NO one is fond of paying taxes. Many would go to the fullest extent to legally avoid paying taxes and in some cases, illegally evade paying taxes. Yet, every able individual ought to and should pay taxes.
This is a moral obligation so compelling that the upper crust of society may even be embarrassed not to pay their fair share of taxes, even if they had adopted legally acceptable methods to avoid taxes.
In the recent past, multinationals had scramble for damage control when they were discovered to be paying low amounts of taxes despite making millions or even billions annually.
A certain former President of the United States has also tried vigorously to prevent his tax records from being scrutinised publicly.
In some countries, paying taxes is a social norm and it will go against the fabric of society not pay taxes. This is not evident in a number of other countries, Malaysia included.
It was reported that Malaysia only has slightly more than 1.3 million individual taxpayers out of a population of more than 33.5 million, representing a mere 4.0 per cent of the whole population.
Our socialist approach to taxation where higher-income individuals pay more taxes may have contributed to our comparatively small number of taxpayers.
Many Malaysians have become complacent when it comes to dealing with income taxes and it may have inculcated a culture of resisting to pay taxes as evidenced by the rejection of the now repealed goods and services tax (GST) regime.
It is a double-edged sword to increase the number of taxpayers in view of the socialist agenda. How do we then get more people to pay taxes, be it income tax or consumption taxes such as GST or sales tax and service tax (SST)?
Tax reliefs and tax rebates
Tax reliefs and tax rebates are available to eligible individuals to reduce their chargeable income and tax payable respectively.
Tax reliefs are deducted against total income, reducing the chargeable income and corresponding income tax payable. Thereafter, individuals with chargeable income not exceeding RM35,000 are also entitled to deduct tax rebates from his or her income tax payable.
In practice, the total amount of tax reliefs claimable by an individual may exceed his total income for the year, resulting in no chargeable income and no income tax payable. If there is income tax payable, an individual may still not pay any income tax if he or she is entitled to sufficient tax rebates to deduct from his or her income tax payable.
Both tax reliefs and tax rebates may ultimately result in one not having to pay any income taxes but for different reasons. Crucially, the difference is an individual must be in a taxable position to deduct tax rebates, whereas an individual is not in a taxable position if there is no income tax payable due to excessive tax reliefs.
Tax reliefs may give the impression of not being subject to income tax. An individual can be delusional over time and it is not inconceivable that many such individuals remain in blissful ignorance about taxes.
Once this is ingrained, it can be challenging for the individual to accept paying taxes. Unlike tax reliefs, an individual has to have income tax payable to deduct the tax rebates against.
In essence, an individual is in a tax-paying position but he or she has sufficient tax rebates to set-off the income tax payable.
Advantages of Tax Rebates
Unbeknown to many, tax reliefs also benefit high-income individuals more due to the tax effects of progressive tax rates. If an individual claims tax relief of RM2,000 and his or her highest tax rate is 5.0 per cent, his or her income tax payable is reduced by RM100 (5.0 per cent x RM2,000).
However, a high-income individual with the highest tax rate of 30 per cent claiming the same tax relief would enjoy an income tax reduction of RM600 (30 per cent x RM2,000). There is an obvious disparity.
Tax rebates, however, work in the opposite. Notwithstanding that high-income individuals are not eligible for income tax rebates, they will also benefit less as each ringgit of tax rebate will set off against lesser chargeable income due to their higher income tax rates.
A tax rebate of RM450 set off against the income tax rate of 3.0 per cent translates to an equivalent chargeable income of only RM15,000 as compared to an equivalent chargeable income of RM45,000 for an income tax rate of 1.0 per cent. (Note: This is an academic example. In practice, the income tax rate of 1.0 per cent is only applicable to a band of chargeable income of RM15,000)
Despite the advantages of tax rebates over tax reliefs, the Malaysian tax system has given more emphasis to tax reliefs over the years.
The number of tax reliefs available for the year of assessment 2022 has increased to more than 20 types from only 13 types for the year of assessment 2001.
As a matter of fact, there were merely only six types of tax reliefs in the year of assessment 1994! The number of types of tax rebates on the other hand has essentially remained the same as far back as the 1970s even though the quantum has increased over the years.
It is unknown why successive governments have liberally introduced more types of tax reliefs over the years.
