How Malaysia can widen the tax base

Malaysia’s revenue problem is not a story about capacity. It is a story about coverage. The economy has become more intricate, with a larger share of services, digital platforms, and cross border flows. Yet the tax net has remained concentrated on a narrower base of formal wages and corporate profits. If the aim is a stronger and more resilient budget without jolting growth, the path forward is not a dramatic hike in headline rates or a sudden flip to a brand new regime. The path is patient, systems based, and anchored in cleaner data, fewer leakages, and a wider denominator. The state collects more not by squeezing the same payers harder, but by making sure more of the economy is visible and participating. This approach reads as administrative first and political second, which is often the only way to move a complex system without scaring households and investors.

The first building block is data. A modern tax administration is a data business as much as it is a legal one. When transactions are recorded in standardised formats and validated at the time they occur, compliance starts to look like a default. E invoicing is the practical expression of this idea. It replaces sporadic audits after the fact with real time trails that let the authorities connect buyers to sellers and map the full chain from procurement to payment. The measure is not superficial digitisation. It raises the cost of misreporting across the system, makes under declaration easier to detect, and gives honest firms the clarity they need to plan. Firms gain from fewer disputes and faster reconciliations, and the state gains from a reliable view of where value is created and where taxes should attach. The political temperature stays lower because enforcement is built into the pipes rather than delivered through public raids and headlines.

Once visibility improves, the second building block is a prudent expansion of indirect taxes that reflects the shape of a service heavy, digital economy. The choice to strengthen the existing sales and service tax rather than leap to a full value added system is not only about politics. It is about administrative sequencing. Switching systems imposes costs on businesses and government, and it requires a long runway of education, software upgrades, and staffing. Strengthening what already exists avoids a period of confusion and allows the state to widen coverage in steps that the administration can deliver. Broadening the service tax to rising segments of the economy, refining the treatment of goods where margins and volumes warrant attention, and cleaning up exemptions that no longer have a policy rationale can raise steady revenue with less friction. Over time, as e invoicing matures and data quality rises, a shift to a more comprehensive value added system would be easier to execute if and when the political space opens.

Within this indirect tax track, two recent moves illustrate how incremental changes can add breadth. The sales tax on low value goods closes a long standing leak where cross border e commerce shipments slipped under the threshold of enforcement. A modest levy restores parity between domestic retailers and foreign sellers who can otherwise take advantage of fragmented declarations and platform logistics. It also normalises the idea that digital convenience does not mean tax exemption, which is an important message as commerce moves online. Another move is the effort to adjust luxury or high end consumption taxes. Early designs for a narrow tax on specific premium goods promised a visible headline, but they carried higher design costs and complicated enforcement for relatively small yields. By contrast, improving the core sales and service net can capture a broader spread of discretionary spending with less administrative drama. The lesson is clear. Narrow boutique taxes that sound targeted often impose complex definitions and encourage avoidance through product relabeling. A cleaner base with fewer carve outs delivers more sustainable results.

A third building block concerns capital. The decision to tax gains on disposals of unlisted shares aligns the treatment of value extraction with the spirit of the income tax. For years, gains realised through private transactions could escape attention even when they reflected value that, in substance, was similar to income. Clearer rules for unlisted equity disposals close an asymmetry that invited arbitrage. The point is not to punish investment. It is to shape it. When entrepreneurs and investors know that quick flips face transparent treatment and that longer holding periods and real business building are respected, the tax system can tilt behaviour toward deeper value creation. Equally important is guidance that spells out scope, mechanisms, and exemptions so that both companies and the revenue authority can administer the rules without turning every deal into a negotiation. Predictability is the hidden currency of revenue. It reduces litigation, smooths cash flows, and lets markets price risk with fewer surprises.

A fourth building block is the rationalisation of subsidies. While not a tax in a narrow sense, a large blanket subsidy is a negative tax on consumption that distorts prices, crowds out more productive spending, and creates the impression that the only way to fund public services is to raise rates on a shrinking group of compliant payers. Replacing broad fuel subsidies with targeted support frees fiscal space at the top while protecting lower income households at the bottom. When diesel prices float and eligibility filters become sharper for petrol support, the budget can redirect resources to health, education, and infrastructure without constantly reaching for new revenue headlines. The inflation optics are delicate, which is why a gradual and well signposted approach matters. Done carefully, subsidy retargeting broadens the effective base because fewer leakages need to be backfilled by higher taxes on the visible minority.

