BBEK4203 PRINCIPLES OF MACROECONOMICS

TABLE OF CONTENTS

1.0

Introduction 1.1 Overview of the Tax System in Malaysia 1.2 Purpose and Scope of the Assignment

1 1 2 3 3 4 4 5 6 7 7 8 9 9 9 10 10 12 13

2.0

Personal Tax System in Malaysia 2.1 Sources of Income Liable to Tax 2.2 Personal tax for Resident in Malaysia 2.2.1 Tax Rates 2.2.2 Personal Relief 2.2.3 Tax Rebate 2.3 Personal tax for Non-Resident in Malaysia 2.2.1 Tax Rates 2.2.2 Tax Relief and Rebate

3.0

Effect of Personal Tax System to Malaysias Economy 3.1 3.2 3.3 3.4 Effect on Economic Growth Effect on Government Income Effect on Government Budget Effect on Distribution of Wealth

4.0

Conclusion

Bibliography

1.0 1.1

Introduction Overview of the Tax System in Malaysia

Taxation is an important economic tool for any country including developing counties like Malaysia (Loganathan and Taha, 2007). Tax is defined as the money or liability that is paid to the government for earnings received (Lee and Gordon, 2005). Generally, all income of companies and individuals accrued in, derived from or remitted to Malaysia are liable to tax. However, income remitted to Malaysia by resident companies (other than companies carrying on the business of banking, insurance, air and sea transportation), non-resident companies and non-resident individuals are not liable for taxation in Malaysia.

Basically, there are two types of taxes in Malaysia: direct and indirect taxation. Administration of direct taxation is the responsibility of the Director General of Inland Revenue Board while indirect taxation is administered by the Director General of the Royal Customs and Excise Department. The governing legislation of Malaysian income tax is the Income Tax Act 1967 and the Labuan Business Activity Tax Act 1990 (LBATA).

There are several types of taxes imposed in Malaysia such as income tax, other direct taxes include real property gains tax. Indirect taxes include sales tax, service tax, excise duty and import duty.

Taxation in Malaysia can also be categorised as company tax and personal tax. A company, whether resident or not is assessable on income accrued in or derived from Malaysia. Income derived from outside of Malaysia sources and remitted by a resident company is not taxable, except in the case of banking and insurance business and sea and air transport undertakings. A company is deemed to be a resident in Malaysia if the

control and management of its affairs are exercised in Malaysia. The places of control and management are determined base on where the meetings of the Board of Directors are held. For company tax, the tax rate of 28% is applicable to both resident and nonresident companies. However, companies carrying on petroleum production are liable to be taxed at 30%.

Another category of tax is personal tax whereby all individuals are liable to tax on income accrued in, derived from or remitted to Malaysia. The rate of tax depends on the resident status as determined by the duration of his stay in the country. A provision for this is indicated under Section 7 of the Income Tax Act 1967.

1.2

Purpose and Scope of the Assignment

The assignment discusses about tax system in Malaysia with specific focus on personal tax whereby an assessment of the tax system to Malaysias economy is done and reported.

2.0

Personal Tax System in Malaysia

One of the types of direct income tax in Malaysia is personal tax. Every individual is subject to tax on income earned in Malaysia or received in Malaysia from outside Malaysia. Income earned overseas and remitted to Malaysia by resident individuals is exempted from tax. A non-resident individual however, maybe taxed for income earned in Malaysia. The tax rate imposed on individual is based on the individuals resident status which is determined by the duration of his stay in the country as provided in Section 7 of the Income Tax Act 1967. Generally, an individual who is in Malaysia for at least 182 days whether continuously or cumulatively in a calendar year is regarded as a tax resident.

2.1

Sources of Income Liable to Tax

Sources of income that are liable to income tax are listed as follows: Gains and profits from trade, profession and business Salaries, remunerations, gains and profits from an employment Dividends, interest or discounts Rents, royalties or premiums Pensions, annuities or other periodic payments Other gains or profits of an income nature not mentioned above.

Chargeable income is determined after adjusting for expenses incurred wholly and exclusively in the production of the income. However, some aspects are not tax deductible which include specific provisions for anticipated losses or contingent

liabilities. The tax imposed based on personal income is different for resident and nonresident in Malaysia as elaborated below.

