Overview of Malaysian Taxation

In Malaysia, the principle of tax charges is similar to the one practiced in United Kingdom where the tax rate is imposed on the person’s income. Malaysia strongly built upon indirect taxes as a source of revenue in its early stage of modernization and has further worsen after the implementation of tax on rubber exports in 1907 due to the increase of rubber production since 1900. Since 1917, many attempts were continuously made but ended up in failure until the Income Tax Act 1967 were implemented on 1 January 1968. The Income Tax Act 1967 incorporated the three laws of income tax existing in Malaysia at the said time which are Income Tax Ordinance 1947 only applicable to Peninsular Malaysia, the Sarawak Inland Revenue Ordinance 1960 only applicable to Sarawak, and the Sabah Income Tax Ordinance 1956 only applicable to Sabah.

There are certain objectives as to why tax is imposed in a country. First, it serves as a source of national income. Source of tax revenue is used to administer the country and to distribute back to the economy through development project or direct assistance. It is an avenue for the Government to obtain funds to sustain the costs of public expenditures such as education and training, national security, maintenance of law and order, disaster relief, healthcare and infrastructure. Secondly, it is also a medium and method for promoting economic growth. It will also minimize the restrictions and economic development. Tax also serves as a mean of income and wealth redistribution. The contribution from wealthy people who have excess income are redistributed through various social allocations by the ministries in the government to the poor and needy in order to build a civilized society.

A Government imposes taxes that are primarily direct taxes and indirect taxes. A direct tax is borne entirely by the entity that pays it, and cannot be passed on to another entity. In the other words, direct tax is paid by the person or organization on which it is levied. The Inland Revenue Board (IRB) administer policies relating to direct taxes which are income tax, petroleum income tax, real property gains tax and stamp duty. The law governing income taxes in Malaysia are governed by the Income Tax Act 1967. The taxable income of an individual and company are computed similarly except that there are no deductible personal reliefs for companies. These 2 taxes are treated differently although they are governed by the Income Tax Act 1967. The individual tax rate for non-residents are fixed at 26% whereas resident individuals are subject to income tax at graduated rates ranging from 0% to 26%. For the year of assessment 2007, the corporate tax rate was 27%. It was reduced to 26% for the year of assessment 2008 and then to 25% for the year of assessment 2009. From the year of assessment 2016, the corporate tax is reduced to 24%. Moving on to the next direct tax, the Petroleum Income Tax Act was introduced in