Malaysian Income Tax Assignment

This assignment discusses the proposed changes in income tax relief and tax deduction in Malaysia, including the separation of EPF and takaful/life insurance, increase in tax relief on total savings in SSPN, and tax deduction for contributions to social enterprises.

MALAYSIAN INCOME TAX ASSIGNMENT
a)
i.
 Reviewing of income tax relief on the contributions made to the accepted
provident fund, takaful and/or life insurance premium.
This was proposed to encourage higher insurance take-up and savings rate for
old aged people. It was proposed, combined tax relief for contributions made
to Employees Provident Fund (EPF) together with the payments of premiums
for life insurance and takaful contributions to be increased up to MYR 7000.
This was a rise from the previous payments of up to MYR 6000. However in
the current payments, relief is separated into MYR 3000 for takaful
contributions and /or payments for the life insurance premiums and MYR
4000 for the EPF contributions (KPMG, 2018)1. Inbound assignees to
Malaysia, those who have claimed life insurance relief will experience a
reduction from MYR 6000 TO MYR 3000 starting in 2019. Also, an
additional tax would be RM 840 and their income to be taxed at 28 percent
top rate.
 Increasing the tax relief on total savings in Skim Simpanan Penddikan
Nasional (SSPN)
This was discussed to encourage more parents to save money for tertiary
education financing for their children (Mohd Rizal Palil, 2011)2. It was
proposed that residents tax relief on the total savings in the National
Education Savings Scheme (SSPN) to be increased from MYR 6000 to MYR
8000, and this relief is only applicable to tax-resident individual in Malaysia
(Rosiati Ramli, 2015)3. This is effective for year 2019 and year 2020.
 Tax deduction for contributions made to social enterprises.
This was proposed to support further the social enterprises that are involved in
the uplifting of the marginalized and under-privileged communities, so as to
create a positive social impact. It was proposed that an income tax deduction
should be provided for contributions made to all social enterprises, which
happens to be subject to 7% maximum of the total earnings of a person, other
than a company including individuals (K. Saira, 2010)4. Note that companies
are also entitled to a deduction so as to contribute to these contributions and
they are subject to 10% maximum of the total income. Pending the issuance of
1 KPMG 2018
2 Palil and Ibrahim 2011: 192-205
3 Rosiati et al. 2015: 45
4 Saira, Zariyawati and yoke-May 2010: 270-276

the finance bill no further details on the definition of social (Shafie Mohamed
Zabri, 2016)5.
ii.
The tax relief on the separation of EPF and takaful/life insurance that was
proposed for budget 2019 in Malaysia was supported by many people. Life
Insurance Association of Malaysia (LIAM) president Anusha Thavarajah said the
separation into RM 4000 for the EPF and RM 3000 for takaful/ life insurance,
will give the right focus to life insurance and encourage more people to get life
insurance so as to protect themselves as it is critical for Malaysians. This is a
much better method compared to the previous tax relief of RM 6000 for EPF and
takaful/life insurance combined. She went on to further note that the savings for
the EFP would meet the needs of retired individuals and the life insurance policy
will allow families to be protected in the case that the breadwinner meets and
unfortunate event. Anusha Thavarajah added that separating EPF and Takaful/life
insurance tax relief would definitely benefit Rakyat and will encourage them to
buy life insurance policies for their loved ones and for themselves which will help
increase the Malaysian insured population to 75%.
Based on calculations made, individuals that earn more than gross income of
RM3030 per month and they are not currently covered by life insurance policy,
will have their EPF tax relief reduced (PWC, 2018)6. This means that if an
individual earns RM 3000 per month and above and is not covered by life
insurance policy then they should make a point of being covered. The spirit of
RM 4000 for EPF and RM 3000 for takaful/life insurance means that those who
are already covered by life insurance policies have a right to claim up to RM 1000
more than in previous years. The additional amount therefore depicts that an
individual increase their amount of coverage for their insurance coverage plan in
the event that life takes a form for the worst.
The budget 2019 for Malaysia was expected to be a burden with introduction of
new taxes, following the pre-budget warning that it was going to be the most
difficult budget ever (Tan, 2018)7. However, with the introduction of new tax
relief, the Malaysian people have found them more advantageous and encouraged
them to participate in uptake of life insurance as a way of protecting themselves.
This will be an improvement because according to Anusha Thavarajah, 4% of the
B40 households and life insurance policies before introduction of the new tax
relief.
5 Shafie, Kamilah and Tham 2016: 28-30
6 PWC 2018
7 Tan 2018