2.2

Personal Tax for Resident in Malaysia

A resident individual is taxed on his chargeable income at graduated rates from 2% to 30% after the deductions of tax reliefs. However, individuals with chargeable income of less than RM2,500 is taxed at zero rate (0%).

2.2.1 Tax Rates The tax rates for resident individual in Malaysia for the assessment year 2012 are indicated in Table 1.

Table 1: Personal Income Tax Rates for Resident Individual Chargeable Income Rate (%) Tax Payable (RM) (RM) On the first 2,500 0 0 On the next 2,500 1 25 On the first 5,000 25 On the next 15,000 3 450 On the first 20,000 475 On the next 15,000 7 1,050 On the first 35,000 1,525 On the next 15,000 12 1,800 On the first 50,000 3,325 On the next 20,000 19 3,800 On the first 70,000 7,125 On the next 30,000 24 7,200 On the first 100,000 14,325 On the next 100,000 26 A qualified person (defined) who is a knowledge worker residing in Iskandar Malaysia is taxed at a rate of 15% on income from an employment with a designated company engaged in a qualified activity in that specific region.

The employment must have commenced on or after 24 October 2009, but not later than 31 December 2015 An approved individual under the Returning Expert Programmes who is a resident is taxed at the rate of 15% on income in respect of having to exercising employment with a person in Malaysia

2.2.2 Personal Reliefs The chargeable income of an individual resident is arrived at by deducting from his total income the following personal reliefs:

Table 2: Personal Tax Relief for Resident Individual Reliefs Personal Wife/Husband relief Child relief - See Note 2 Parents medical expenses relief (maximum Disabled relief (maximum) RM 9,000 (see Note 1) 3,000 1,000 (for each child) or 4,000 5,000 (see Note 6) 5,000 (for purchase of basic supporting equipment for self, wife, child or parent 7,000 (see Note 3)

Life insurance and/or contributions relief to approved provident funds relief (maximum) Disabled child reliefs (unmarried) 5,000 Medical/education insurance relief 3,000 (maximum) Purchase of books and similar publications 1,000 relief (maximum) Purchase of computer (every 3 years) 3,000 Purchase of sports equipment 300 Amount deposited into Skim Simpanan 3,000 Pendidikan Nasional for taxpayers child (maximum) Note 1: With effect from YA 2010, personal relief be increased from RM8,000 to RM9,000 Note 2: With effect from 2006, a child pursuing tertiary education at a recognised local institution of higher learning at diploma level and above and for each child studying at a recognised institution of higher learning abroad

at degree level, the relief is increased from RM1,000 to RM4,000. Note 3: Effective YA 2010, the existing relief will be increased to RM7,000. The increased relief amount of RM1,000 is given solely on annuity scheme premium from insurance companies contracted with effect from 1 January 2010. With effect from YA 2011, the existing relief of RM6,000 on contributions made for life premiums and/or approved fund contributions will be extended to include contributions made Note 6: With effect from YA 2011, the existing relief of up to RM5,000 on medical expenses for parents to be extended to include expenses on medical treatment and care for parents with certain conditions to be met

A married woman may have her income assessed separately with an overall tax liability reduced, although this may not always be the case. The separate assessment covers all her income sources. If she opts for joint assessment with her husband, the husband is given a wife relief of RM3,000.

2.2.3 Tax Rebate Tax liability of a resident individual is reduced due to the provision of tax rebate as follows: For an individual with income not exceeding RM10,000 a rebate of RM110 is given. A further rebate of RM60 is given for his wife. A wife with separate assessment will be entitled to a rebate of RM110 if her chargeable income does not exceed RM10.000. The equivalent amount paid in respect of any zakat, fitrah or other Islamic religious dues which are obligatory A sum of RM400 for the purchase of a computer by an individual or his wife The amount of fee paid to the government for the issue of an employment pass, visit pass or work permit.

