Widening the tax net - Edge Weekly
"If the system is good, there are very small leakages and the actual revenue is collected, obviously the tax rate will go down.” — Mohd Nizom
By Chester Tay and Esther Lee / The Edge Malaysia
22 Jun 2023, 02:00 pm
This article first appeared in The Edge Malaysia Weekly on June 12, 2023 - June 18, 2023
THE atmosphere was tense, with lawsuits and dispute cases piling up, when Inland Revenue Board (IRB) CEO Datuk Mohd Nizom Sairi took the helm about 20 months ago. He has done a good job since he took up the role in October 2021 if one uses the size of the tax collection as the main key performance indicator (KPI).
IRB’s gross direct tax collection last year was a record high of RM175.4 billion, a 21.75% increase from RM144.1 billion in 2021. And Mohd Nizom is confident that Malaysia will see a fresh record this year.
The amount collected was 9.5% or RM15.2 billion higher than the Ministry of Finance’s (MoF) estimate of RM160.2 billion for 2022.
In 2022, corporate income tax made up the largest portion of direct tax revenue at RM82.13 billion while personal income tax amounted to RM33.78 billion, according to data provided by the central bank, which records the net direct tax collection. Both taxes were higher in 2022 compared with 2021.
Mohd Nizom attributes the higher tax collection to improved compliance, stronger economic growth of 5.6% in the first quarter and the final payment of the one-off Cukai Makmur in January, amounting to about RM2 billion, as well as a higher number of taxpayers.
Even if one-off items like Cukai Makmur were stripped out, he says, IRB’s tax collection growth still outpaced that of gross domestic product, with both corporate and personal income tax collection growing at double digits year to date. “I don’t think anybody will deny [the revenue growth was because] we have been doing better on our part,” he adds.
For 2023, Mohd Nizom says that year to date, the collection is already 20% higher than the previous corresponding period. He expects the government to revise its estimate for direct tax revenue this year.
MoF had projected a direct tax revenue of RM164.14 billion in the revised Budget 2023. Should the 20% increase in tax collection be sustained for the rest of the year, IRB’s collection would come in at RM210.48 billion. Even with a smaller annual increase of 15%, the amount would still hit RM200 billion.
However, it is worth noting that petroleum income tax more than doubled last year to RM23.42 billion from RM11.57 billion in 2021. It comes as no surprise given that Brent crude oil prices averaged at US$101 a barrel in 2022 compared with US$70 in the previous year.
Crude oil prices have fallen this year and are currently hovering at US$70 to US$80 a barrel. This means petroleum income tax will be lower in line with the softer oil prices.
So, 2023 could be a real test for Mohd Nizom without the boost from petroleum income tax, seeing how Brent crude prices have fallen, and the absence of the one-off Cukai Makmur.
Softer approach
Taxpayers — both businesses and individuals — were largely resentful of IRB, particularly when the taxman aggressively switched gears to raise its collection by conducting various operations nationwide like Ops Patuh, Ops Gegar and Ops Kutip in 2017.
Mohd Nizom, who rose through the ranks to become CEO of IRB in October 2021, has adopted a different approach during his tenure in a bid to change the public perception of the authority, from being an aggressive tax collector to a leading administrator. To a large extent, he is proud that the record high collection was achieved without the aggressive auditing done by a special task force a few years ago.
The amount of direct tax revenue collected is undeniably an important KPI in measuring IRB’s performance, but Mohd Nizom believes it is not the most important thing to look at. The priority is to raise compliance levels, namely to have more tax residents doing their civic duty of paying income tax. Once that is achieved, collection will improve, says the CEO who joined IRB as an assessment officer in 1985.
“There should not be the perception that these are bad people [those who avoid paying taxes]. That doesn’t matter to us. We have to be professional. We are just there to ensure everybody complies with the law and fulfils their obligation, and to be fair to those who comply,” says Mohd Nizom.
