Prime Minister Anwar Ibrahim, who tabled the 2025 budget yesterday, said the government plans to progressively broaden the tax base with measures such as the 2% tax on dividend income of over RM100,000 earned by individual shareholders.
Three economists said the move is aimed at addressing potential tax avoidance by SME owners who may opt to receive income through dividends rather than salaries.
Malaysian Economic Association president Yeah Kim Leng said the proposal will close the loophole where SME owners evade taxes through not paying themselves salaries, and instead, earn income from their company’s dividends.
Universiti Malaya’s Goh Lim Thye said the proposal will equalise the tax on wage earners and passive income earners as dividend income received by individual shareholders is currently not taxed.
However, he said, the proposal may not significantly boost tax revenue given the small number of SME owners who might receive more than RM100,000 in dividends.
“Only a fraction of the shareholders who are holding a significant number of shares in public-listed companies will likely receive RM100,000 in dividends, perhaps, the top 10%,” he said.
Barjoyai Bardai of the Malaysia University of Science and Technology held a different view, saying many potential taxpayers live on dividends alone and have never paid any income tax.
“This is because they are not eligible to pay taxes as they don’t have any taxable income,” he said.
“So, when we include dividends as a taxable income, we increase the tax base. In the long term, we should be able to collect a lot of revenue from this dividend tax,” he said.
He also said the dividend tax, along with the capital gains tax introduced in March, are like “twin taxes” that will ensure potential tax evaders have to pay tax either way.
“Even if the companies decide not to declare any dividends, they will still have to pay the capital gains tax when they sell their shares to reap profits,” he said.
Another economist, Geoffrey Williams, said this tax may lead to double taxation.
“If they are SME owners, the company belongs to them… so the company’s income is their income too. The company is already taxed, and with this proposal, they’d get double taxation. Tax on profit and tax on their income,” he said.
Exemptions will be granted to dividend income from foreign sources; dividends distributed from the profits of pioneer-status companies and reinvestment allowance; dividends paid, credited, or distributed from the profits of tax-exempted shipping companies and dividends distributed by cooperatives.
The exemptions will also be applicable to dividends declared by closed-end funds; dividends received by residents from Labuan entities; and any pre-existing exemptions on dividends at the shareholder level.
The tax does not apply to profit distributions made to contributors and depositors of EPF, the Armed Forces Fund Board (LTAT), Amanah Saham Nasional Bumiputera, or any unit trusts.
In the budget, the ministry said the government’s total revenue is forecast to rise by 5.5% to RM339.7 billion, driven by favourable economic prospects and reforms aimed at enhancing tax collection.
It said this increase is primarily driven by a 6.6% growth in direct tax collection, amounting to RM188.8 billion, alongside a 9.8% rise in indirect tax, bringing the total to RM70.2 billion.