Tax reform journey – A long and arduous road

The Star

a day ago

SINCE the 2000s, Malaysia has been continually advancing tax reforms, adjusting these in response to the nation's fiscal needs, economic developments and the demands of businesses and the public.
Among the most impactful reforms was the goods and services tax (GST), introduced during former premier Datuk Seri Najib Razak's administration in 2015.
Although globally recognised as a more transparent and fair tax system, its execution was somehow flawed.
Delays in input tax refunds severely affected businesses' cash flow, and rising prices led to public discontent, resulting in the cancellation of GST in less than five years due to political pressure.
Following the GST's cancellation, filling the resulting revenue gap became a key challenge for the new government.
Since Budget 2022, several tax reform measures have been announced each year.
These include the tax identification number, voluntary disclosure programmes by the Customs Department and Inland Revenue Board, tax compliance certificates, taxation on overseas income remitted to Malaysia, low-value goods tax, capital gains tax, personal shareholder dividend tax and subsidy rationalisation policies.
These aimed to improve the nation's financial situation and close tax evasion and avoidance loopholes.
Over the past two years, significant reforms have included electronic invoicing and the expansion and adjustment of the sales and service tax (SST) rates.
Initially, e-invoicing was to be implemented in four stages, with full implementation by Jan 1, 2027.
However, the timeline has been revised several times, most recently to July 1, 2026, with exemptions for micro-businesses earning less than RM500,000 annually.
These frequent changes have led many to expect further reversals, prompting delays in action.
The extension was partly due to realistic pressures, as many small and medium enterprises remain unfamiliar with e-invoicing, and misinformation is widespread.
Rushing implementation without adequate training, departmental coordination and system readiness could lead to chaos.
The expansion of the SST faced similar issues.
The swift announcement and implementation left businesses with insufficient time to understand and prepare. Industry groups highlighted flaws, urging guideline revisions.
Consequently, within a week of the announcement, exemptions, amendments and adjustments occurred.
While listening to public feedback is necessary, obvious issues could have been resolved during policy drafting through comprehensive consultation, avoiding post-announcement amendments.
Frequent policy reversals not only create confusion but also damage government credibility.
The expanded SST took effect on July 1, and while ministers and experts claimed its impact on prices would be minimal, many industry groups disagree.
The market's reaction remains to be seen, and the government, especially the Domestic Trade and Costs of Living Ministry, must monitor prices closely.
Price increases
Regardless, some goods and services will see price increases due to higher SST.
Whether this expansion helps improve the nation's financial situation remains a question.
In fact, both the government and the business community, having experienced GST and SST, understand that the GST, with its input and output tax offset mechanism, is the most effective tax system.
It doesn't accumulate taxes nor increase costs of goods and services due to its tax offset mechanism; moreover, most essential goods are zero-rated or exempt.
If the government effectively monitors prices and efficiently handles refunds, the public's impact wouldn't be as severe as perceived.
However, the SST mechanism causes tax layers to accumulate throughout the supply process.
While it appears businesses bear the tax, they inevitably pass on the increased costs to consumers to maintain margins.
Direct or indirect impact
Despite assurances that only a limited range of services and products are affected, consumers inevitably face direct or indirect impacts.
For instance, businesses paying an additional 8% service tax on rent will transfer this cost to consumers, affecting competitiveness and raising product or service prices.
The public's lack of understanding of the GST mechanism, coupled with previous implementation shortcomings, fuels resistance to its reintroduction.
Although the government repeatedly states it won't reintroduce GST soon, recent tax measures reflect GST principles.
Essentially, we're implementing GST mechanisms without the name.
Tax reform, no matter how comprehensive, will inevitably impact livelihoods and business costs initially.
However, if the reform direction is correct, it benefits the nation's fiscal health and economic development in the long run.
Sufficient time needed
The government must not only increase revenue but also allow sufficient time for engagement and consultation before implementing new policies or systems.
Educating businesses and the public on the necessity and details of new tax systems prevents policy reversals and misinformation, avoiding a repeat of the GST's past failures.
Balancing government revenue with public welfare, especially for middle and low-income groups, without overly burdening high-income individuals is challenging. It requires effective inter-departmental and ministry coordination and tests our leaders' resolve to drive necessary but unpopular reforms for the nation's long-term development.
Datuk Koong Lin Loong is the managing partner of Reanda LLKG International. He is also the treasurer general cum chairman of SME committee, The Associated Chinese Chambers of Commerce and Industry of Malaysia. The views expressed here are the wirter's own.