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Malaysian govt should announce clear revenue target in tax reform, says World Bank

Publish date: Mon, 22 Apr 2024, 04:07 PM

KUALA LUMPUR (April 22): The Malaysian government should announce how much revenue it is targeting from its reforms to avoid a patchwork approach to taxes, according to the World Bank.

A clear target would allow the government to undertake adequate, well-timed, and well-sequenced tax policy, said World Bank lead economist for Malaysia Dr Apurva Sanghi. Malaysia has been under-collecting taxes and the government needs to raise more revenue, he said.

"The only point we are making is that it's important to publicly announce a revenue target,” Apurva said during a media briefing on the World Bank’s April 2024 Malaysia Economic Monitor report titled “Bending Bamboo Shoots: Strengthening Foundational Skills”.

Malaysia has been trying to shrink a long-running fiscal deficit that stretches back to the 1998 Asian Financial Crisis. Most recently, the government has introduced a slew of measures ranging from trimming subsidies to imposing additional taxes in a bid to fix its weakened finances.

To soften the blow on cost of living, the government has pledged to dish out cash and other aid. This year, the government is targeting to narrow its budget gap as a proportion of economic output to 4.3% from 5% last year.

The government’s recent efforts to widen the tax base - in the form of the capital gains tax and expanded services tax - are insufficient at addressing the revenue inadequacy even as they are a step in the right direction, Apurva said.

A defined target would also allow the government to better communicate its tax reform decisions with the public and the industry, as it provides perspective to how much additional revenue has to be raised, Apurva stressed.

“The question is how much more?” Apurva noted. “What should the target be, should it be from 12.6% to 13% or 14%?”

Tax collection, as a percentage of gross domestic product (GDP), is projected to rise to 12.8% in 2024 from 12.6% in 2023, he noted. That compares to the regional average of 25%.

“When you don’t set a target you don’t know where you’re going, there are many roads to take,” he noted. “So it's very important to know where you’re going.”

World Bank senior economist Chong Yew Keat highlighted at the same event that setting revenue targets is a common practice among developed economies whereby they are set based on the country’s structural spending.

For example, an ageing population would mean related spending such as healthcare will rise as a percentage of GDP, he noted.

“This will ensure that the government takes a longer view and ensures that the increase in revenue is adequate and also allows for tax policy to be more well-timed and better sequenced over a long period of time,” he added.

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