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TAX AND REVENUE TRENDS AND IMPLICATIONS IN MALAYSIA
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Business and Management Quarterly Review, 8(2), 1-14, 2017
ISSN 2180-2777
TAX AND REVENUE TRENDS AND IMPLICATIONS IN MALAYSIA
Juliana Mohd Abdul Kadir
University of Malaya/Universiti Teknologi MARA, Johor
Mohamed Aslam and Zarinah Yusof
University of Malaya
ABSTRACT
This paper aims to fill the gap in the existing literature related to tax reform in Malaysia. The study focuses
through two major perspectives. First, we discuss the tax reforms in selected Asian countries like India,
China, Thailand and Indonesia. Second, we examine the trend of tax revenues and forecast their amount for
5 years onwards. For analysis, we apply a linear trend line to calculate the least square fit. From the
findings, the study proves that majority of taxes show an increasing trend. Besides that, the forecasting of
tax revenues also shows that there are some improvements between 2014 and 2018; except for the case of
import duties. These findings have profound implications for Malaysia tax system. Our calculations suggest
that the sales tax revenue could improve between 2014 and 2018 but it would be slower than the other taxes.
Hence, with the introduction of the GST by the Malaysian government, it is hoped that this consumption tax
(i.e. GST) would bring more benefit to the country. In addition, the findings are supported by the Laffer
curve theory and the curve can be applied for both direct and indirect taxes in Malaysia. Therefore, the
government should set the rate below the optimal level to maximise its revenue.
Keywords: Tax reform, Tax revenue, Trend line, Forecast, Malaysia.
INTRODUCTION
Despite more than 30 years of studies on tax reforms, questions such as whether it is significant to tax
revenue remains largely unanswered. Not only that, how tax reform relates to the economic performance
still remains unclear. In fact, the reform is applied to overcome the weaknesses in the current tax system. In
Malaysia, GST is implemented to overcome the inherent weaknesses in the sales and services taxes system
since it has a very narrow scope; and at the same time, it aims to broaden the country’s revenue base (Tan,
2012). There remains intense debate among economists and policymakers over the decision making of
whether to cut a tax rate or to cut its spending. Tax cuts are possible to increase growth which will
accelerate the economy in short runs and enlarge output growth in the long runs. On the other hand, the
option of cutting down on spending would decrease the government deficits and debts. However, Romer and
Romer (2007) claimed that reduces in tax rate can increase the rate of interest and decrease the output in
both periods. The main goal of tax systems is to fulfil the equity and efficiency requirements. The steps
taken by the Latin American governments after World War II were to achieve the vertical equity aim where
the rich should shoulder a much heavier burden of taxes than the bottom group. Due to the Latin American
debt crisis in the 1980s, tax system was required in order to settle the fiscal imbalances. Tax reform was
needed since there was a constraint to foreign capital.
Therefore, Brill and Hassett (2007) and Sanchez, (2006) suggested that different types of taxes applied
by any countries must corresponds to the original purpose of tax creation. In a neo-classical theory, Emanual
J. Mutt and Arthur Laffer recommended that tax should be imposed as low as possible and relevant tax
exemption should be given to firms. High tax imposed on firms would hamper the economic development and
restraint the firms’ investment capability. This would reduce production level and subsequently lead to
recession. Laffer has suggested the relationship between the tax rates and tax revenue. This is known as a
Laffer Curve Theory. According to him, high tax rate leads to high tax revenue only up to a certain level, and
will then begin to decline. Tax rate that is too high will discourages production and decreases taxable
income. In general, most of the early researches on tax reform have done the descriptive analysis rather
than analytical assessment. Most of them focused on evaluating the goals in terms of revenue adequacy,
economic efficiency, equity and simplicity (Owens, 2005). Previous studies have paid little attention to the
effects of tax reform on tax revenue. Therefore, this study seeks to fill the gap in the existing literature by
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ISSN 2180-2777
analysing the case of Malaysia in a different manner and discuss some reforms taken from other Asian
countries; India, China, Thailand and Indonesia. The reason why we observe these Asian countries is that
the countries are located in the same Asian region, therefore it could be presumed that all countries have
similar factors in terms of national geopolitical, geographical, historical and social context that are similar to
the Malaysia. These factors would be a good benchmark cases for Malaysia to learn from especially related
to tax reform.
This paper addresses two main areas. We proceed by addressing two basic objectives. First, we discuss
the tax reforms in selected Asian countries such as India, China, Thailand and Indonesia. Second, we
examine the trend of tax revenues and forecast their amount for 5 years onwards. In this study, tax reform
is referred to the changes in the tax rate. We choose certain types of taxes to be studied such as tax corporate
and individual income tax for direct taxes and import and sales tax for indirect taxes. The revenue trend and
its forecast amount can assist the government in measuring further economic and tax policy plan. Our paper
proceeds as follows. In Section 2, we presents literature survey. Section 3 discusses the data and analysis.
