The More the Money, the More the Taxes


Penang Monthly charts the sources of federal government revenue.

Over the last 45 years, government revenue has registered impressive annual growth rates: in 1970 it hit RM2.4bil; by 2015, it had exceeded RM219bil.

In Malaysia, the sources of government revenue are classified into three broad categories: tax revenue, non-tax revenue and non-revenue receipts.

Tax revenues are made of direct and indirect tax. Direct tax is levied and paid by the person on whom it is levied. Collection of direct tax falls under the jurisdiction of the Inland Revenue Board (IRB). Indirect tax is tax collected by a third party from the person who bears the tax payment burden. The responsibility of collecting indirect tax belongs to the Royal Customs and Excise Department.

Of the three, tax revenues are by far the largest and most important source of income. Between 1970 and 2015, tax revenue contributed an average of three-quarters of total revenue while non-tax revenue made up a quarter. Contributions from non-revenue receipts were negligible – in 2015, it was a mere 1% of total revenue.

A Peek into the Counting House

A detailed breakdown of the federal government’s revenue can be obtained from the Treasury’s federal government revenue estimates, which is tabled at the Budget presentation in October every year by the Minister of Finance. The Estimates provide the revenues for the previous years, a revised collection estimate for the current year and a forecast for the following year.

The government earned RM219.1bil in revenue for 2015, which was lower by 0.7% than 2014’s RM220.6bil. Earlier estimates had forecasted 2015 revenues at RM222.2bil but the final number was lower than expected due to depressed oil-based revenues.

In 2015, once again tax revenue contributed the lion’s share of revenue with a 75.5% share or RM167.1bil, followed by non-tax revenue at 23.5% (RM51.5bil), non-revenue receipts (RM1.29bil) and revenue from the Federal Territories (RM892mil).

The top seven contributors in 2015 were corporate income tax (RM63.7bil or 29.1% of total federal revenue), return on investments (RM32.8bil or 15%), GST (RM27bil or 12.3%), individual income tax (RM26.3bil or 12%), various duties (RM15.7bil or 7.1%), licenses and permits (RM12.5bil or 5.7%) and lastly, petroleum income tax (RM11.6bil or 5.3%). These seven alone made up 86.5% of total revenue and each contributed at least RM10bil.

Corporate income tax collection for 2015 was 2.4% lower than 2014’s RM65.2bil due to slower economic growth and weaker corporate earnings. The Treasury had initially forecasted RM68.3bil or 4.7% (RM3.1bil) higher in collections from corporate income tax, but this was not to be.

Historically, corporate income tax was not always the largest income generator; from 1970 to 1995, this mantle was worn by various duties (import, excise and export). The duo swapped places from 1995 onwards as the strong economic growth and launch of Malaysia’s Privatisation Master Plan in 1991 saw many former state-owned enterprises privatised and paying income tax as corporate citizens.

From 1996 to 2015, corporate income tax contributed an average 25% of total government revenue, making it the number one contributor. Petronas alone paid a significant chunk of the total corporate tax – in 2015 alone it doled out RM9.2bil. It is by far the single largest tax payer in Corporate Malaysia.

Returns on investment are mostly dividends declared by government-linked companies or bodies to the government. The importance of returns from investment multiplied from the mid-1980s onwards with the onset of the privatisation policy. Unfortunately, the bulk of monies originates from a single source – Petronas.

In 2015, of the RM32.8bil in returns received, RM26bil or 79% was from Petronas. The next two largest contributors here were Bank Negara Malaysia (RM3bil) and Khazanah Nasional (RM1.4bil). The balance was contributed from government-owned banks, with Bank Rakyat (RM385mil) being the largest. Other public-owned banks handed out a further RM765mil in dividends.

Income from individual income taxes for 2015 was 15.3% higher than 2014’s RM24.4bil.

Other Sources of Income

Apart from banks, other government bodies which have declared large bounties include the Companies Commission of Malaysia (RM338mil) and Percetakan Nasional1 (the corporatised Government Printers), with RM150mil. Even the National Heart Institute (IJN) dished out RM11mil in payments to the government. Placement of excess cash with various banks is also another source of income and this includes deposits with banks (RM389mil) and RM167mil in interest on bank balances and another RM180mil in interest from money market deposits.

Takings from an eight-month long GST was RM27bil while the collections from sales and service tax was RM8.2bil for the first four months of the years, bringing 2015’s total to RM35.2bil. This is double 2014’s total sales and service tax collection of RM17.3bil. The full impact of the GST was only to be felt in 2016 when it is estimated to have raked in a whopping RM41bil.2

Income from individual income taxes for 2015 was 15.3% higher than 2014’s RM24.4bil. The growth was due to a low unemployment rate of 3.1%3 and a 5.3% mean monthly wage growth.4 The higher tax collection came despite the 1-3% tax reduction for all income brackets to help negate the effects of the GST. Malaysia’s individual tax base is narrow, with only 2.1 million wage earners paying taxes out of a workforce of 14.5 million.5

Despite their slump over the years, the three duties – export, import and excise – still contribute significantly to the government’s coffers. The largest of the three is excise duties, which are levied on all locally manufactured goods. Excise duties collection is the second biggest non-tax revenue after the GST. In 2015 RM11.9bil were collected, the majority of it from alcoholic beverages, cigarettes and motor vehicles. The biggest contributor is for motor vehicles, contributing RM6.6bil.6 Cigarettes and alcoholic beverages brought in RM3.5bil and RM1.7bil respectively. Excise duties on cigarettes and alcohol are dubbed “sin tax” by the media and have been easy targets for the government to raise much needed supplementary funds.

