MALAYSIA is in a tough spot with government revenues falling because of the low oil prices as well as effects of the Covid-19 outbreak on the economy and will find it challenging either way if it raises taxes or opts for loans.

Putrajaya could consider turning to loans, although this would increase national debt, said tax experts.

Raising tax rates, on the other hand, would also have a negative impact on the economy, cautioned K-Konsult Taxation Sdn Bhd managing partner Koong Lin Loong.

It’s not possible to increase the tax rate for the sales and services tax (SST), which means the option to raise revenue from indirect taxes is limited, he said.

The current situation does not provide the government with many options to diversify revenue streams.

With limited fiscal space to manoeuvre, borrowing could be an option, said Koong.

“The only way would be by increasing non-tax revenue, which is to get a loan but that will increase the government’s debt,” he said.

With oil price plunging to US$30 (RM129), the government could expect some adjustments to its revenues.

Direct tax accounts for a lion’s share of government revenues at 51%.

Oil-related revenue, such as dividends from Petronas, make up 19%, while indirect tax and non-tax accounts form 11% and 20% respectively.

Chua Tia Guan, head of tax and financial consulting at Asia Business Centre said this is not the right time to introduce new tax rates with the intention of increasing revenue.

He said if the government were to revert to the goods and services tax, it should be with the aim of fulfilling the revenue targets for the SST.

“But if they implement GST, it would indirectly increase income tax income as there is a form of self-assessment in it, which will make businesses more cautious with their account.”

“So if they want to reimplement GST, they should wait until the economy recovers to increase the tax rate.”

Putrajaya should instead look into stimulating the economy to ensure sustainability of businesses and jobs, he said.

However, Chua said under the current circumstances where oil revenue will likely be lower, the fiscal deficit is expected to widen.

The new Perikatan Nasional government which took over Putrajaya last week is to study the country’s financial standing at the economic action council meeting on Monday, before any decision to recalibrate the budget.

Budget 2020 was drawn up based on the Brent crude oil price of US$62 per barrel.

AmBank Research said in a note recently the reliance on oil revenue is leaving the Malaysian economy vulnerable to global oil market movements. 

“The risk stems from the government’s estimate in Budget 2020 that the Brent oil price will be at US$62 per barrel. For every US$1 per barrel drop in the oil price, it will reduce oil revenue by RM300 million.

“Thus, pressure on the fiscal deficit/GDP, which is now at 3.4%, could rise to 3.6%-3.8% of GDP based on an RM8.1 billion loss in revenue,” it said.

If the oil price further weakens to the range of US$20-25 per barrel, Malaysia could experience a revenue of shortfall of RM RM11.1-RM12.6 billion. – March 13, 2020.