“That way, you don’t go and victimise anybody, because you don’t have that intention. You just want to make sure everybody plays their role accordingly, that’s all. That is professionalism for us.
“Enforcement is just one of the administrator’s duties. It should start by making the public understand the law, know and be aware of the law, because the law states your [taxpayers’] responsibility.”
Hence, Mohd Nizom is focused on three areas, which he abbreviates as AES — awareness, education and services — seeking to foster trust, transparency and efficiency, as well as setting a new standard in tax administration. Central to these priorities is a focus on professionalism and customer-centric services, he says.
“After we have increased awareness and educated them, we must also provide services for them to perform their obligations. That is also the role of administrator,” he explains.
“We have to provide services so that your tax-paying obligation [can be fulfilled] with ease. Meaning easy, no confusion, no complications, no difficulties, easy in every aspect, and also as cheap as possible.”
However, Mohd Nizom stresses that the change in approach does not mean IRB is taking its foot off the pedal when it comes to enforcement, as going after non-compliant activities is a means to do justice to taxpayers who have been complying with the law.
IRB’s success in meeting its collection targets has indeed given him time to focus on improving the organisation’s other processes.
Low number of taxpayers
There are 4.5 million individual taxpayers in Malaysia, higher than the 2.5 million at end-2017, according to MoF data. However, Mohd Nizom acknowledges that the number is still low. The 4.5 million taxpayers are just slightly more than one quarter of the country’s labour force of 16 million, versus a total population of 33 million, the ministry’s data shows.
Mohd Nizom attributes the relatively small community paying personal income tax to the country’s high tax threshold, even though Malaysia’s income tax rates are relatively high compared with other countries in the region.
“Our highest [income tax] rate is 29%, so the rate is high. But in terms of threshold, I think this country is among the most generous [in the region]. [Even if you earn a salary of] RM3,200 a month, you are not required to pay income tax. Plus, there isn’t any consumption tax,” he says.
“If you have a family, there are deductions, so the threshold would be higher. Probably for the single breadwinner in a household with a monthly income of RM5,000 is still not subject to tax.”
Of the total personal income tax collected, 85% is contributed by the T20 (top 20% income group), who earn more than RM10,000 in monthly income, says Mohd Nizom, who sees this as an unsustainable trend. He understands the grouses of the high-income group as they feel they are being penalised for working hard to earn more. “That’s why the government has to think of other ways of raising revenue, rather than just targeting the T20,” he adds.
Mohd Nizom’s answer to the question of tax reform is the Goods and Services Tax. He describes GST as a low hanging fruit for tax reform. The consumption tax will effectively help widen the tax net and it is a fairer tax in his view. In addition, he believes Malaysians are more receptive to it now.
“I think [the government is] convinced that it needs the tax [GST]. Everyone in the country is [convinced]. Even the ones that took it away. Not only for revenue, but from an equitable perspective,” he says.
GST was implemented at 6% in April 2015 during Datuk Seri Najib Razak’s administration in the former premier’s bid to raise more revenue amid a rising national debt and falling oil prices. The consumption tax was abolished in 2018 by the Pakatan Harapan administration after various controversies in handling the GST refunds were brought to light following the downfall of the previous government.
Additionally, Mohd Nizom says the government should relook its existing tax incentives for multinational corporations (MNCs) amid the growing adoption of a minimum effective tax rate of 15% globally under the Organisation for Economic Co-operation and Development’s (OECD) Inclusive Framework on Base Erosion and Profit Shifting initiative.
“Because under the global minimum tax rules, tax incentives that we have currently will no longer be beneficial to investors because you are subject to a minimum tax of 15%,” he says.
“Everywhere in the world will be like that. Governments have to rethink the incentives given as a tool to attract foreign direct investment.”
Mohd Nizom reveals that IRB has received an invitation from MoF to participate in a committee and provide its views on this reform.