2.3

Personal Tax for Non-Resident in Malaysia

Generally, a non-resident in Malaysia is liable to tax at the rate of 30%, and there is no personal relief granted to him. An employee on a short-term visit to Malaysia enjoys tax exemption in respect of his income from an employment exercised in Malaysia when his presence does not exceed 60 days in a calendar year. However, non-resident individuals who perfomed independent services such as consultancy services are not exempted from tax.

2.3.1 Tax Rates The tax rates for non-resident individual in Malaysia for the assessment year 2012 are indicated in Table 3.

Table 3: Tax Rates for Non-Resident Individuals in Malaysia Types of Income Public Entertainers Professional Income Interest Royalty Rate (%) 15% 15% 10%

Special classes of income - Rental of moveable property 10% - Technical or management services fee * 10% - Use of property or installation or operation of any plant, 10% machinery or other apparatus purchased from a non-resident person Dividend (single tier) Exempt Dividends (franked) 25 Business and employment income 26 Income other than the above 10 * Only fees for technical or management services rendered in Malaysia are liable to tax

2.3.2 Tax Relief and Tax Rebate Non-residents are not eligible to claim relief and rebates and are subject to a tax of 27% on their taxable income. With effect from year 2010, the rate of tax of nonresidents will be reduced from 27% to 26%.

3.0

Effect of Personal Tax System to Malaysias Economy

Government revenue derived from tax includes both direct and indirect taxes. Direct taxes are collected by the Inland Revenue Board which includes income tax from individuals, companies, other persons and petroleum, stamp duty, estate duty and real property gains tax.

3.1

Effect on Economic Growth

During the earlier stage of development in Malaysia (the 1960s), most revenue from tax were collected from indirect taxes, accounting for 76.7% of governments revenue (Kasipillai, 2006). However with tax reform over the years, there has been less reliance on indirect taxes and more on direct tax. Starting from 1999, the major contribution to governments revenue comes from direct tax at 69%. In 2005, the collection of direct tax represents 51% of the government total revenue (Economy Report, 2007). According to Loganathan and Taha (2007), direct tax revenues for Malaysia within the year 2001 to 2006 showed that revenues from personal tax averaged at about RM9,000 million. Major contributor to the direct tax revenue for the government comes from companies with RM28,.414 million collected in 2006.

3.2

Effect on Government Income

The decrease of maximum personal income tax from 27% to 26% beginning 2010 for chargeable income group exceeding RM100,000 does to a certain extent reduce governments income from personal income tax revenue. In addition, the personal relief which was increased from RM8,000 to RM9,000 in 2010 also added to a reduced earnings from personal tax income for the government. However, the tax relief and rebate

ensured that each individual taxpayer enjoys an increase of RM1,000 in disposable income (Chin, 2009).

The inclusion of new tax policy regarding personal tax such as the 15% income tax rate for knowledge workers residing in Iskandar Malaysia and those individuals under the Returning Expert Program would further reduced revenues collected by government from personal income taxation. The reduced rate of taxation imposed on knowledge workers is a measure by the government to attract Malaysians to reside, work and valueadd in the promoted industry sectors of Iskandar Malaysia. However, this means that for each knowledge worker, the government loses revenue from personal income tax at a rate of 6% as these workers were supposed to be taxed at 26%.1

3.3

Effect on Government Budget

The personal income tax proposed some tax relief and rebate for resident in Malaysia. These relief and rebate amounts to RM9,000 per individual (excluding non-resident) indicating loss of revenue for the government. Thus, the governments tax budget needs to shift its focus on other types of income or increase efficiency of tax collection in order to maintain their revenue.

3.4

Effect on Distribution of Wealth

The government has reduced the personal income rate from 27.0% in 2009 to 26.0% in 2010 up to now. In addition, individual relief and tax deduction has also been increased. However, the impact of such measures on consumption is limited as only 1 million out of 10.5 million workers pay income taxes. Moreover, the income tax cut affect only those
1

Iskandar Regional Development Authority (2011). Guidelines for Application of 15% Tax Rate Scheme for Knowledge Workers in Iskandar Malaysia, URL:

http://www.iskandarmalaysia.com.my/pdf/tax-scheme/faqs-15-Tax-Rate-Scheme-IM.pdf 10

with earnings more than RM100,000 per year. The decrease of personal tax rate is a measure by the government to reduce the burden of the lower income group and indirectly increasing economic growth rate.

