Explained: Current State of Malaysian Tax

As of 2020, they are 16.5% [1] of 15 million workforces were subject to individual income tax. This translate to only 2.5 million peoples are contributing to national income. For 2020, tax collected from Individual Income Tax was RM 38.95 billion. This figures represent 17.3% to government revenue and 2.75% from the GDP.

The Federal Government revenue is classified into 4 main categories, namely:

1. Tax Revenue
2. Non-Tax Revenue
3. Non-Revenue Receipts
4. Revenue from Federal Territories

Tax Revenue is classified into Direct Tax Revenue and Indirect Tax Revenue. Direct Tax Revenue are as follows:

1. Income tax
   • Companies
   • Individual
   • Petroleum
   • Withholding
   • Cooperative
   • Others
2. Other direct tax
   • Stamp duty
   • Real property gains tax
   • Labuan business activity tax
   • Others

Our main focus for discussion is on Direct Tax Revenue that is coming from Income Tax. Particularly Income Tax that is deriving from individual.

Situation of Individual Income Tax in 2021 and 2022

Individual income tax was estimated to decline by 6.6% to RM 36.4 billion due to fewer taxable individual taxpayers following higher unemployment rate at 4.5% in 2021. However in 2022, individual income tax, which is expected to improve by 3% to RM 37.5 billion, consistent with expected improvements in the job market.

If individual income tax in 2021 was collected at RM 36.4 billion, this figure represent 30.32% from Direct Tax and 22.50% from Tax Revenue. Individual income tax represent a big chunk into Government revenue in 2022

Compensation & Income Tax Relationship

According DOSM, Social Accounting Matrix, 2015 [2], compensation for employees were amounted to RM 515.9 billion. Meanwhile based on MoF, Economic Outlook 2022 [3], compensation for employees were amounted to RM 564.4 billion (forecasted,2021). By taking individual income tax, which is expected to to be collected at RM 36.4 billion (forecasted,2021), this figure only represent 6.45% tax amount were subject to individual income tax. This is 0.95% dropped from 2020 percentage collection.

This dropped in percentage maybe due to salary reduction. Therefore making chargeable income is very much lesser compared to 2020. On the side note maybe Malaysians were starting to consider tax relief investment instead.

If we recalculate tax amount based on income tax for individual collection and employees compensation, for 2020 it should be 7.40%. Therefore for 2021, taxpayers percentage is equivalent to 14.38%. We will use this numbers from now on for discussion purposes. However the number of taxpayers remain the same.

Tax Relief Investment

To date there are 3 types of investment which is entitle to get a tax relief from tax payment. They are:

1. Employees Provident Fund, EPF
2. Skim Simpanan Pendidikan Nasional. SSPN
3. Private Retirement Scheme, PRS

The maximum tax relief amount from these 3 types of investment alone may save yourself up to RM 15,000 from chargeable income. Breakdown of these investments are as follow:

1. EPF – RM 4,000 tax relief
2. SSPN – RM 8,000 tax relief
3. PRS – RM 3,000 tax relief

Employees Provident Fund, EPF

According to EPF Annual Report 2020 [3], the number of new members in 2020 was 400,186. Previously ini 2019 it was 526,766 new members registered in 2019. A decrease of 24.03%. Perhaps this new members started to plan for their tax relief investment. Roughly around 500,000 new members in 2022 (assumption).

Skim Simpanan Pendidikan Nasional, SSPN

As for SSPN savings account openings in 2021, a total of 421,281 accounts were opened [4]. With deposits worth of RM 3.01 billion. This is equivalent to RM 7,144 per account. This figure close to RM 8,000 tax relief offered to individual.

Private Retirement Scheme, PRS

Account registered for PRS is also increasing. There are 41,000 of accounts were opened [5]. Making the PRS account number increased to 531,000 in 2021.

Conclusion

If you are adding up all these numbers (for 2021 assumption) as follows:

1. EPF – 500,000 new members
2. SSPN – 421,281 new members
3. PRS – 41,000 new members

This is equivalent close to 1 million new members in respective tax relief investment accounts were opened . As of the workforce in 2020, it was 15.67 million. In 2021 it was 15.94 million. 16.50% taxpayers in 2020 represent 2.59 million workforce. Meanwhile for 2021, 14.38% taxpayers represent 2.29 million workforce.

A reduction in 30,000 numbers of workforce who is paying the tax maybe due to new members in respective tax relief investment accounts were opened. On the other hand unemployment plays the role as well.

Source:

1. MoF, Fiscal Outlook 2020
2. DOSM
3. EPF
4. NST
5. SC

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