“Under the global minimum tax rules, if a business’ effective tax is 10%, we will apply a Qualified Domestic Minimum Top-Up Tax (QDMTT) to make it at least 15%, otherwise the 5% will be imposed by another jurisdiction on these MNCs,” he explains.
Plug leakages
Mohd Nizom believes IRB can play its part to plug tax leakages — a critical move to replenish the nation’s coffers and enable the government to have the ability to cut direct taxes to attract talents and investments.
“As a government, wouldn’t you use the opportunity to lower tax to gain the support of the people? But you can only get the opportunity if your revenue is enough, which is either by way of increasing rates or improving the infrastructure so that there are fewer leakages. We are focusing on plugging the leakages,” he says.
“If the system is good, there are very small leakages and the actual revenue is collected, obviously the tax rate will go down,” he adds.
Apart from asserting professionalism within IRB, other efforts to plug leakages include the ongoing Special Voluntary Disclosure Programme (SVDP) 2.0 and adoption of e-invoicing (see accompanying stories).
SVDP 2.0: Last chance to have your tax debt forgiven before the IRB comes for you
IT has been about a week since the Special Voluntary Disclosure Programme (SVDP) 2.0 came into force. From June 6 this year to May 31 next year, the Inland Revenue Board (IRB) is giving taxpayers an opportunity to come forward and declare any previously unreported or under-reported income without incurring a penalty.
“We are encouraging people to come forward. You will not have to pay a penalty. Just voluntarily declare whatever tax you have not paid in the past and we will accept it in good faith,” says IRB CEO Datuk Mohd Nizom Sairi, stressing that this is also a strategy to cast the country’s tax net wider.
If one recalls, the first-ever SVDP was implemented not too long ago in November 2018, when the Pakatan Harapan coalition came to power. It managed to generate an additional RM7.1 billion in taxes for the country.
Mohd Nizom says the proposal for SVDP 2.0 was submitted to the government by IRB with the intention of giving taxpayers another chance to start afresh, just as the country was making a fresh start under the new administration.
SVDP 2.0 has undoubtedly caused dissatisfaction among compliant taxpayers as they see the move as going easy on non-compliant taxpayers, especially since there is no penalty imposed on unreported or under-reported income from previous years.
“We understand that they [compliant taxpayers] are not happy. But we are telling them to take a long-term view. We are saying to them that after this, especially for those who have not been paying what is due, we will go out and enforce the full force of the law because opportunity was given but they did not come forward,” says Mohd Nizom.
“Hopefully with that message, they [non-compliant taxpayers] will come forward and the compliant taxpayers will see it from the fact that those people are no longer escaping their civic duty.”
Hence, it is clear that the main aim of SVDP 2.0 is to bring people who are currently operating outside the tax net into the tax base.
“If you come to us and declare [your overdue taxes], from now on, you will have to be honest with that particular source of income. We are looking at the benefit not from what is being declared now [for past income], but the potential of that particular source [of income] going forward,” Mohd Nizom says, explaining that the newly identified source of income will be added to the system.
Mohd Nizom hopes that tax residents will take advantage of SVDP 2.0 and come forward during this period as their tax debt will no longer be forgiven once IRB opens an audit case on them.
“Under SVDP 2.0, those who are being audited or investigated, and where we have found discrepancies in their income declaration, will not be eligible for it, simply because such cases are no longer ‘voluntary’ — we found them,” he points out.
The fact that this is the second time the government is offering this programme raises questions about its effectiveness. Nonetheless, Mohd Nizom, who has spent 38 years of his career at IRB, is hopeful.
He notes that SVDP 2.0 was initiated because of what the taxman learnt from the first programme. He does, however, acknowledge that SVDP 1.0 would have been better if the then government had not reduced the minimum penalty post-SVDP substantially to 45% from 80%. Like all public policies and measures, political will is the key factor to ensure success.
While SVDP 1.0 generated RM7.1 billion in additional tax revenue, IRB realised that most of the additional revenue came from cases which they were in the midst of auditing or investigating. Under SVDP 1.0, taxpayers who were being audited or investigated were given the opportunity to settle their tax debt under the initiative after arriving at an agreement with IRB on the assessment.
