The current tax system is unfair to the middle class and lower income groups do you agree?

Written BY: Ying Jie

            Tax system in Malaysia was introduced by the British colonial government by 1948 while in 1967 the Malaysia tax laws were administered by Inland Revenue Board (IRB). Thus, the income tax laws were consolidated and revised to create a unified federal income tax law which was enacted by the Parliament and became effective throughout Malaysia.

            The Malaysian personal income tax is a progressive system. The tax is based on chargeable income (the total earned income minus all non-tax deductions and rebates) and has been made progressive through the imposition of a progressive tax rate structure (see Table 1). All resident individuals are liable to be taxed on income accrued in and derived from Malaysia or received in Malaysia from outside Malaysia.

The individual is taxed on the taxable income, which is derived after deducting the various tax deductions from the chargeable income. The taxable income is subjected to a graduated tax rate that rises from 0% to 26% with the effect from the year of assessment, 2010, shown in Table 1. It is clear that a progressive income tax structure has been created by the imposition of rising marginal tax rates (the rate relevant to the last ringgit) on higher income brackets. For example, on the first RM2,500 of taxable income, no tax is imposed, but on the last RM100 (000 or more), the maximum rate of 26% is applied.

Written BY: Kheng Kheng

            Meanwhile, do the tax system fair to all the people? Certainly not because tax system in Malaysia is unfair to middle and low income people. While the most benefit in Malaysia tax system is high income people which the Government charged higher taxes to higher people but the high income people can get the rebates from their expenses, commitments and loans which all these can help high income people to getting rebates from the government. For example, high income people can ‘escape’ the personal income taxes by buying new cars which the act had mention that buying cars can be getting rebates because its consider as your expenses. What if the low and middle income people? All these circumstances had not benefits to them because they did not have any extra money to purchase new vehicles or new houses so it had increased their commitment because they could not get any rebates from the government. In a small summary, the personal income taxes had only fair to high income people but it is not benefit to low and middle income people because the taxes have not achieved fairness and balance to all the people. In general, although the deductions lower the taxes payable by all taxpayers, they favour higher income tax payers by providing them with greater tax savings. In other words, the amount of income that escapes taxation as a result of these deductions is larger for higher income tax payers than for their lower income counterparts. By favouring higher income taxpayers, these allowances and deductions contradict the principle of progressivity.

           Deductions granted in the form of deductions from the chargeable income, therefore, may reduce the progressivity of the tax system as the higher income tax payers gain a greater tax saving from an identical deduction relative to lower income tax payers. This discrepancy arises because the size of the tax saving from a deduction awarded in this manner depends on the marginal tax rate of the taxpayer. The higher the marginal tax rate faced by the tax payer, the higher the tax saving from the deductions granted. Because higher income taxpayers face a higher marginal tax rate under a progressive tax structure, they will enjoy greater tax savings.

Written BY: Wei Kean

           Before the implementation of GST, our taxation system collected taxes only from 25 % of the population. Another 75 % of the citizens only paid service charge and other national taxes. However, with the implementation of GST, all traders became tax collectors on behalf of the government collecting the goods and services tax. Nobody can escape from GST. All citizens must pay tax and those who withdrew money from abroad also had to pay for the service inclusive of GST.

Thus the impact of GST on the low income earners especially those who had no financial mean and depending on study loans or family finance would incur a higher monthly expenditure. According to a report, 45% of the undergraduates from institutions of higher learning were offered a salary less than RM1500 after graduation. Compared to the national average income of Malaysians, this group would be placed under the category of the lower middle group.

Some products have no GST. If there is a selective consumption of goods and food, one may be able to avoid GST. However, some traders had transferred the additional cost due to GST to the consumers and eventually the public faced the problem of inflation. Thus the cost of living had increased and it was impossible to avoid GST.

If students could not shoulder the financial burden, they would transfer the load to the family. At present our national domestic debt had reached 87.1% of the national gross domestic product (GDP). A big chunk of the family expenditure was financing loans. Once they could not manage their financial debt, more and more people would choose bankruptcy as the last resort. It was similar to US subprime mortgage crisis and our study loan crisis may erupt anytime in our country.

There were proposals to learn from other nations like imposing GST on the rich, taxed on selected items, rejecting luxurious purchases and facing hard times together with the Rakyat. Besides that, there were also proposals to increase the income tax rate, enlarging the circle of taxpayers and making higher income group to pay more tax. We could also learn from France which imposed a maximum tax rate until 75% on the rich or introduced a redistribution of social resources.

Written BY: Louis Foo

The above measures were a success in North European countries but not in France as some areas could not implement them at all. The writer believed that taxation should not be based mainly on the income of a worker. It should maintain the approach of more wages for more work to spur the economic growth. Hence it is better for the government to tax more on capital gains rather than taxing the ordinary Rakyat.

When our former Prime Minister Mahathir came into power, he introduced many trader- friendly policies. The corporate tax was reduced from 40% to 25%. We should regard tax collection as a mechanism for redistribution of wealth. Taxing more on the corporate sector is tantamount to reclaiming profit from basic resources. At the same time to reinvest, providing subsidies and maintaining the resources at an acceptable state.

As far as the nation is concerned, this policy is fair and just to the society. The youth and the undergraduates of the institutions of higher learning were financially weak. They should be exempted from taxation but to receive social aid before being employed. This gives them a fair chance to survive in the society and to prevent the vicious cycle of borrowing to spend.

A proper tax collection system will bring development to the nation. On the contrary, a poor system may ignite a fuse to overthrow the government in power.

In conclusion, the tax system in Malaysia is unfair to low and middle class people which the system has many mistakes to the nation so I think that the tax system in Malaysia have to improve because it does not have benefit to all the people. It has been argued that several factors undermine the ability of the personal income tax system to narrow the income gap among tax payers. Malaysia's income tax system attempts to promote fairness and maintain its progressive structure by relying on progressive marginal tax rates. Unfortunately, this progression in marginal tax rates is the main source of the problems that have eroded the progressivity of the individual income tax, for example, granting greater tax savings for the rich as well as encouraging tax evasion.

Reference:
The Edge Malaysia (2013) Taxing Issues [ONLINE] Available at: https://www.pwc.com/my/en/assets/press/130923-the-edge-taxing-issues-jagdev-singh.pdf [Accessed 3 May 2016] 

Malaysian Tax System (2010) [ONLINE] Available at: http://studentsrepo.um.edu.my/1155/4/BAB_1.pdf [Accessed 3 May 2016]

PWC (2015) Malaysian Tax and Business Booklet [ONLINE] Available at: http://www.pwc.com/my/en/assets/publications/2016-malaysian-tax-business-booklet.pdf [Accessed 3 May 2016]

Tough Nickel (2016) Malaysian Tax Issues for Expatriates and Non-Residents [ONLINE] Available at: https://toughnickel.com/personal-finance/Quick-Guide-to-Malaysian-Tax-for-Expartrites-and-Non-Residents [Accessed 3 May 2016]

Yong Kuan Chen (2012) THE PROGRESSIVITY OF THE MALAYSIAN PERSONAL INCOME TAX SYSTEM [ONLINE] Available at: http://web.usm.my/km/30(2)2012/KM%2030(2)%20ART%202%20(27-43).pdf [Accessed 3 May 2016]

 Huang Kang Wei (2015) Protest against the unfair implementation of GST [ONLINE] Available at: http://www.malaysianchinesenews.com/2015/04/protest-against-the-unfair-implementation-of-gst/ [Accessed 3 May 2016]