The second measure was to increase tax relief on total savings on Skim Simpanan
Pendikkan Nasional (SSPN). SSPN is usually a savings instrument (or scheme)
specifically designed to enable guardians and parents to save for higher education
for their children. This scheme was created by the National Higher Education
Fund Corporation (PTPTN) and has changed many lives in Malaysia. Savings
made to the National Education Savings Scheme is a measure of qualifying one
for additional tax relief in the 2019 Malaysian budget. This is due to the increase
in the quantum from RM 6000 to RM 8000. Under this scheme, families with
very young children are highly encouraged to participate since it has various
benefits apart from the main one which is tax relief. The made it possible for
deductions to be limited to the full amount deposited the whole year. In addition,
a resident must produce a statement by SSPN to substantiate total amount (net
total) deposited in the year in question. This scheme offers two savings funds for
future education of children. These savings plans offer high dividend rates and
also includes additional benefits like income tax relief, PTPTN loan eligibility,
takaful protection for children and even Syariah compliant savings guaranteed by
the government.
With the increase in tax relief for SSPN deposits by guardian and parents, there is
an addition RM 2000 that can be retrieved from government, so as to offset one’s
annual income tax from previous years, hence making it an attractive savings plan
as long as the annual income tax is high enough for one to claim the full amount.
Another alternative would be depositing RM 8000 on SSPN if buying life
insurance is not lucrative because it costs money, and would still have the desire
to recover the loss of RM 2000 in the PF tax relief.
In January 2019, PTPTN announced a 4% dividend from the two savings product
under the National Education Savings Scheme, which includes, SSPN-I and
SSPN-i Plus for 2018. Mr Wan Saiful Wan Jan, PTPTN chairperson, reported the
dividend would include a RM 144.55 million allocation and will benefit
depositors up to 3.91 million. He added that the 4% rate was based on the net
returns on investments and on deposits received and this ensured PTPTN was still
able to attain and maintain dividend rates that are quite competitive despite the
challenging economic situation. This will ensure SSPN will be more competitive
and will become the most preferred instrument for savings by the people.
The third measure as tax deduction for contributors made to social enterprises.
Before the measure was introduced in the 2019 budget, there was a list of
approved institutions, organizations and funds where contributions made to them
would be a deduction capped at 10% for companies and 7% for persons other than
companies, of their aggregate income. This tax deduction was granted to
companies when they made contribution to social enterprises, subject to 7%
maximum limit of the total income, however the definition of companies that

qualify to be called a social enterprise has yet to be confirmed. This measure was
welcomed by many as it is a way of uplifting marginalized communities and the
under privileged in the society who previously did not have enough avenues or
social enterprises supporting them.
b)
Goods and services tax (GST) means the tax on most products, goods and services for
consuming domestically within all levels in the production process (Y Beh, 2013)8. It is
also the input tax for organizations with revenue of RM500k and above. GST was put
into action in April 2015 and is said to be the most common form of taxation used. In
most countries it can be referred to as the Value Added Tax (VAT). This GST covers
everyone that includes: traders and retailers. For the sales tax it covers manufacturers
while the service tax covers services that are prescribed like the professional ones (Zainol
Bidin, 2016)9. GST was effected in Malaysia to outdo the SST when their prime minister
gave the budget speech in 2010. However, this caused much debate and the GST system
was only implemented on 1st April 2015. This introduction of the GST system was so as
to upgrade the existing tax system by making it more effective and efficient (Singh,
2010)10.SST is covered by two tax laws on a variety of goods. Sales tax is imposed on the
manufacturer level only while services tax is on the consumers that consume tax services.
SST tax rates usually are less transparent when compared to GST that has a 6% rate while
SST varies from 6% to 10% in their rates.
(Amanuddin Shamsuddin, 2016)11 argues that the implementation of GST in Malaysia
brought many benefits to consumers and businesses and this, from the nation’s
perspective showed that GST will improve the standards of living of Malaysian people
because revenue collected will be used for social infrastructure development like the
health and public facilities and institutions, education facilities. He also added that
implementing the GST system, businesses will benefit from input tax recovery, and this
will reduce the costs forgone when doing business.
On 16th July 2018, finance minister for Malaysia Lim Gua Eng announced that the bill
concerning SST was to be tabled and passed in Parliament. Moreover, re-introduction of
SST will ensure its rates to be set at 6% and 10% for sales and services respectively. The
government broadcasted that GST was to be replaced and abolished by SST on 1st
September 2018. This will involve changing of various tax reporting and filing protocols
that became common place since GST introduction in 2015.
8 Beh and Ng 2013:5
9 Zainol et al. 2016: 193-197
10 Singh 2010:18-22
11 Amanuddin 2016:55