Import duty collection totalled RM2.7bil and the largest contributor was motor vehicles (RM618mil). Export duty collection totalled RM1bil which comprised primarily of crude oil export (RM989mil).

Income from licenses and permits is another significant contributor (RM12.5bil). They include petroleum royalty (RM5.1bil), motor vehicle licenses (RM2.6bil), foreign workers’ levy (RM2.3bil) and others such as passport fees and work permits for foreign workers.

Black Gold

Companies with income from upstream petroleum operations in Malaysia pay a corporate tax called the Petroleum Income Tax Act (PITA) at a rate of 38%.7 However, due to depressed oil prices (2015’s US$52 per barrel compared to 2014’s US$99)8, PITA was reduced by 2% to 36% in 2015. This, along with weaker earnings of oil and gas companies, saw 2015’s PITA dip to RM11.6bil – a 64.6% drop from 2014’s RM27bil. Even Petronas was affected by the weaker oil prices and paid RM6.7bil in PITA compared to 2014’s RM10.7bil.

Petronas station. Petronas is Malaysia’s largest tax payer and the single largest contributor to the government’s coffers.

In 2015 Petronas paid RM9.2bil in corporate tax and RM6.7bil in PITA for a total income tax of RM15.8bil (2014: RM30.1bil). That’s an astonishing 7.2% of total government revenue; not only is Petronas Malaysia’s largest tax payer, it is also the single largest contributor to the government’s coffers.

Petronas pays a combination of 25% corporate tax (for its downstream originated revenue) and 38%9 petroleum income tax (for upstream revenue such as sale of oil and gas). In 2015 Petronas paid RM9.2bil in corporate tax and RM6.7bil in PITA for a total income tax of RM15.8bil (2014: RM30.1bil). That’s an astonishing 7.2% of total government revenue; not only is Petronas Malaysia’s largest tax payer, it is also the single largest contributor to the government’s coffers.

Petroleum-related revenue is not merely confined to PITA or Petronas’ corporate income tax and dividends alone; their contributions include other sources such as royalty and profits from the petroleum operations of the Malaysia-Thai Joint Development Authority,10 export duty on crude oil, sale tax on petroleum products (now replaced by the GST) and import duties.

In 2015 oil-related revenue made up 25.6% of total government revenue, compared to 2014’s 39.1%.11 From this, Petronas’ contribution was RM41.8bil or 19% (2014: RM59.1bil or 27%) of total government revenue.

This addiction is not a new discovery as economists have raised red flags of Malaysia’s over-reliance on oil revenues many times over the last three decades. A consumption tax was suggested as far back as 1988, and after many false starts, the GST was finally implemented in 2015.

Despite public grumblings, it cannot be denied that the GST has to some extent diversified the government’s revenue base, tapped a new source of income, plugged leakages in tax compliance and reduced its crutch on oil revenue. In 2015 oil-related revenue dropped by RM29bil or 15% from 2014’s RM85.7bil and yet total government revenue for 2015 only declined by a mere 0.7% or RM1.5bil, from 2015’s RM220.6bil! This RM29bil shortfall was made up mostly from RM18bil in new GST income, higher dividends from Khazanah Nasional and Bank Negara Malaysia, and higher individual income tax collection, among others.

On the surface, it appears that Malaysia’s revenue stream is well-diversified – we have seen seven main income generators which contribute more than RM10bil each (although corporate income tax alone weighs in with a hefty 29%). These seven segments alone contributed 86.5% of 2015’s total revenue.

However, these numbers hide the fact that government revenue still relies heavily on oil revenue. It is in everyone’s interest that the government diversifies revenue generation, increases tax compliance and plugs leakages in revenue collection. That way, the government can balance its books and squirrel away surpluses during boom times to splash during downturns.

At the time of writing, the figures for 2016 were yet to be released.

1 In December 2016, it was sold for more than RM130mil to Tan Sri Syed Mokhtar’s group. ( mofs-percetakan-nasional-msia-bhd-sold-syedmokhtar).
5 Only employees with monthly incomes exceeding RM4,000 are required to pay tax.
6 In Malaysia, excise duties are slapped on all types of imported motor vehicles, four-wheel drive vehicles and MPVs and vans, at rates from 60% to 200%. The exception is commercial vehicles which attract zero excise duties.
7 Normal corporate tax rate is 25%.
8 2015/16 and 2016/16 Economic Reports.
9 Petronas 2015 and 2014 Annual Reports.
10 Created to exploit the commercialisation of oil and gas in the Gulf of Thailand since 1990.
11 In comparison, over 32 percent of Norway’s revenues originates from all sources of petroleum activities.

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