Asimen Macroeconomics

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BBEK4203

PRINCIPLES OF MACROECONOMICS


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TABLE OF CONTENTS

1.0 Introduction 1

1.1 Overview of the Tax System in Malaysia 1

1.2 Purpose and Scope of the Assignment 2

2.0 Personal Tax System in Malaysia 3

2.1 Sources of Income Liable to Tax 3

2.2 Personal tax for Resident in Malaysia 4

2.2.1 Tax Rates 4

2.2.2 Personal Relief 5

2.2.3 Tax Rebate 6

2.3 Personal tax for Non-Resident in Malaysia 7

2.2.1 Tax Rates 7

2.2.2 Tax Relief and Rebate 8

3.0 Effect of Personal Tax System to Malaysias Economy 9

3.1 Effect on Economic Growth 9

3.2 Effect on Government Income 9

3.3 Effect on Government Budget 10

3.4 Effect on Distribution of Wealth 10

4.0 Conclusion 12

Bibliography 13


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1.0 Introduction1.1 Overview of the Tax System in MalaysiaTaxation is an important economic tool for any country including developing counties

like Malaysia (Loganathan and Taha, 2007). Tax is defined as the money or liability that

is paid to the government for earnings received (Lee and Gordon, 2005). Generally, all

income of companies and individuals accrued in, derived from or remitted to Malaysia

are liable to tax. However, income remitted to Malaysia by resident companies (other

than companies carrying on the business of banking, insurance, air and seatransportation), non-resident companies and non-resident individuals are not liable for

taxation in Malaysia.

Basically, there are two types of taxes in Malaysia: direct and indirect taxation.

Administration of direct taxation is the responsibility of the Director General of Inland

Revenue Board while indirect taxation is administered by the Director General of the

Royal Customs and Excise Department. The governing legislation of Malaysian income

tax is the Income Tax Act 1967 and the Labuan Business Activity Tax Act 1990

(LBATA).

There are several types of taxes imposed in Malaysia such as income tax, other

direct taxes include real property gains tax. Indirect taxes include sales tax, service tax,

excise duty and import duty.

Taxation in Malaysia can also be categorised as company tax and personal tax. A

company, whether resident or not is assessable on income accrued in or derived from

Malaysia. Income derived from outside of Malaysia sources and remitted by a resident

company is not taxable, except in the case of banking and insurance business and sea and

air transport undertakings. A company is deemed to be a resident in Malaysia if the


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control and management of its affairs are exercised in Malaysia. The places of control

and management are determined base on where the meetings of the Board of Directors

are held. For company tax, the tax rate of 28% is applicable to both resident and non-

resident companies. However, companies carrying on petroleum production are liable to

be taxed at 30%.

Another category of tax is personal tax whereby all individuals are liable to tax on

income accrued in, derived from or remitted to Malaysia. The rate of tax depends on the

resident status as determined by the duration of his stay in the country. A provision for

this is indicated under Section 7 of the Income Tax Act 1967.

1.2 Purpose and Scope of the AssignmentThe assignment discusses about tax system in Malaysia with specific focus on personal

tax whereby an assessment of the tax system to Malaysias economy is done and

reported.
http://www.asiatradehub.com/malaysia/tax1.asp


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2.0 Personal Tax System in MalaysiaOne of the types of direct income tax in Malaysia is personal tax. Every individual is

subject to tax on income earned in Malaysia or received in Malaysia from outside

Malaysia. Income earned overseas and remitted to Malaysia by resident individuals is

exempted from tax. A non-resident individual however, maybe taxed for income earned

in Malaysia.

The tax rate imposed on individual is based on the individuals resident status

which is determined by the duration of his stay in the country as provided in Section 7 of

the Income Tax Act 1967. Generally, an individual who is in Malaysia for at least 182

days whether continuously or cumulatively in a calendar year is regarded as a tax

resident.