Malaysia as a developing country practices open market policy. In 2007, Malaysian economy was ranked 29th largest in the world based on buying power parity with gross national income (2007) at $357.9 billion and a growth rate of between 5% to 7% since 2007. On distribution of income, there are 5.8 million household in 2007. Out of this, 8.6% have monthly income below RM1,000; 29.4% with income between RM1,000 and RM2,000 while 19.8% between RM2,001 to RM3,000. This implies that almost 40% of the household are earning below RM2,500 indicating exemption from income taxation. Only 4.9% are generating an income of RM10,000 and more monthly thus there is only a small percentage of household subjected to personal tax rate at 26%. This means that the wealthiest 20 percent of Malaysians control 53.8 percent of the wealth, while the poorest 60 percent of the populations controls just 21.3% of wealth. At the very bottom of the income range, the poorest 20% of the population controls only 4.5% of wealth.2

Malaysian tax policy sees to it that the imposition of personal tax on the Malaysian community will not cause those in the lower income bracket to suffer from burden of personal tax cut which may lead to their lowered spending power. Those earning less than RM2,500 enjoys 0% tax rate. Income tax is an annual charge levied on both earned income (wages, salaries and commission) as well as unearned income (dividends, interest, rents). The progressive income taxation is designed to distribute wealth more evenly in the Malaysia population and helps in automatic fiscal stabilisation to cushion the effects of economic cycles.3
2

Encyclopedia of the Nation (2012). Malaysia Poverty and Wealth, http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-ANDWEALTH.html 3 Trade Chakra (2012). Income Tax in Malaysia, http://www.tradechakra.com/economy/malaysia/income-tax-in-malaysia-205.php

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4.0

Conclusion

The discussion in this paper provided a brief overview of the taxation system in Malaysia and an elaborate discussion of the personal income taxation in this country. It is indicated that residents which are defined based on the number of days an individual reside in Malaysia for a given year can be categorized as resident and non-resident each with different taxation structure. Generally, non-residents are taxed at 30% while residents at 26%.

Tax is revenue for any government and policies of taxation in a country may have certain effects on the nations economy. In this discussion, the effect of personal taxation on economy in Malaysia was elaborated in terms of economic growth, government income and budget, and also on distribution of wealth. The discussion showed that personal taxation in Malaysia helps to protect the lower income groups which form the majority of the population while at the same time, still capable of providing the government with about RM9,000 million in revenue annually.

It is concluded that tax system of a country serves not merely as a source of income for the government but is used to promote the economy growth and development too. This paper serves to highlight that it is our duty to pay for tax as this helps to generate revenue for the government and indirectly contribute to economic development of our country.

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Bibliography Chin, J. (2009). Highlights of Budget 2010, The Edge Malaysia Online, URL: http://www.theedgemalaysia.com/index.php?option=com_content&task=view&id= 152027&Itemid=79 Encyclopedia of the Nation (2012). Malaysia Poverty and Wealth, URL: http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/MalaysiaPOVERTY-AND-WEALTH.html Iskandar Regional Development Authority (2011). Guidelines for Application of 15% Tax Rate Scheme for Knowledge Workers in Iskandar Malaysia, URL: http://www.iskandarmalaysia.com.my/pdf/tax-scheme/faqs-15-Tax-Rate-SchemeIM.pdf Kasipillai, J. (2006). A Comprehensive Guide to Malaysian Taxation-Under Self Assessment. Kuala Lumpur: McGraw-Hill. Lee, Y. and Gordon, R. (2005). Tax structure and economic growth. Journal of Public Economics, 89, 1027-1043. Loganathan, N. and Taha, R. (2007). Have Taxes Led Government Expenditure In Malaysia? Journal of International Management Studies, August 2007 Malaysia. (2006). Quarterly www.treasury.gov.my Updates Malaysian Economy, 2006. URL:

Malaysia. (2006). Economic Report 2006/2007. URL: http://www.treasury.gov.my Trade Chakra (2012). Income Tax in Malaysia, URL: http://www.tradechakra.com/economy/malaysia/income-tax-in-malaysia-205.php

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