“A lot of the cases were settled then and it was part of the initiative. For new ones [those who came forward voluntarily and were not being audited or investigated], the numbers were not as high as we had expected,” says the IRB CEO.
A refrain that is commonly heard among taxpayers is that while they religiously pay their taxes each year, they receive little benefit from it in return. Furthermore, the perception that public funds have been misused has caused taxpayers to grudgingly comply or in some cases avoid complying.
To those who opine that their tax money brings them little to no benefit, Mohd Nizom says: “You cannot see it in isolation. It has to be viewed as an ecosystem. If you start right from the beginning where you actually have an opportunity to make an income, did it just spring out of nowhere or is it because the system is working? If someone says everything is done on their own accord [without a functioning system in place], try going to a deserted island and set up your business there.”
Will there be more SVDPs?
Mohd Nizom certainly hopes not, and does not recommend that the government do so. “There should no longer be such initiatives unless they take place in a different generation,” he says.
“If we have another one, it will only be negatively interpreted. I don’t think any government, be it present or future, would want to go that way. I am quite confident that it will not happen again in the foreseeable future.”
The taxman has even taken steps to convey to policymakers that the SVDP is the final second chance for non-compliant taxpayers. Instead, awareness and education programmes will be the priority in IRB’s efforts to improve tax collection.
Mohd Nizom says IRB’s expected outcome from SVDP 2.0 is about RM1 billion from about 50,000 cases, but he is not fixated on the figure.
“That is our expectation, but whether or not we achieve it, it can be interpreted in two ways. If the outcome is less than expected, it may mean that people are generally complying. On the other hand, it can mean that people do not care, which is worrying if that were the case,” he adds.
If it is the latter, it will mean that IRB will have to put more effort into enforcement, whereas the former will give IRB more time to focus on its services for taxpayers — an easier, cheaper and more convenient approach to facilitating taxpayers’ civic duty.
“There is no one-size-fits-all approach. It has to be tailored to the situation based on the compliance level,” says Mohd Nizom.
Mohd Nizom hopes SVDP 2.0 will help bring in income that was previously off the radar screen, while the e-invoicing initiative will force most transactions to leave behind a digital footprint, enhancing IRB’s ability to trace income that is subject to tax.
Although these initiatives can mitigate tax leakages, they are long-term measures and it will take time before the results can be seen. While Mohd Nizom acknowledges that there is low hanging fruit when it comes to tax reforms, these measures might be politically unpopular.
“For example, [lower income earners] are low hanging fruit because they are not paying any tax. If you introduce GST, they will be subject to it. It is not favourable. Tax reforms are actually social, economics and politics — all these have to be in tandem, otherwise nobody will want to do it,” he says.
E-invoicing a means to tackle the shadow economy
In an environment where the shadow economy is expanding quickly, the persistent loss of tax revenue, and how to tax this segment, has been a conundrum for the government.
The shadow economy, also known as the underground economy, includes not only illegal activities but also unreported income from legal activities. In essence, it constitutes income that would generally be taxable if it were reported to the tax authorities.
While there is no accurate measure of how large the shadow economy is in Malaysia, Inland Revenue Board (IRB) CEO Datuk Mohd Nizom Sairi says a rough estimate puts it at 20% to 25% of gross domestic product.
“Let’s be clear that in the shadow economy, it includes both legal and illegal activities. And whether you like it or not, the shadow economy exists within the legal economy,” he points out.
While the illegal activities in the shadow economy do not come under IRB’s purview, the taxman is tackling unreported income from legal activities through its e-invoicing initiative.
As the name suggests, e-invoicing is a system where invoices are issued electronically by the supplier to the buyer. The system allows IRB to act as an intermediary to validate the e-invoices issued.