Section 4 describes the reforms and reports the findings. Finally, Section 5 presents the conclusions and
recommendations of the study.
LITERATURE REVIEW
Taxes constitute an important instrument for generating revenue for the government. Besides the economic
motive, Jorge and McNab (2000) identified that taxes are also used to meet the socio-economic goals in terms
of transferring resources from the private to the public sector; distributing government expenditure fairly by
income group, vertical equity; and among people with the same economic circumstances, horizontal equity;
and promoting growth, stability and efficiency of the economy. However, tax systems in developing countries
differ from those of the advanced countries. This is due to the lack of a modern tax administration and
limited number of taxpayers in developing countries as mentioned in Amir et al. (2013). On the other hand,
Di John (2006) found that developing countries’ economies are dependent on the agricultural, small
enterprises and informal sectors. Their contribution of total wages to the national income is small and the
share of the total expenditure of large enterprises is small as well. He conducted the study in many middle
income countries. By critically reviewing and analysing all relevant literatures and theories, he
demonstrated that indirect taxes, particularly the VAT, are one of the most regressive taxes. Not only that,
VAT also contributes to a relatively higher share of overall tax burden in Latin America. He recommended
that countries experiencing a serious unequal income distribution needs to diversify their revenue,
particularly from direct taxes, by applying progressive income tax and property tax in the long run. Revenue
effects of tax reform are hardly considered in the literature. There are few existing studies that consider this
relationship. Generally, from experience, we can lessen the successes and failures of the reform undertaken
since not all countries have the same changes, and are mostly differ in terms of context, process, substance
and timing. Pagan, Soydemir, and Tijerina-Guajardo (2001) found in their study that the majority of the
literatures stated a positive relationship between tax rate and government revenue.
They investigated the impact of increment of GST rate from 10 percent to 15 percent in Mexico. The
Mexican government has increased the rate of GST due to the Mexico Peso crisis in 1994. They estimated
the model by using impulse response and variance decomposition methods. Their result showed that the
government revenue has increased due to the increment of the GST rate. The similar pattern appeared in
the case of Nigeria, when the VAT was introduced in 2009. Onaolapo, Aworemi, & Ajala (2013) examined the
impact of VAT on revenue generation by using stepwise regression analysis. The result indicated that the
VAT has increased the government revenue in Nigeria. They also recommended that the government should
try to improve the method of collecting taxes to ensure honesty and compliance towards taxes payment. In
addition, in 2000, Indonesian government introduced VAT to increase the tax revenue. Amir et al. (2013)
evaluated the impacts of VAT introduction on key macroeconomic variables, as well as the impacts on
poverty and income distribution. They stated that the VAT contributed to 32 percent of total tax revenue
and 55 percent of total government revenue in 2008. The policy reforms have also led to a small reduction in
the incidence of poverty. However, the policy had also led to an increase in income inequality. Keen and
Lockwood (2010) examined the factors and impacts of the increased in the VAT rate on effectiveness of
national tax systems. The analysis used panel data regression for 143 countries and a 25 years’ series. VAT
introduction had reduced the marginal cost of public funds. Their study revealed that VAT is the most
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ISSN 2180-2777
effective instrument in generating revenue for the government. They showed that it could increase up to 4.5
percent of revenue-to-GDP in the developed and more open countries in the long run. Huizinga (2002)
studied the impact of VAT exemption on financial services and businesses in European Union in 1998. He
estimated the different rates of VAT to be charged to households and businesses. From the finding, he
pointed out that VAT exemption will significantly increase total VAT revenues by 4.7 percent. However,
there is little impact on overall welfare with the increased in the price of financial services. Dietl, Jaag,
Lang, Lutzenberger, and Trinkner (2010) also performed a study on European Union examining the impact
of VAT exemption. The analysis used simulation. From the finding, they found that there were opposing
impacts of VAT exemption. The VAT exemption brings negative impact on tax revenue and positive impact
on consumer surplus and welfare. Another article investigated the efficiency and distributional impacts of
the VAT reform in Germany. Boeters, Böhringer, Büttner, & Kraus (2010) applied general equilibrium
(AGE) approach to examine the VAT differentiation, which has been imposed in the country. To develop the
model, they used Input–Output Table for 1997, the production–consumption transition matrix (Z-matrix)
and the German Income and Expenditure Survey. They found out that this policy has improved several
macroeconomic indicators such as gross domestic product (GDP), employment, domestic capital, and
aggregate consumption, thus increased public welfare. They brought up some cases; firstly, the elimination
of the reduced VAT rate has caused small redistributive effects. Therefore, VAT differentiation can be
considered as an important factor of redistribution. However, it has a small effect on the industry output, so
the different rates of VAT should be transformed into subsidy for some industries rather than being
instruments of redistribution.