The two tax systems have broad differences. Whereas SST has a narrow tax base, GST
carries a tax base that is broad. SST has a compounding and cascading index which is
eliminated in the GST system. In GST regime, exports are zero-rated and eligible for
input tax to be claimed while in the SST regime there is no complete relief for the exports
(Nor Iza Ishak, 2015)12. In the GST system tax on many stages usually addresses the
issues concerning vertical integration and transfer pricing which is not usually in SST.
The classification issues in SST are minimal in GST. In addition in the GST system there
is increase in tax productivity while in SST tax productivity has been declining over the
years. The scope for GST is broader; hence a wider range of goods, products and services
is taxed whereas in the SST system, more items are tax free.
The new tax regime SST that was put into operation in September 2018 has two parts:
sales and services. On the sales part, sales tax is usually charged on goods and products
that are taxable and/or those that are manufactured in and imported in Malaysia, and
goods and products that are manufactured to be exported are not subject to this tax. The
tax rates are 5%, 10%, a specific rate or tax exempt. Here goods are taxable unless they
are specifically listed as being exempt from the sales tax. This type of tax is usually a
single-stage one, which depicts that it can be imposed at one stage only in the chain of
supply i.e. at manufacturer’s level and/or import level. To maintain this single-stage idea
manufacture of goods and products that are taxable would be entitled to an exemption on
the sales tax paid for the components, raw materials and packaging materials.
On the services part, the services tax which is at 6% is imposed on prescribed and
specific services provided by a taxable individual who has business transactions in
Malaysia. This tax is also a single-stage meaning it can only be charged one time by any
service provider and here there are no exemptions or input mechanisms in its context.
(Narayanan, 2014)13. Services that are prescribed specifically to service tax are hotels,
restaurants, gaming, telecommunication, motor vehicle repair, credit cards, professional
and consultancy services, domestic flights IT services and electricity.
The new tax regime replaced the GST tax regime because it was flawed. GST allowed
middlemen and brokers to raise prices and take advantage of the system by using tax as a
convenient reason. GST also caused hardship to people where the cost of goods kept
going up since its implementation. During the GST regime, claim back of tax by
businesses was difficult which high chances of being declined and even at times it
required RM 500k in sale before being claimed (Urif, 2018)14. Also the GST exempted
goods used to be the expensive items instead of the necessities that most people needed.
SST differs quite substantially from the previous GST and according to (Faruqi, 2015)15
GST is essentially taxing consumption not production; therefore the burden of tax falls on
the consumers. Receipts from SST rely on strength that private businesses and
12 Ishak, Othman and Omar 2015: 80-99
13 Narayanan 2014:5-10
14 Urif 2018:103-104
15 Faruqi 2015: 10-15

consumption show in their spending activities (Nurulhasni Shaari, 2015)16. The fault of
SST tax regime is the high tax avoidance rates, extensive exemptions and double taxation
in the value-chain which ends up pushing the prices up. This explains the low collection
of revenue from SST, (Mathew Alappatt, 2014)17.
GST serves as a powerful means of collecting revenue aiming at reducing fiscal deficit
(Sim Choon Ling, 2015)18. Therefore, GST tax system is a better tool to stimulate
economy because revenue collected is maximized and GST being a broad consumption
tax, it covers most sectors in the Malaysian economy i.e. all products, services and goods
in Malaysia (Nor Hafizar Mansor, 2013)19.
According to (Poh Jin Goh, 2017)20, GST proves to be a much better, fairer and adaptable
system to SST as it has the advantage of enhancing compliance lowering businesses
operational cost, it increases global competitiveness, reduces red tape, lowering business
costs, provides fairer prices to consumers and mainly creates transparency in the existing
system of tax.
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