The “Federal Government Revenue” section of the Budget 2024 report details that personal income tax is projected to contribute approximately RM40.8 billion.

Taxes on corporate revenue represent the largest share, at RM98.5 billion, amounting to just over half of all tax receipts.

The data highlights the government’s continuing reliance on tax contributions to sustain public spending and underscores the importance of diverse revenue streams.

These streams include consumption-based taxes such as the sales and service tax (SST), as well as potential mechanisms targeting personal wealth and inheritance.

The case for a consumption tax – such as the SST, which was reintroduced on Sept 1, 2018 and has now been expanded to cover more items – is compelling.

For a start, the income tax has many loopholes that enable taxpayers to reduce or avoid their obligations altogether.

On the other hand, the wealth tax is not only difficult to enforce but also raises capital flight risks, while the inheritance tax is like a sieve.

Ways to not pay

Income tax leaves a lot of room for manouvre and every taxpayer exploits it to the hilt.

Apart from personal relief and those for spouse and children, there are many other ways to get a “discount” on what you pay.

Purchases such as those for computers or tablets, fees for educational pursuits, healthcare costs and expenditure on personal disabilities are deductible expenses and they add up to a fair bit, relieving the taxpayer of a bigger tax bill.

Then there are those in the informal economy, such as gig workers, who do not declare their income and therefore, do not pay anything.

HR Asia, an Asian online publication for HR professionals, citing data from the statistics department, said in an April 9, 2025 report that gig workers already accounted for more than a quarter of the Malaysian workforce as of December 2023.

The under-declaration of income and over-declaration of expenditure to get more personal tax relief, coupled with the failure to account for gig workers, leaves a large deposit of potential revenue that remains uncollected by the federal government.

But going forward, the introduction of e-invoicing is expected to minimise incidence of under-declaring of income and over-claiming of expenses.

The shortcomings of other taxes

The idea of imposing taxes on personal wealth and inheritance has been bandied about quite a bit.

Its proponents, such as Lidy Nacpil, a coordinator for the Asian People’s Movement on Debt and Development, and former Klang MP Charles Santiago, see it as an effective way to raise revenue without adding to the burden on the middle and low-income groups.

It is politically appealing given the view that only the wealthy will pay despite the fact that it does not actually reduce real income inequality.

Wealth redistribution occurs through other mechanisms, such as public sector employment and preferential policies, while government interventions to rebalance economic power have benefited only the elite within the target groups rather than the genuinely poor.

Therefore, a wealth tax may shift wealth among the elites but is unlikely to bridge the urban-rural income divide meaningfully.

Besides this, the tax on wealth has often already been levied through income tax, capital gains tax or stamp duties, leading to double taxation if it is also imposed.

This invariably encourages the wealthy to restructure their assets through trusts, offshore entities and gifting to avoid the tax.

Tax experts have also highlighted the fact that Malaysia lacks the enforcement infrastructure, reliable asset registries, and valuation capacity to administer such a tax effectively.

The inheritance tax is not much better. Assets can be transferred to heirs or trusts before death while legal structures can be used to shield wealth.

Holders of movable or offshore assets can also under-declare their value.

At the same time, it needs a lot of resources to enforce so it may not justify the revenue gained.

The way out

Data from the Inland Revenue Board (LHDN) shows that from 2016 to 2022, an average of only 17.8% to 19% of Malaysians in the workforce pay income tax, underscoring the imperative for a wider tax base.

The consumption tax, in the form of the SST, ensures everyone contributes his share to the government coffers, a necessity given our rising expenditure and widening deficit.

Under Budget 2025, the government has allocated RM421 billion for expenditure, a 3.3% increase over the previous budget.

This is expected to narrow the budget deficit to 3.8% of the GDP, lower than the 4.1% under Budget 2024 but a deficit nonetheless.

The SST offers several advantages. It is a broad-based and stable source of revenue compared with a volatile petroleum income or narrow income tax base. Even those in the informal sector and tourists are not exempted.

The government is expected to raise an additional RM10 billion annually from expanding the SST to cover many more classes of goods and services.

Despite concerns expressed by some quarters, RHB Investment Bank has pointed out that the SST is expanded to include only discretionary or non-essential items, such as luxury goods, entertainment and certain lifestyle services, leaving only limited impact on inflation.

For the SST to remain viable and fair, basic goods and services should remain exempt or zero-rated to protect the poor, while enforcement should leverage on digital tools and e-commerce tracking.

Avoiding the pitfalls

Any policy to ensure the nation’s fiscal sustainability, including the SST, will fail if there is no accountability.

Recent history has shown that while revenue can be raised, it can also be easily squandered through leakages at the top due to poor governance and abuse of power.

Plugging leakages and restoring public trust are more important than introducing new taxes or expanding the scope of the SST.

A fair and efficient tax system can only work when revenue is managed with integrity.