Secondly, the VAT reforms have insignificant impact on welfare and thirdly, the introduction of a
revenue-neutral of a harmonized VAT combined with reductions in the marginal income tax rates or social
security contributions bring extensive welfare gains to the people. Buettner and Erbe (2014) studied the
impact of abolishing the VAT exemption on consumer and intermediate-input demand for financial services
in OECD countries. Their result showed that the tax revenue increases from three aspects, which are the
taxation of consumers, taxation of financial services and labor market responses. Furthermore, they
provided empirical test by using the case of Germany. Abolition of VAT exemption of the three categories of
services was able to increase 1.3 percent of revenue. In addition, the welfare also increased to about 0.04
percent of GDP. Lockwood (2011) looked at the impact of VAT on tax revenue for 26 European Union
countries for 2007. Based on data for 2007, he found that the VAT revenues are down 0.06 percent when the
VAT was implemented. In Brazil, Pereira and Teixeira (2010) examined the impact of indirect tax on the
economy. From the finding, they proved that the reduction of indirect taxes has improved the country
economic performance. The study also showed that a reduction of 10 percent in indirect taxes on final and
intermediate goods would improve the economic growth by 0.05 percent to 0.19 percent and welfare from
US$ 2.26b to US$ 3.20b. From the studies of developed and developing countries, the results show the
increase in tax rate has led to an increase in the tax revenue. However, as for tax exemption, some cases in
European countries proved that it has increased in revenue and some showed that it has increased in
consumption and welfare but reduced revenue.
DATA AND ANALYSIS
The data include direct and indirect tax revenues. They were collected from Bank Negara Malaysia in 2014
and various issues of Malaysian Economic Report from 1960-2013. Both types of taxes will affect tax revenue
depends on the applied rates. Specifically, as there is a change in the tax rate, the effect would be seen in the
tax revenue. The trend line is an important analysis to examine the impact of tax reform on its revenues. In
addition, the trend line is applied in this study to forecast the future trend for each tax revenue. Based on
the trend line analysis, it can indicate either the revenue is increasing or decreasing. We obtained an exact
forecast amount for the particular tax revenue by applying a linear trend line to calculate the least square fit
for a line based on the data given. Excel was used to find the line that best fits the points. The following
equation describes the general trend line applied in this study.
t
where is the tax revenue; is the intercept;
slope, and t is the time/year. We considered t 0, for
the starting year of estimation. The trend line shows which direction the tax revenue is going. On the basis
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of this, we generated four trend lines for each tax chosen in this study that can be found from Equations 1 to
4 in Section 4.
Tax Revenue in Selected Countries
We have included countries in the South and East Asia - Malaysia, India, China, Thailand and Indonesia
where some reforms on other tax system have been implemented. These countries have their own history
and reasons behind the reformation in the tax system. A comparison can be made among these countries
since they are considered as developing countries and located in the same region as well. Table 1 shows the
share of tax revenue-to-GDP of these five countries from 2005 to 2012.
Table 1: Tax revenue-to-GDP for selected countries, 2005-2012
2005
2006
2007
2008
2009
2010
2011
2012
India
9.91
11.03
11.89
10.75
9.64
10.19
8.80
10.66
China
8.68
9.19
9.93
10.27
10.54
10.48
10.64
10.70
Thailand
17.24
16.74
16.12
16.45
15.16
15.97
17.55
16.50
Indonesia
12.50
12.25
12.43
13.04
11.43
10.85
11.77
11.80
Malaysia
14.83
14.52
14.30
14.66
14.94
13.74
15.24
16.10
Source: World Bank (2014)
From the table, it is shown that there has been a rising trend in tax revenue-to-GDP in most of the
countries. The biggest contribution was experienced by Thailand, at 16.50 percent in 2012. Thailand enjoyed
its peak of 17.55 percent in 2011, after being improved from 15.97 percent in 2010. Malaysia shows the next
highest share, which rose from 14.83 percent in 2005 to 16.10 percent in 2012. Indonesia contributed more
from 2005 to 2008, with an average of 12.56 percent. The remaining two countries, India and China indicate
a reasonable share from 8 percent to 12 percent between 2005 and 2012. Therefore, we found that tax ratio
in Malaysia is relatively high compared to other countries in the region, excluding Thailand.