Beginning June 2024, e-invoicing will be mandatory for companies with revenue of RM100 million and above. The implementation of this system will trickle down to other businesses over the next few years to eventually reach a point where every business in the country will adopt this measure.
Mohd Nizom calls e-invoicing a system that encourages taxpayers to comply by design.
“In an environment where e-invoicing is mature, which will take a few years, you cannot afford to do business without being in the system. When it is regulated, tax computation will be based on the e-invoice. If you are a seller and you say you don’t want to put the invoice so you can record lower sales, your customer will probably insist on it because they will use that as their cost of doing business,” he explains.
“So, the environment will force all who do business to be in the system,” he adds.
Notably, several countries have already adopted e-invoicing for more than a decade. Ironically, it is not the advanced economies but those like Mexico, Brazil, Chile and South Korea.
Studies have shown that e-invoicing has been effective in reducing non-compliance in a country. Take what tax technology consulting leader at Deloitte Malaysia Senthuran Elalingam said in a commentary published by The Edge in January, that e-invoicing reduced the tax gap from indirect tax collection by more than 50% in Mexico and brought over 4.2 million micro businesses into the formal economy.
Meanwhile, Brazil’s tax revenue went up by US$58 billion with the introduction of e-invoicing.
Mohd Nizom says IRB is currently developing the system for its e-invoicing initiative and is confident that the system will be able to cope with the voluminous transactions that will take place daily.
“It would be perfect if e-invoicing and cashless payment move hand in hand. In the future, we will provide smaller traders who do not wish to invest in a system [like the bigger companies] with a free solution. Countries like Brazil and Mexico have applied this,” he adds.
The taxman is cognisant that some businesses will still be able to stay hidden, even with the implementation of e-invoicing, but believes that when the system becomes more integrated, many will be forced to be part of the ecosystem in order to effectively carry out their business.
“If you talk about Sustainable Development Goals, this is one of them. If you take the approach of only enforcement, how many will you be able to catch? But if you force it by design [with e-invoicing], it will be a more sustainable way to collect revenue,” says Mohd Nizom.
Legacy to leave behind
Mohd Nizom (standing, fourth from left) with his colleagues after joining IRB in the 1980s
Mohd Nizom, who hails from a Federal Land Development Authority (FELDA) settlement in Hulu Selangor, has witnessed first hand IRB’s transformation from a government department into a statutory body in 1995 through an initiative spearheaded by Datuk Seri Anwar Ibrahim in his previous tenure as finance minister.
Mohd Nizom says that as prime minister, Anwar pledged to provide IRB with “full freedom to enforce the law” during his visit to the tax authority.
“It is our day-to-day responsibility to make sure people pay what they are supposed to. We are trying to send an image that tax does not discriminate. We will actually enforce the law equally — that’s the message we want to send,” he points out.
“People may not see it yet, but we have to make it seen. It is about trust. [IRB] is important, but why is everything we do unliked by people? We need to correct that. We have to reach a level where everyone has full trust in us, in what we do, and it can be done through transparency and all that,” he adds, saying that this is a legacy he hopes to leave behind.
Mohd Nizom says that with continued efforts to enhance efficiency through digitalisation and flattening its corporate structure, IRB’s workforce will get leaner over the next five years, but emphasises that the reduction will be through natural attrition.
“A total of 2,900 [positions] at the support level will no longer be needed because either those functions have been digitalised or will be done at the executive level through multi-tasking,” he explains.
“In about five years, we will shrink the workforce by about 25% from 12,000 to about 9,000 because of digitalisation. We don’t lay off. When they retire, the post will be written off and we won’t fill those vacancies.”
It is worth noting that Mohd Nizom reached retirement age last year, but his tenure was extended by the government, giving him more time to implement the reforms at IRB.
“My life is actually devoted to this organisation. It has a special place in my heart. [To achieve] the vision [mentioned] just now, we need to position ourselves correctly,” he says before ending the 2½-hour interview and heading off to Pahang for another stakeholder engagement session.
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