None of these tools work at full strength without a parallel investment in compliance culture. E invoicing and analytics make it possible to audit smarter, but the social contract around taxes improves when larger taxpayers embrace governance frameworks that reduce the temptation to treat every assessment as a bargaining session. When boards see tax as an ongoing control environment rather than a once a year crisis, voluntary disclosure rises and disputes fall. Small businesses, meanwhile, benefit from clear thresholds, standard forms, and helpful pre filing guidance that reduces the time and intimidation involved in staying onside. Over time, the administration should aim to publish anonymised dashboards by sector and size that show compliance rates and audit outcomes. Peer visibility creates pressure to improve, and the public sees that oversight is not arbitrary.

Sequencing is the quiet hero of reform. Trying to push a wholesale regime change while both the public and businesses are still adapting to e invoicing would multiply execution risk. A more credible sequence is to finish the rollout of invoice standards, expand sales and service coverage where it is administratively feasible, plug the obvious e commerce channels that have evaded the net, and strengthen capital gains rules where leakage has been most salient. The state should treat these steps as a coherent package that builds confidence through delivery rather than announcements. Each delivered step increases the political space for the next step, and each success raises the odds that more ambitious changes can be entertained later without fear of a backlash.

There are also gains to be made at the interfaces where the informal and formal economies meet. Platform intermediaries in ride hailing, delivery, home sharing, and online freelancing are natural nodes for documentation and withholding. Modest default withholding with annual reconciliation brings thousands of micro enterprises into the formal net while giving them proof of income that helps with credit and social protection. The policy logic mirrors what is underway with invoice standardisation and the sales tax on low value goods. It is easier to formalise activity when the point of contact is a large, organised intermediary that can absorb compliance obligations, build simple tools for their users, and report aggregate data to the authorities.

All of this adds up to a model of consolidation that privileges coverage over shock. It does not deny the appeal of a single flagship tax change that promises to solve the revenue problem in one stroke. It simply recognises that fiscal trust compounds through delivered competence. Rating agencies and bond markets often reward a string of credible administrative improvements more than a dramatic pivot that later requires a reversal. Businesses, in turn, prefer a glide path of predictable tightening to abrupt increases that force them into hurried system changes and unplanned cash outflows. Households find it easier to adjust when prices move in steps and when compensation is well targeted rather than sprayed across the income distribution.

This model also invites a better conversation with the public. When people can see that the state is investing in better pipes, is closing obvious leakages, and is not demanding more from the same payers without also widening the denominator, resistance softens. Communication can move from slogans to evidence. Dashboards can show compliance trends by sector, estimates of the shadow economy shrinking, and how retargeted subsidies are cushioning the most vulnerable families. The message shifts from an abstract promise to a concrete account of progress. In that kind of environment, even proposals that were once politically costly can receive a fairer hearing because trust has been built through visible delivery.

Looking ahead, the goal is not only to raise more money. It is to raise it in a way that supports better growth. Clean invoice data cuts the cost of doing business. Predictable indirect tax rules let firms price with confidence. Clearer treatment of private share disposals reduces the fog around exits and restructurings. More focused subsidies restore the fiscal space for investments that lift productivity. Stronger governance lowers the compliance premium that honest firms often bear when the system around them is murky. Taken together, these pieces help Malaysia climb the value chain without asking markets to swallow fiscal volatility.

There is a simple way to test whether this approach is working. If in two or three budget cycles the share of revenue from a broader set of sectors has risen, if audit inventories are smaller, if disputes resolve faster, and if capital raising for genuine business building remains healthy, the country would be on the right track. None of those indicators requires a banner headline. They require persistence. Reform fatigue is a real risk, which is why the state should keep the sequence short, the milestones visible, and the messaging free of triumphalism. The prize is a tax system that feels boring in the best way. It works quietly, covers more of the economy, and funds public goods without drama.

Ultimately, the question often framed as how Malaysia can widen the tax base does not have a single dramatic answer. It has a disciplined one. Finish the job of building a reliable transaction spine. Use that visibility to broaden the sales and service net with clear scope notes and fewer exemptions. Align capital taxation with the quality of investment by closing arbitrage while protecting real enterprise. Retarget subsidies so that the budget does not need to lean as hard on a narrow group of payers. Strengthen compliance culture so that big taxpayers treat tax control as a board level responsibility and small firms can comply without fear. If the state keeps showing that it can deliver each step in order, the base will widen, the budget will strengthen, and the economy can grow with more confidence that the rules will be predictable tomorrow as well as today.