Reform of Direct Taxes
This section discusses the reformation of direct taxes in the selected countries. According to Ahluwalia
(2002), India began to implement tax reform at the central government when the country faced high debt
and fiscal deficits in 1991. To overcome the problems, Rao (2000) mentioned that the reform in 1992-1993
managed to reduce the rate of individual and corporate taxes. The reform has simplified the tax system to
discourage tax evasion; expand the tax base by reducing exemptions and transform domestic production tax
into a value-added tax. The outcomes from the reform increased personal and corporate income taxes
revenue. In the 1991 reform, there was maximum reduction in personal and corporate tax rates. In the case
of personal income taxes, besides increasing the exemption items, the tax rates were drastically reduced and
workers were not subjected to pay income tax should their wages fall below the maximum earning of Rs75,
000. In addition, according to Rao (2000), for corporate income taxes, they have broadened the base and
reduced the rates to 35 and 48 percent on both domestic and foreign companies respectively. After a few
years, in 1994, China also reformed its tax system. As noted by Toh and Lin (2005), China tried to increase
the ratio of tax revenue-to-GDP and centralised the distribution of total revenues. Whalley and Wang (2007)
also highlighted the reformation in the tax system that was implemented by integrating the income tax
rates for different types of enterprises and personal income taxes. This is because, prior to 1994, China
experienced low ratio of tax revenues to GDP as compared to other developing nations with even lower per
capita income, higher prices of electricity, raw materials and oil, higher bank loan interest rate and trade
deficit. However, in the second half of the 1990s, the tax revenue growth was greater than, or at least, the
same with nominal GDP growth. This situation actually affects the changes in the share of three main
sectors; agricultural, industrial and service sectors. The abolition of agricultural tax reduced and replaced
the shares with the contribution from other economic sectors. In addition, Brys et al. (2013) proved that
China’s tax system was in the lead in terms of corporate tax revenue, in which non-resident businesses
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ISSN 2180-2777
contributed a 31.8 percent to tax revenue in 2008. Furthermore, Kennedy (2007) reported that the
government tried to help reduce the farmers’ burden in 2000 by launching a tax-for-fees program to
eliminate various unofficial fees. The initiative was proven to reduce 620 farmers’ burden by at least 30
percent. Up till 2013, Hale (2014) mentioned in his study that the government tried to applied same policy
on farmers since it remains a major challenge in China. On the other hand, with high global interest rates,
decreasing prices and demand of export commodity due to the 1997 Asian financial crisis, Thailand faced an
entirely different situation. Field and Wongwatanasin (2007) observed that a lot of firms were not able to
pay taxes, while informal sectors were trying to avoid from paying taxes. The government tried to increase
tax payment compliance by implementing various schemes, for instance, focusing on VAT refunds,
simplifying taxes, enhancing tax administration, and simplifying requirement for new set-up business.
However, Field and Wongwatanasin (2007) again noted that the government assistance to the local
industries was relatively low, compared to the high-performing Asian economies (HPAEs), Hong Kong, The
Republic of Korea, Singapore and Taiwan. These countries’ export and economic growths were growing fast,
which led to inequality in income distribution. Up to the year 2005, Thailand has implemented more tax
reforms, by introducing new tax rates for personal income at 55 percent, business tax at 50 percent and
corporate tax at 30 percent.
In addition, Indonesia was also affected by the Asian financial crisis. Compared to Thailand, Hill
(2000) stated that the Indonesian economy faced a decline of 13.1 percent in 1998. Besides that,
unemployment also increased from 3 percent (1996) to 6.3 percent (1999) along with poverty and unequal
income distribution. Ikhsan, Trialdi and Syahrial (2005) addressed that the government has effectively
focused on revenue from taxes to achieve fiscal sustainability in order to solve challenges such as financial
problem, inflation and low growth. This is because one of the big challenges faced by the country was the
decrease in oil and natural gas revenues. However, the number of taxpayers was still low, and with the high
element of tax evasion, the tax revenue-to-GDP ratio was low as compared to other developing countries.
Furthermore, the corporate revenue was also very low as compared to other countries since 98 percent of
Indonesian companies were controlled by small and micro enterprises. The majority of them are agriculture
and small petty trading units and mostly were not registered companies. In 2007, the Indonesian corporate
tax rate was planned to be reduced at 28 percent and 25 percent in 2010. Also, the government proposed to
simplify the corporate tax rate into one rate and a single rate of 10 percent or 15 percent for the small
enterprises with a turnover of 2 billion Rupiah in order to avoid tax evasion among SMEs. In the earlier of
21st century, Indonesia succeeded in increasing the government revenue but did not achieve their optimal
level. In 2000, the government focused on reforming income tax. While in 2008, amendments were
implemented by adjusting the marginal tax rates and imposing flat rate towards income and corporate taxes
respectively.