Perhaps tax rebates require an individual to be in tax paying position whereas tax reliefs have a feel-good factor of not being so. Unfortunately, the latter can sow a culture of not paying taxes.
Progressive Income Tax Rates
Our progressive income tax rates start at the rate of zero per cent for the initial chargeable income of up to RM5,000. In theory with the various tax reliefs and tax rebates, an individual will be earning well above RM37,000 per year of assessment before he or she has to pay any income tax. This amount of income is even higher if the individual is entitled to claim more tax reliefs.
The zero per cent initial tax bracket should be eliminated or reduced as far as possible to get more individuals into a tax-paying position. Subsequently, tax rebates can neutralise the tax payable for the poor and underprivileged. The notion of paying taxes can be inculcated with them being in a tax-paying position but still not pay any taxes.
Refunding Tax Rebates
Excess of tax reliefs over total income cannot available be carried forward to future years of assessment and excess of tax rebates over income tax payable are not refundable.
Low-income individuals are thus not incentivised to pay more attention to income taxes and may trivialise taxes.
When the individual eventually earns more and become taxable, taxes become a burden. In a way, this cultivates a negative perception towards taxation.
If excesses of tax rebates are refundable, it can help alleviate the negative perception towards taxation. The refunds will become a form of encouragement to become a taxpayer and many will be incentivised to be more involved as they could get refunds. This will auger well to increase the number of individual taxpayers.
These refunds may even be a form of targeted aid for the poor, not unlike Bantuan Rakyat 1 Malaysia (BR1M) and other similar programmes which are coincidentally also managed by the Inland Revenue Board of Malaysia.
Consumption Taxes
Consumption taxes in Malaysia take the form of SST and for a brief period, GST. As part of the socialist agenda, both SST and GST exempted or tax at preferential rates, certain goods and services that are deemed to be essential.
Consumption taxes work on the principle that an individual pays more taxes as he or she consumes more goods and services. Nonetheless, the weakness in exemptions and preferential rates is that the rich will equally enjoy them.
The rich may even benefit more as they have the financial ability to consume more goods and services.
Opponents of GST argued that it is regressive since the poor still had to pay GST on non-essential goods and services. Surprisingly, the same lens is not applied to SST even though the poor also pay SST.
One radical reform is to avoid exemptions and preferential rates although exports may still need to be zero-rated for purposes of overseas competitiveness.
Assistance for the poor can be alternatively channelled through targeted measures such as consumption tax rebates.
Exemptions and zero-rating are often the source of disputes between taxpayers and the authorities with differing opinions whether a good or service is taxable, exempted or zero-rated.
Their elimination will also aid to reduce such disputes as taxes are applied in the same manner across the board.
A good tax system should embody the principles of certainty and simplification, and they are unnecessary complications that we can do without.
Achieving Equilibrium Through Proportionality
Everyone should pay taxes in proportion to his or her ability. Proportionality is one of the four maxims of taxation laid down by Scottish economist and moral philosopher Adam Smith nearly 250 years ago.
The Goldilocks of paying a fair share of taxes – not more, not less; is still held in high regard as one of the guiding principles of good taxation.
Adversity to paying taxes has led to far too few paying taxes in Malaysia. Malaysians appear to beholden the government of the day not to collect taxes, be it income taxes or consumption taxes, leading to challenges to introduce reforms or changes.
Attempts to increase revenue or enlarge the tax base are often met with scepticism. Even well-heeled Malaysians will jump onto the bandwagon and sing the same chorus objecting to changes.
This is in contrast to certain countries where it is an acceptable norm to pay taxes regardless of one's standing in society.
Citizens of these countries often take pride in paying taxes and loathe those who do not.
When everyone pays taxes, there is a shared commitment to shoulder the burden. This will instill a sense of belonging as a responsible citizen of the nation as everyone is a stakeholder in the nation's well-being.
Civic consciousness could improve and when everyone has a sense of ownership, public apathy will be reduced and public involvement in societal matters will increase.
Paying taxes is not necessarily regressive as there are various means to address the needs of the poor and segments of the population who do not derive gainful income.
It is still possible to achieve proportionality and meet our socialist agenda with a bit of tweaking.
Malaysia is far from having a culture of paying taxes and we will likely face great resistance to shift towards it. While it appears to be a lofty target, it is achievable if we persist.
* The writer is senior executive director indirect tax & transfer pricing at Grant Thornton Malaysia.