This money does not simply vanish; it’s systematically drained from the nation’s coffers through various channels of leakage, ranging from customs fraud and corporate tax avoidance to a pervasive culture of corruption.
While the recently unveiled 13th Malaysia Plan aims for fiscal consolidation through measures to ensure the efficient use of public funds and plug leakages, these measures will achieve very little unless more is done to plug the gaping holes in Malaysia’s revenue streams.
An enormous shadow economy
While the precise scale of Malaysia’s revenue leakage problem is difficult to measure, a recent study published in the Journal of Financial Crime estimates that the size of the shadow economy averages almost a quarter of gross domestic product at RM118 billion.
Revenue leakage also occurs on a wide scale through non-compliance with tax laws.
Economist Geoffrey Williams attributes this in part to the administrative difficulties for small and medium enterprises in registering for and collecting the sales and service tax.
“People avoid tax because it is easy to do so, they simply under-declare their income or hide their true sales and revenues,” he said, adding that enforcement difficulties and low penalties further disincentivise compliance.
Lost customs and excise fraud
One of the most direct and costly forms of leakage is customs and excise fraud, to the tune of hundreds of millions every year.
Between 2018 and 2023, the Malaysian Anti-Corruption Commission (MACC) estimated that corruption had robbed the country of RM277 billion – an annual average of RM46 billion.
Putting the number into perspective, Williams told FMT that this annual average is equivalent to the entire public health budget.
“It could also pay three million people a monthly pension of RM1,500 or cut the (fiscal) deficit in half,” he added.
The finance ministry has estimated annual losses from the smuggling of high-duty goods alone at up to RM5 billion.
The curse of cronyism and corruption
The scale of the problem is amplified by direct complicity. MACC’s Op Sikaro operation uncovered a tobacco and cigar smuggling syndicate that caused a RM250 million tax loss, aided by “the cooperation of certain enforcement officers”.
Another investigation led to the arrest of 34 customs officers accused of receiving RM4.7 million in bribes, leading to RM1.5 billion to RM2 billion in losses over just two years.
Industry lobbying also muddies efforts to tighten loopholes. Market research links resistance to tobacco tax hikes with the flood of cheap, illicit cigarettes – creating a narrative that attributes the illicit trade problem to taxation rather than enforcement gaps, while undermining public health objectives.
Center to Combat Corruption and Cronyism chief executive Pushpan Murugiah said corruption and cronyism at high levels means that funds allocated to economic development instead languish in offshore bank accounts.
“That money is never re-circulated back into Malaysia to create economic opportunities and growth. Instead, it forms the revenue of foreign companies.”
The unseen costs of revenue leakage
Beyond the staggering numbers, the most damaging long-term effects of this leakage remains the corrosion of the nation’s institutional and social foundations.
Pusphan told FMT that the perception that the law is unequally applied will necessarily lead to low adherence to the law in general.
“Citizens may decide en masse not to pay their taxes, perhaps due to the perception that the wealthy minority who owe the most tax can get away with avoiding it, so why should everyone else pay theirs?”
There is also a market distortion that arises when businesses evade taxes with few to no consequences. These businesses gain an unfair competitive advantage over their law-abiding counterparts, penalising legitimate enterprises and fostering a market where illicit activity is perceived as a viable path to success.
The road ahead
To combat this problem, Malaysia has initiated a number of strategic countermeasures. A new capital gains tax on unlisted shares and a phased rollout of a nationwide e-invoicing system have been set out to boost compliance.
The government has also introduced public platforms like the e-Pelarian Cukai system which allows citizens to report tax evasion anonymously.
In terms of enforcement, the government has strengthened multi-agency cooperation, as seen in operations like Op Sikaro which involved MACC, the Inland Revenue Board, and the customs department.
The government has also been combating excise fraud through the use of enhanced tax stamps. These stamps, used on products like cigarettes and alcohol, serve as a verifiable tax and excise duty compliance mechanism by tracking the item from production to sale.
Many goods seized in customs raids lack these stamps, immediately identifying them as illicit.
A Malaysian-made solution for a Malaysian-led future
The solutions to Malaysia’s revenue challenges are not necessarily found abroad. Rather, they lie in an enhanced commitment to our inherent strengths.
Malaysia already possesses the keys: robust enforcement agencies like MACC and the customs department, a clear policy roadmap including the nationwide e-invoicing system, and the technological capacity to deploy advanced solutions like enhanced tax stamps.
The success of operations like Op Sikaro against corrupt officials and the detection of billions in leakage demonstrate that the will and ability to enforce the law exist. It is scaling these efforts, while ensuring accountability and consistency in stamping out the shadow economy, which is the true challenge.
By empowering its institutions, fostering a culture of integrity, and leveraging its digital infrastructure, Malaysia has everything it needs to chart its path to fiscal health.