Malaysia has implemented many tax system adjustments over the last 50 years. Based on a study by
Cameron et al. (2010), tax reform which is called the incremental approach, has introduced several minor
steps of tax modification, which mostly focused on a predetermined target affecting a single tax. Narayanan
(2007) demonstrated that the government revenue has largely come from direct taxes compared to indirect
taxes since 1982. The differences in the amounts between them became larger as the years passed, and were
affected by the growing economy in the 1980s, which concentrated more on heavy and manufacturing
industries. Singh (2002) argued that the growth in the total tax revenue however, was reduced from 1985 to
1989 due to two reasons; the fluctuation in the price of petroleum; and the increase in tax exemption and tax
incentives for the private sectors to encourage more capital formation. However, from 2001 onwards and up
to 2012, the total direct taxes continuously contributed to half of the government’s revenue with an average
of 51.45 percent. In 2002, the Malaysian government designed and implemented several policies and
strategies through the Pre-emptive Stimulus Package to minimise the negative impact of the external
recession. As noted in the Economic Report 2002/2003, the policies includes the alteration of corporate tax
with a 70 percent exemption for pioneer status; and an increase in exemption from 10 percent to 20 percent
to promote the export of local products. In addition, several direct tax modifications were introduced for: (1)
corporate tax in 1998, 2002 and 2009; and (2) individual income tax from 2003-2005 which are discussed
below.
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Corporate Tax
According to the Economic Report 1998/1999 in the 1998 Malaysian Budget, it was announced that the
corporate tax rate has to be lowered to 28 percent from 30 percent. Again in 2002, the rate was reduced to 20
percent because Malaysia had imposed a much higher rate compared to the other ASEAN countries in that
same year (Swire, 2007). The corporate tax rate was slightly reduced from 1986 to 1989; however, the rate
was drastically increased from 1990 (RM4, 497) to 1998 (RM17, 294). Subsequently, in 1999 and 2000 it was
again reduced, but, thereafter continued to be increased up until 2012 (RM51, 288). In 2009, the rate was
imposed at 25 percent with the introduction of the present year basis of assessment and self-assessment
system (SAS). Palil, Hamid, and Hanafiah (2013) claimed that SAS were introduced to upgrade the tax
administration and enhance voluntary compliance.
RM m
Changes in Corporate Tax Rates
35000
30000
25000
20000
15000
10000
5000
0
28%
25%
30%
25%
20%
20%
15%
10%
5%
corporate tax
Reform
0%
1998
2002
2009
Years
Figure 1: Corporate Tax for 1998, 2002 and 2009
Source: Bank Negara Malaysia (2014) and Various Issues of Economic Report (1960-2013)
Based on Figure 1, the corporate tax revenue in 1998 was RM17, 294m with an imposed rate of 28
percent; however, after the rate was reduced to 20 percent in 2002, the revenue increased to RM24, 642m.
The red line shows the downward trend of the rates and the opposite trend of tax revenue. On the other
hand, in 2009, the trend exhibit a direct effect, as the rate increased to 25 percent, the revenue also
increased to RM30, 199m. From the graph it is clear that, when the rate was reduced to 20 percent (2002),
the revenue increased continuously for the year 2002 and 2009. The slight increase in the rate might be the
result of a large number of companies paying taxes. For forecasting the corporate tax revenue ( ), we refer
to Equation 1 below:
t Equation 1
Based on Equation 1, the starting year was considered to be 1998 when t 0. The amount of corporate
tax revenue for 2014 (t = 16) is RM49, 238.90m. In 2018 (t = 20), it is forecasted to increase up to RM59,
289.70m. The forecasted value of revenue increased with an average of 20.41 percent over the five years
period of estimation. The graph plotted below depicts the trend of the corporate tax revenue in Figure 2.
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ISSN 2180-2777
Corporate Tax
RM m
80,000
R1= 9035.7 + 2512.7t
60,000
40,000
corporate tax
20,000
Linear (corporate tax)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
0
Years
Figure 2: Trend line and Forecast for Corporate Tax Revenue
The figure above describes the trend line with an upward slope from 1998 to 2013 while the corporate
tax revenue itself fluctuated. Based on the graph, it can be estimated that the revenue will continue to
increase for the first five years after 2013.
