact of Covid-19 would be minimal as the country had a strong revenue base to offset the shortfall in tax collection’.

Similarly, the expense that companies cannot afford to reduce is corporate income tax. Companies can reduce headcount to cut costs but, just like Ahmad, they have to pay corporate income tax so long as these companies record a taxable profit. 

The government should consider giving tax reliefs to the SMEs, which are currently taxed at 17% for the first RM600,000 in taxable income and the balance at 24%. The government could consider giving a 100% tax relief on the first RM1 mil in taxable income and the balance to be taxed at 24% for the next three years. However, this tax relief should come with some strings attached which is, the said SME should not retrench any local employees during the tax relief period. 

For large corporates, the government should also consider giving some tax reliefs in the form of lower tax rates for the next three years, say from current 24% to 17%. This will result in substantial savings of about 29% to these corporates.

For 2019, corporate income tax amounted to 26.9% of federal government revenue; granting a tax relief could result in loss of revenue of about 8.1% which is slightly more compared to the personal income tax relief of 6.7% above. 

However, the exemption in corporate income tax could potentially mean that these companies have more funds to sustain their operations and do not need to retrench or reduce so many headcount and could even have more funds to reinvest into the company to increase production. 

The savings from the reduced corporate tax would be invested back into the economy to generate more economic activities. As a safeguard, the reduced corporate income tax could come with certain covenants such as limiting the retrenchment of local employees. 

The income tax waiver or reduction for both personal and corporates would be more far reaching compared to generous tax exemptions for purchase of properties and have an immediate impact to the economy at large. 

The average rakyat will have more disposable income to spend and corporates will have more cash flow to sustain their operations. The mode for the next two years will be sustainability and recovery as well as ensuring that the rakyat and corporates have sufficient cash to do so is key to success. 

Windfall tax 

It is said that for every crisis, there will be the lucky few who will benefit and indeed it has been reported that there are a few sectors and companies in Malaysia that has by chance “benefited” from Covid-19 such as those in healthcare, manufacturing of latex gloves and personal protective equipment.

In fact, it was just reported that some of the owners of these companies have become billionaires overnight. To offset the loss of revenue from granting of tax exemptions, the government could implement a “windfall tax” for the next two years on companies and sectors that somehow ‘benefited’ from Covid-19. 

This Covid-19 windfall tax would be similar to the windfall tax that was imposed on CPO producers in the past when the price of CPO was very high due to the high price of crude oil. 

The monies from the Covid-19 windfall tax could help to offset the loss of revenue from granting the personal and corporate income tax exemption. 

Digital tax 

The government must also push ahead with the implementation and execution of the digital tax as more and more businesses move to online strategy to cut costs and also due to Covid-19. 

Technology giants have been known to use various innovative methods as they move their goods and services worldwide in order to avoid paying tax. The government must ensure that all providers of online goods and services that are used by consumers in Malaysia pay the required taxes so that our government does not lose out on much needed revenue during these challenging times.

Banks had given a six-month loan repayment moratorium to their borrowers to help ease the burden of Covid-19 and we would urge the government to also show some compassion to our rakyat and our companies, across the board to ease their suffering by granting a temporary tax (income) holiday. 

This article is written by Datuk Chang Kim Loong, Hon. Sec-Gen of the National House Buyers Association (HBA), a non-governmental and not-for-profit organisation.

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