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World Bank Urges Malaysian Government to Set Clear Revenue Target in Tax Reform

KUALA LUMPUR (April 22): The World Bank recommends that the Malaysian government specify the revenue targets for its reforms to avoid an ad hoc approach to taxation.

Dr. Apurva Sanghi, the World Bank’s lead economist for Malaysia

Dr. Apurva Sanghi, the World Bank’s lead economist for Malaysia, emphasized the importance of setting clear revenue goals to enable the government to implement appropriate tax policies effectively and in a timely manner. He noted that Malaysia has been collecting insufficient taxes and needs to increase revenue.

During a media briefing on the World Bank’s April 2024 Malaysia Economic Monitor report titled “Bending Bamboo Shoots: Strengthening Foundational Skills,” Dr. Apurva stated, “Our main point is the necessity of publicly announcing a revenue target.”

Malaysia has been striving to reduce a persistent fiscal deficit that originated during the 1998 Asian Financial Crisis. Recently, the government has implemented various measures such as reducing subsidies and introducing new taxes to address its fiscal challenges.

To mitigate the impact on living costs, the government has committed to providing cash and other forms of assistance. This year, the government aims to reduce its budget deficit to 4.3% of economic output from 5% last year.

In addition, Dr. Apurva Sanghi emphasized that the Malaysian government’s recent steps to broaden the tax base, including the introduction of a capital gains tax and an expanded services tax, are a positive move but fall short of addressing the revenue shortfall.

He stressed that establishing a specific revenue target would enable better communication of tax reform decisions to the public and industry stakeholders, providing clarity on the amount of additional revenue needed.

“The question is how much more?” Dr. Apurva emphasized. “What should the target be, should it be from 12.6% to 13% or 14%?”

He noted that tax collection as a percentage of gross domestic product (GDP) is projected to increase to 12.8% in 2024 from 12.6% in 2023, which is still significantly below the regional average of 25%.

“When you don’t set a target, you don’t know where you’re going; there are many roads to take,” he explained. “So it’s very important to know where you’re going.”

At the same event, World Bank senior economist Chong Yew Keat highlighted that setting revenue targets is a standard practice in developed economies, where targets are based on the country’s structural spending.

For instance, he explained that an ageing population would lead to increased spending on areas like healthcare as a percentage of GDP.

“This approach ensures that the government takes a longer-term perspective and ensures that the revenue increase is sufficient, allowing for tax policy to be more strategically timed and sequenced over time,” he added.

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