Individual Income Tax
Individual income tax has been collected since the 1960s with a small tax base rate imposed. A study by
Chen (2012) indicated that in 1985, the revenue was contributed by only 13 percent of the total number of
employees, and in 1986-1998, the number of taxpayers increased twice as much compared to the population
increase. In the 1991 Budget based on the Economic Report 1998/1999, the rate was reduced from 40 to 35
percent and 5 to 4 percent for the top and lowest personal income tax rates, respectively. The average income
tax revenue from 1992-2002 was RM6, 429m, which increased to RM13, 901m from 2003-2012 as reported by
Bank Negara Malaysia (2014). In addition, Fatt et al. (2011) explained that in 2004, the individual income
tax was liberalized by the introduction of SAS. These changes led to a rise in the income tax revenue, as
shown in Figure 3.
9,500
Changes in Income Tax Rates and
SAS Implementation
During
RM m
9,000
After
8,500
8,000
Before
7,500
7,000
2003
2004
Years
2005
Figure 3: Income Tax 2003-2005
Source: Bank Negara Malaysia (2014) and Various Issues of Economic Report (1960-2013)
The graph reveals the income tax revenue before (2003), during (2004) and after (2005) the
introduction of SAS in Figure 3. The revenue was RM7, 984m in 2003 and steadily increased to RM8, 977m
in 2004. However, the amount was slightly reduced to RM8, 649m in 2005. This also shows that the revenue
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contributed during and after the implementation of SAS was much higher than before it was introduced.
Equation 2 shows the trend for income tax revenue ( ).
t
Equation 2
Based on Equation 2, 1999 (t = 0); the income tax revenue was predicted to be RM21, 376m in 2014
and the amount will keep increasing until 2018 with RM26, 169.20m, as described in Figure 4.
Income Tax
30,000
R2 = 3401.5 + 1198.3t
RM m
25,000
20,000
15,000
Income Tax
10,000
Linear (Income Tax)
5,000
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2018
0
Years
Figure 4: Trendline and Forecast for Income Tax Revenue
The income tax trend line shows that it experienced an upward slope from 1999 to 2013 with a small
fluctuation in the revenue as shown in Figure 4. A forecast of the amount of revenue for the first five years
shows an improvement with an average of 22.42 percent.
Reform of Indirect Taxes
In the 1990s, India managed to reduce excise, import and tariffs; and retained a progressive tax during the
reformation period. This reform lessened the indirect tax revenues but it was offset by the increase in direct
tax to GDP from 14 percent (1990) to 24 percent (1997) during the reformation period. However, by 2005,
Acharya (2005) identified that the tax structure has been extensively reformed particularly at the central
planning. Import duties were relatively low during 1970-1992 thus brought more revenue to the government.
After the economic crisis in 1991, the tax reformation committee had set up three major plans: to decrease
the trade taxes revenue, to increase the consumption taxes revenue by replacing excise duties into VAT; and
lastly, to increase the direct taxes revenue. Therefore, the lower rate in import duties after the 1992-1993
reform had reduced the tax revenue. Not only that, even the revenue from excise duties share was reduced
at a much quicker pace. The maximum rate was between 1997 and 1998, at 40 percent but it has been
planned to be reduced, emulating other South-East Asian countries with a lower rate. In 1991, the tax on
selective services was introduced, but the central government only started to implement that in 1994. The
tax was imposed on telephones, non-life insurance and stock brokerage, and later the base has been
broadened and covers many items in the market. However, Whalley and Wang (2007) described that the
reformation in the indirect tax system in China was implemented by broadening a scope of the VAT, and
abolishing the tax on products, since it had the redundancy of both of these taxes. China was weak in
indirect tax system since the burden was unequal and brought negative impact towards firms and publics.
This is due to its complicated tax system that was controlled by the central government that is incompatible
within its own market system. Therefore, based on Toh and Lin (2005), China switched the tax on products
to VAT in 1994. The goal was to promote a market-oriented economic development.
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In Thailand, the government implemented a part of 1990s economic and financial reforms with VAT
introduction in 1992 as a tax modification. In 1997-1998, Sujjapongse (2005) explained that the government
tried to reduce the deficit and social impact of the crisis as well as stimulating the economy to reduce the
budget, increasing the rate of VAT from 7 percent to 10 percent, increasing the excise taxes and import
duties, and imposing taxes on luxury consumer goods. The government also helped small firms by giving
them an exemption of 1.8 million Baht of annual sales amount, as noted in the study by Sriwan, Kobkit, and
Dussadee (2006). In 1999, the government aggressively increased fiscal decentralisation in order to reduce
overlapped tasks between local and central; this is done in order to increase the government revenue as well.
Besides that, in the same year, the government had increased selection of excise taxes, reduced import tariff
and managed fixed asset depreciation to increase investment opportunity. Sujjapongse (2005) again said
that the reform of the customs tariff structure in 2002 was structured with the imposition of three ranges of
rates, 1 percent, 5 percent and 10 percent. In 2004, the average tariff for general international trade was
11.46 percent; while for the WTO member, the rate was fixed at 10.71 percent. Evidence found by Amir et al.