2.1 Sources of Income Liable to TaxSources of income that are liable to income tax are listed as follows:

Gains and profits from trade, profession and business Salaries, remunerations, gains and profits from an employment Dividends, interest or discounts Rents, royalties or premiums Pensions, annuities or other periodic payments Other gains or profits of an income nature not mentioned above.

Chargeable income is determined after adjusting for expenses incurred wholly and

exclusively in the production of the income. However, some aspects are not tax

deductible which include specific provisions for anticipated losses or contingent


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liabilities. The tax imposed based on personal income is different for resident and non-

resident in Malaysia as elaborated below.

2.2 Personal Tax for Resident in MalaysiaA resident individual is taxed on his chargeable income at graduated rates from 2% to

30% after the deductions of tax reliefs. However, individuals with chargeable income of

less than RM2,500 is taxed at zero rate (0%).

2.2.1 Tax RatesThe tax rates for resident individual in Malaysia for the assessment year 2012 are

indicated in Table 1.

Table 1: Personal Income Tax Rates for Resident Individual

Chargeable Income

(RM)

Rate (%) Tax Payable

(RM)On the firstOn the next

2,5002,500

01

025

On the firstOn the next

5,00015,000 3

25450


20,00015,000 7

4751,050


35,00015,000 12

1,5251,800


50,00020,000 19

3,3253,800


70,00030,000 24

7,1257,200


100,000100,000 26

14,325

A qualified person (defined) who is a knowledge worker residing in IskandarMalaysia is taxed at a rate of 15% on income from an employment with adesignated company engaged in a qualified activity in that specific region.


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The employment must have commenced on or after 24 October 2009, but notlater than 31 December 2015

An approved individual under the Returning Expert Programmes who is aresident is taxed at the rate of 15% on income in respect of having toexercising employment with a person in Malaysia

2.2.2 Personal ReliefsThe chargeable income of an individual resident is arrived at by deducting from

his total income the following personal reliefs:

Table 2: Personal Tax Relief for Resident Individual

Reliefs RM

Personal 9,000 (see Note 1)

Wife/Husband relief 3,000

Child relief- See Note 2 1,000 (for each child) or4,000Parents medical expenses relief (maximum 5,000 (see Note 6)

Disabled relief (maximum) 5,000 (for purchase of basic

supporting equipment for self,wife, child or parent

Life insurance and/or contributions relief toapproved provident funds relief (maximum)

7,000 (see Note 3)

Disabled child reliefs (unmarried) 5,000

Medical/education insurance relief(maximum)

3,000

Purchase of books and similar publicationsrelief (maximum)

1,000

Purchase of computer (every 3 years) 3,000

Purchase of sports equipment 300

Amount deposited into Skim SimpananPendidikan Nasional for taxpayers child(maximum)

3,000

Note 1: With effect from YA 2010, personal relief be increased from RM8,000 toRM9,000

Note 2: With effect from 2006, a child pursuing tertiary education at a recognisedlocal institution of higher learning at diploma level and above and foreach child studying at a recognised institution of higher learning abroad


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at degree level, the relief is increased from RM1,000 to RM4,000.Note 3: Effective YA 2010, the existing relief will be increased to RM7,000. The

increased relief amount of RM1,000 is given solely on annuity scheme

premium from insurance companies contracted with effect from 1January 2010. With effect from YA 2011, the existing relief of RM6,000on contributions made for life premiums and/or approved fundcontributions will be extended to include contributions made

Note 6: With effect from YA 2011, the existing relief of up to RM5,000 onmedical expenses for parents to be extended to include expenses onmedical treatment and care for parents with certain conditions to be met

A married woman may have her income assessed separately with an

overall tax liability reduced, although this may not always be the case. The

separate assessment covers all her income sources. If she opts for joint assessment

with her husband, the husband is given a wife relief of RM3,000.

