KUALA LUMPUR (Feb 3): In view of moderating crude oil prices that may trim the federal government’s revenue in 2023, the World Bank recommends the federal government to devise ways to diversify the revenue stream.

World Bank’s lead economist for macroeconomics, trade and investment Dr Apurva Sanghi said Malaysia also continues to undercollect in personal and consumption taxes, trailing many comparative peers that are expected to restrict revenue stream to the coffers.

“In the case of Malaysia, reducing expenditure is important but increasing revenue arguably is even more so. This is because of the decline in revenue in the last 10 over years. The Goods and Services Tax (GST) is not the only way the government can raise revenue, but there’s personal income tax (PIT) which in Malaysia is not optimal. Tax reliefs in personal income tax are not helpful,” he said at the World Bank’s Malaysia Economic Monitor February 2023 entitled ‘Expanding Malaysia’s Digital Frontier’ on Friday (Feb 3).

The draft Budget 2023, which was tabled in last Oct, gave a 2% personal income tax rate reduction from 13% to 11% for middle-income households with a taxable income of between RM50,000-RM70,000.

In addition, households with a taxable income of between RM70,000-RM100,000 would see their personal income tax rate decline from 21% to 19%. Meanwhile, a higher tax rate of 25% (previously 24.5%) will be applied to households with a taxable income of RM250,000-RM400,000.

“Overall, this is expected to have limited impact on improving revenue collection in the future” said Apurva.

He added that rigid expenditures remain high and are expected to increase in 2023. Notably, obligations related to salaries, pensions, and interest payments stood at around 56% of total government spending in 2022 compared with 66% in 2021.

“The combined spending on these structural expenditures is expected to increase to 61% of total government expenditures in 2023. The increased spending on these items, together with the decline in revenue, remains a constraint to the government’s fiscal space and poses a challenge to long-term fiscal sustainability,” said Apurva.

According to the World Bank’s report, government revenue collection is expected to decline further from 15% of gross domestic product (GDP) in 2023 to an average of 14.7%  in the medium-term.

“The Fiscal Responsibility Act (FRA) which is being drafted and finalised, should include detailed plans on measures to diversify its revenue sources. Consideration should be given to streamlining reliefs and broadening the tax base of personal income tax and by enhancing the consumption tax framework,” said the World Bank report.

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