(2013) stated that Indonesia is still implementing the fiscal adjustment programs with modifying VAT and
luxury sales tax introduced in the 2000s. Generally, Indonesia applies a 10 percent of single rate tax and
imposes 5-25 percent for additional luxury VAT. Changing and adjusting the tariff rate is very competitive
and politically very difficult based on experience from Thailand and Batam. Therefore, it is better to
maintain the tax rate at a minimum or remove the exemption in order to reduce tax distortions. Besides
that, increasing tax compliance and reducing tax evasion are also important parts in a tax administration
that have been applied. Similar to other developing countries, Bank Negara Malaysia (2014) reported that
from the 1960s to 1981, Malaysia relied more heavily on indirect tax rather than a direct tax, as indicated in
Figure 5.
Ratio of Taxes to Government Revenue,
1963-2012 (%)
100
Percentage
80
60
Total Taxes
40
Direct Taxes
20
Indirect Taxes
2011
2007
2003
1999
1995
1991
1987
1983
1979
1975
1971
1967
1963
0
Years
Figure 5: Ratio of Taxes to Government Revenue
Source: Various Issues of Economic Report (1960-2013)
For instance, in 1963, the percentages for indirect tax and direct tax to the government revenue were
more than double, at 58.7 percent and 20.9 percent, respectively. However, in 1981, these percentages were
respectively reduced to 41.0 percent and 38.7 percent. This shows that in the period of 1975 to 1981,
although indirect tax rate was still higher than direct tax as demonstrated in Economic Report 2013/2014,
but the differences had been reduced. The current issue of tax reform was announced by the Prime Minister
of Malaysia in the 2014 budget with the introduction of a new tax, the GST, enforced on 1st April 2015 at a 6
percent rate, to replace the sales and services tax (GST Malaysia, 2014). In a discussion below, we will
explain the indirect tax modification focusing on: (1) import duties from 2011-2012; and (2) sales tax from
2001-2002.
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Business and Management Quarterly Review, 8(2), 1-14, 2017
ISSN 2180-2777
Import Duties
In 2011, the rate imposed for import duties was 25 percent with collected revenue of RM 2, 026m. The
imposed tax rate continued to steadily increase to 30% in 2012 which then also caused the increment of the
revenue to RM 2, 282m, as illustrated in Figure 6. The relationship between the tax rate and tax revenue
was positive, as the rate increased, the revenue from import duties also increased.
Change in Import Duties Rates
2400
2300
RM m
32%
30%
30%
2200
2100
2000
28%
25%
1900
1800
26%
Import Duties
24%
Reform
22%
2011
2012
Years
Figure 6: Import Duties for 2011-2012
Source: Bank Negara Malaysia (2014) and Various Issues of Economic Report (1960-2013)
Figure 6 shows that the relationship between the tax rate and tax revenue was positive, as the rate
increases, the import tax revenue also increases. The proportion of import duties to the total indirect taxes
in 2012 was 6.57 percent, which was a small increment from 6.20 percent the year before. Equation 3 shows
the forecasting revenue for the import duties.
t
Equation 3
Equation 3 reveals that a number of import duties revenue ( ) was forecasted to be negative, which
was opposite to the other taxes discussed earlier. The trend was predicted to be negative with the amount
reducing from RM1, 881.35m in 2014 to RM1, 241.79m in 2018. The amount was reduced by approximately
33 percent between 2014 and 2018. We can see the downward sloping graph in Figure 7.
Import Duties
RM m
5,000
4,000
long term
3,000
short term trend
2,000
R3 = 4279.7 - 159.89t
1,000
0
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Years
Import duties
Figure 7: Trend line and Forecast for Import Duties Revenue
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Business and Management Quarterly Review, 8(2), 1-14, 2017
ISSN 2180-2777
The trend line in Figure 7 shows that the import duty revenues experienced a downward slope from
1999 to 2013 with a fluctuating revenue collection. The highest value was in 1999 whilst the lowest was in
2010. The trend line for import duties for the forecasted years 2014-2018 follows the earlier trend (since
1999), which was a decreasing trend. Meanwhile, if we consider the trend from the year 2010, the
forecasting trend was an increasing trend. Therefore, it can be concluded that there are contradictions
between the long-term (since 1999) and short-term trends (since 2010), as it shows decreasing and
increasing trends, respectively.