2.2.3 Tax RebateTax liability of a resident individual is reduced due to the provision of tax rebate

as follows:

For an individual with income not exceeding RM10,000 a rebate ofRM110 is given. A further rebate of RM60 is given for his wife. A wife

with separate assessment will be entitled to a rebate of RM110 if her

chargeable income does not exceed RM10.000.

The equivalent amount paid in respect of any zakat, fitrah or other Islamicreligious dues which are obligatory

A sum of RM400 for the purchase of a computer by an individual or hiswife

The amount of fee paid to the government for the issue of an employmentpass, visit pass or work permit.


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2.3 Personal Tax for Non-Resident in Malaysia

Generally, a non-resident in Malaysia is liable to tax at the rate of 30%, and there is no

personal relief granted to him. An employee on a short-term visit to Malaysia enjoys tax

exemption in respect of his income from an employment exercised in Malaysia when his

presence does not exceed 60 days in a calendar year. However, non-resident individuals

who perfomed independent services such as consultancy services are not exempted from

tax.

2.3.1 Tax RatesThe tax rates for non-resident individual in Malaysia for the assessment year 2012

are indicated in Table 3.

Table 3: Tax Rates for Non-Resident Individuals in Malaysia

Types of Income Rate (%)

Public Entertainers Professional Income 15%Interest 15%

Royalty 10%

Special classes of income- Rental of moveable property- Technical or management services fee *- Use of property or installation or operation of any plant,

machinery or other apparatus purchased from a non-residentperson

10%10%10%

Dividend (single tier) Exempt

Dividends (franked) 25Business and employment income 26

Income other than the above 10

* Only fees for technical or management services rendered in Malaysia are liableto tax


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2.3.2 Tax Relief and Tax Rebate

Non-residents are not eligible to claim relief and rebates and are subject to a tax of

27% on their taxable income. With effect from year 2010, the rate of tax of non-

residents will be reduced from 27% to 26%.


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3.0 Effect of Personal Tax System to Malaysias EconomyGovernment revenue derived from tax includes both direct and indirect taxes. Direct

taxes are collected by the Inland Revenue Board which includes income tax from

individuals, companies, other persons and petroleum, stamp duty, estate duty and real

property gains tax.

3.1 Effect on Economic GrowthDuring the earlier stage of development in Malaysia (the 1960s), most revenue from tax

were collected from indirect taxes, accounting for 76.7% of governments revenue

(Kasipillai, 2006). However with tax reform over the years, there has been less reliance

on indirect taxes and more on direct tax. Starting from 1999, the major contribution to

governments revenue comes from direct tax at 69%. In 2005, the collection of direct tax

represents 51% of the government total revenue (Economy Report, 2007). According to

Loganathan and Taha (2007), direct tax revenues for Malaysia within the year 2001 to

2006 showed that revenues from personal tax averaged at about RM9,000 million. Major

contributor to the direct tax revenue for the government comes from companies with

RM28,.414 million collected in 2006.

3.2 Effect on Government IncomeThe decrease of maximum personal income tax from 27% to 26% beginning 2010 for

chargeable income group exceeding RM100,000 does to a certain extent reduce

governments income from personal income tax revenue. In addition, the personal relief

which was increased from RM8,000 to RM9,000 in 2010 also added to a reduced

earnings from personal tax income for the government. However, the tax relief and rebate


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ensured that each individual taxpayer enjoys an increase of RM1,000 in disposable

income (Chin, 2009).

The inclusion of new tax policy regarding personal tax such as the 15% income

tax rate for knowledge workers residing in Iskandar Malaysia and those individuals under

the Returning Expert Program would further reduced revenues collected by government

from personal income taxation. The reduced rate of taxation imposed on knowledge

workers is a measure by the government to attract Malaysians to reside, work and value-

add in the promoted industry sectors of Iskandar Malaysia. However, this means that for

each knowledge worker, the government loses revenue from personal income tax at a rateof 6% as these workers were supposed to be taxed at 26%.1

3.3 Effect on Government BudgetThe personal income tax proposed some tax relief and rebate for resident in Malaysia.

These relief and rebate amounts to RM9,000 per individual (excluding non-resident)

indicating loss of revenue for the government. Thus, the governments tax budget needsto shift its focus on other types of income or increase efficiency of tax collection in order

to maintain their revenue.