Sales Tax
According to the Economic Report 1993/1994, in 1993 and 1994, the sales tax was reduced and abolished for
certain items to encourage production and to increase the competitiveness of locally made products. The
ratio to the total indirect taxes was 23.4 percent and 23.8 percent, respectively. Based on Figure 8, there was
a positive relationship between the rates and revenue for sales taxes in 2001 and 2002. As the rates
increased from 8 to 10 percent, the revenue would increase from RM7, 356m to RM9, 243m.
Change in Sales Tax Rates
10000
8%
8000
RM m
12%
10%
8%
6%
4%
2%
0%
10%
6000
4000
2000
0
2001
Sales Tax
Reform
2002
Years
Figure 8: Sales Tax 2001-2002
Source: Bank Negara Malaysia (2014) and Various Issues of Economic Report (1960-2013)
The sales tax revenue (
) is calculated based on the trend equation, as follows.
t
Equation 4
The sales tax revenue was projected to be RM9, 384m in 2014 and was forecasted to continue to
increase to RM10, 326.96m by 2018. This shows that the rate would increase up to 10.05 percent throughout
five years period and the predicted amount can be seen in Figure 9.
Sales Tax
RM m
15,000
R4 = 5847.9+235.74t
10,000
Sales tax
5,000
Linear (Sales tax)
0
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Years
Figure 9: Trend line and Forecast of Sales Tax Revenue
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Business and Management Quarterly Review, 8(2), 1-14, 2017
ISSN 2180-2777
Figure 9 shows the trend line for sales tax revenue in 1999 to 2013. The revenue gradually increased with
the lowest revenue collected in 1999 and the highest in 2013. The predicted amounts show that there was an
increasing trend for sales tax revenue between 2014 and 2018 with an upward sloping graph.
CONCLUSION AND RECOMMENDATION
In this paper, we demonstrated the impact of tax reform on tax revenue and also predicted the tax revenue
for another five years starting from year 2013. Overall, the results indicated contradicting trends for the tax
revenue. Some evidence showed that as the rate increased, revenue increase; however, revenue could also
reduce as the rate increased. For instance, based on Figure 1, for the direct taxes as certain rate
modifications have taken into account on corporate tax, the trend of revenue is still increasing whether the
rates imposed increase or decrease. However, this only applies should the tax rate changes is less than 10
percent (Figure 1). For the income tax in Figure 3, the revenue generated after 2003 was satisfactory;
however, in 2005, it was slightly reduced, but still higher than the year before the introduction of SAS.
Moreover, for the case of indirect taxes, we can see from Figures 6 and 8 the import duties and sales tax,
which were discussed separately; both taxes experienced an upward trend as the tax rates imposed were
increased. The evidence from this study suggested that as the government introduced a new rate for both
import duties and sales tax, the increase in the rate imposed would increase the tax revenue. However,
based on Figures 6 and 8, it should be noted that only a new maximum tax rate of 5 percent could be added
to the present amount.
In addition, from the second major finding, it was suggested that the government could still receive a
rise in revenue from all the taxes except import duties. The forecasted amount for five years indicated that
the biggest change in revenue came from import duties with a reduction of 33 percent followed by an
increase in the individual income tax with 22.42 percent between 2014 and 2018. For sales tax, the average
predicted amount was revealed to be the slowest and the import duty predicted to be the fastest over the five
years compared to the other taxes. It can be clearly seen that there was an increase in the revenue for all
types of taxes between 2014 and 2018 except import duties (considered as the long-term effect).
It is recommended that the government can increase import duties, however, if the long-term trend is
followed, the revenue would decrease (Figure 7). Nevertheless, based on the short-term trend (2010
onwards), the revenue would increase as tax rates increase. These findings are supported by the Laffer curve
theory that stated that as the rate increase, the revenue will increase to the optimal level and will then
reduce (Laffer, 2004). The curve can be applied for both direct and indirect taxes since a high rate of tax
would distort workers and firm performance, and, ultimately, would affect the consumption level. Therefore,
the government should set the rate below the optimal level to maximise its revenue.
Furthermore, from the calculation, it was proven that the sales tax revenue would improve between
2014 and 2018 but that it would be slower than for the other taxes. Hence, with the introduction of the GST
by the Malaysian government in April 2015, it is hoped that this consumption tax (i.e. GST) would bring
more benefit to the country. In addition, it could also support the theory of optimal level by reducing the
economic distortion and maintaining equilibrium in the income distribution. In conclusion, it is useful for
further research to discuss specific tax reform process, particularly concerning the future implementation of
GST with the support of experienced countries. Another issue that could be addressed by future research is
by comparing the shift of government revenue dependency from direct to indirect taxes. The impact can be
determined by each type of taxes that would be reduced or increased in the revenue and the way it would
assist the government generally as well as provide value-added growth to the Malaysian industries.
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ISSN 2180-2777
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