3.4 Effect on Distribution of WealthThe government has reduced the personal income rate from 27.0% in 2009 to 26.0% in

2010 up to now. In addition, individual relief and tax deduction has also been increased.

However, the impact of such measures on consumption is limited as only 1 million out of

10.5 million workers pay income taxes. Moreover, the income tax cut affect only those

1Iskandar Regional Development Authority (2011). Guidelines for Application of 15% Tax Rate Schemefor Knowledge Workers in Iskandar Malaysia, URL:

http://www.iskandarmalaysia.com.my/pdf/tax-scheme/faqs-15-Tax-Rate-Scheme-IM.pdf
http://www.iskandarmalaysia.com.my/pdf/tax-scheme/faqs-15-Tax-Rate-Scheme-IM.pdfhttp://www.iskandarmalaysia.com.my/pdf/tax-scheme/faqs-15-Tax-Rate-Scheme-IM.pdfhttp://www.iskandarmalaysia.com.my/pdf/tax-scheme/faqs-15-Tax-Rate-Scheme-IM.pdf


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with earnings more than RM100,000 per year. The decrease of personal tax rate is a

measure by the government to reduce the burden of the lower income group and

indirectly increasing economic growth rate.

Malaysia as a developing country practices open market policy. In 2007,

Malaysian economy was ranked 29th largest in the world based on buying power parity

with gross national income (2007) at $357.9 billion and a growth rate of between 5% to

7% since 2007. On distribution of income, there are 5.8 million household in 2007. Out

of this, 8.6% have monthly income below RM1,000; 29.4% with income between

RM1,000 and RM2,000 while 19.8% between RM2,001 to RM3,000. This implies thatalmost 40% of the household are earning below RM2,500 indicating exemption from

income taxation. Only 4.9% are generating an income of RM10,000 and more monthly

thus there is only a small percentage of household subjected to personal tax rate at 26%.

This means that the wealthiest 20 percent of Malaysians control 53.8 percent of the

wealth, while the poorest 60 percent of the populations controls just 21.3% of wealth. At

the very bottom of the income range, the poorest 20% of the population controls only

4.5% of wealth.2

Malaysian tax policy sees to it that the imposition of personal tax on the

Malaysian community will not cause those in the lower income bracket to suffer from

burden of personal tax cut which may lead to their lowered spending power. Those

earning less than RM2,500 enjoys 0% tax rate. Income tax is an annual charge levied on

both earned income (wages, salaries and commission) as well as unearned income

(dividends, interest, rents). The progressive income taxation is designed to distribute

wealth more evenly in the Malaysia population and helps in automatic fiscal stabilisation

to cushion the effects of economic cycles.3

2 Encyclopedia of the Nation (2012). Malaysia Poverty and Wealth, URL:http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-AND-WEALTH.html3 Trade Chakra (2012). Income Tax in Malaysia, URL:http://www.tradechakra.com/economy/malaysia/income-tax-in-malaysia-205.php
http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-AND-WEALTH.htmlhttp://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-AND-WEALTH.htmlhttp://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-AND-WEALTH.htmlhttp://www.tradechakra.com/economy/malaysia/income-tax-in-malaysia-205.phphttp://www.tradechakra.com/economy/malaysia/income-tax-in-malaysia-205.phphttp://www.tradechakra.com/economy/malaysia/income-tax-in-malaysia-205.phphttp://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-AND-WEALTH.htmlhttp://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-AND-WEALTH.html


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4.0 ConclusionThe discussion in this paper provided a brief overview of the taxation system in Malaysia

and an elaborate discussion of the personal income taxation in this country. It is indicated

that residents which are defined based on the number of days an individual reside in

Malaysia for a given year can be categorized as resident and non-resident each with

different taxation structure. Generally, non-residents are taxed at 30% while residents at

26%.

Tax is revenue for any government and policies of taxation in a country may have

certain effects on the nations economy. In this discussion, the effect of personal taxation

on economy in Malaysia was elaborated in terms of economic growth, government

income and budget, and also on distribution of wealth. The discussion showed that

personal taxation in Malaysia helps to protect the lower income groups which form the

majority of the population while at the same time, still capable of providing the

government with about RM9,000 million in revenue annually.

It is concluded that tax system of a country serves not merely as a source of

income for the government but is used to promote the economy growth and development

too. This paper serves to highlight that it is our duty to pay for tax as this helps to

generate revenue for the government and indirectly contribute to economic development

of our country.

[2,656 words]


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Bibliography

Chin, J. (2009). Highlights of Budget 2010, The Edge Malaysia Online, URL:http://www.theedgemalaysia.com/index.php?option=com_content&task=view&id=152027&Itemid=79

Encyclopedia of the Nation (2012). Malaysia Poverty and Wealth, URL:http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-AND-WEALTH.html

Iskandar Regional Development Authority (2011). Guidelines for Application of 15%Tax Rate Scheme for Knowledge Workers in Iskandar Malaysia, URL:

http://www.iskandarmalaysia.com.my/pdf/tax-scheme/faqs-15-Tax-Rate-Scheme-IM.pdf

Kasipillai, J. (2006). A Comprehensive Guide to Malaysian Taxation-Under SelfAssessment. Kuala Lumpur: McGraw-Hill.

Lee, Y. and Gordon, R. (2005). Tax structure and economic growth. Journal of PublicEconomics, 89, 1027-1043.

Loganathan, N. and Taha, R. (2007). Have Taxes Led Government Expenditure InMalaysia?Journal of International Management Studies, August 2007

Malaysia. (2006). Quarterly Updates Malaysian Economy, 2006. URL:www.treasury.gov.my

Malaysia. (2006).Economic Report 2006/2007. URL: http://www.treasury.gov.my

Trade Chakra (2012). Income Tax in Malaysia, URL:http://www.tradechakra.com/economy/malaysia/income-tax-in-malaysia-205.php
http://www.theedgemalaysia.com/index.php?option=com_content&task=view&id=152027&Itemid=79http://www.theedgemalaysia.com/index.php?option=com_content&task=view&id=152027&Itemid=79http://www.theedgemalaysia.com/index.php?option=com_content&task=view&id=152027&Itemid=79http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-AND-WEALTH.htmlhttp://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-AND-WEALTH.htmlhttp://www.iskandarmalaysia.com.my/pdf/tax-scheme/faqs-15-Tax-Rate-Scheme-IM.pdfhttp://www.iskandarmalaysia.com.my/pdf/tax-scheme/faqs-15-Tax-Rate-Scheme-IM.pdfhttp://www.treasury.gov.my/http://www.treasury.gov.my/http://www.treasury.gov.my/http://www.treasury.gov.my/http://www.tradechakra.com/economy/malaysia/income-tax-in-malaysia-205.phphttp://www.tradechakra.com/economy/malaysia/income-tax-in-malaysia-205.phphttp://www.treasury.gov.my/http://www.treasury.gov.my/http://www.iskandarmalaysia.com.my/pdf/tax-scheme/faqs-15-Tax-Rate-Scheme-IM.pdfhttp://www.iskandarmalaysia.com.my/pdf/tax-scheme/faqs-15-Tax-Rate-Scheme-IM.pdfhttp://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-AND-WEALTH.htmlhttp://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-POVERTY-AND-WEALTH.htmlhttp://www.theedgemalaysia.com/index.php?option=com_content&task=view&id=152027&Itemid=79http://www.theedgemalaysia.com/index.php?option=com_content&task=view&id=152027&Itemid=79

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