It takes more than the threat of penalties to compel some Malaysians to fulfil certain legal obligations; these people habitually wait for incentives instead. That is why there are usually long queues at police stations whenever discounts are offered on outstanding traffic fines.
Similarly, local authorities dangle discounts on taxes and waive late charges to encourage property owners to settle their arrears. And from time to time, the government’s debt-laden National Higher Education Fund Corporation seeks to boost its coffers by giving discounts to reward the repayment of student loans.
VDP
The biggest example of the carrot approach in Malaysia is the tax amnesty, known as the Voluntary Disclosure Programme (VDP), that was in effect from November 2018 to September 2019 (for direct taxes) and from January 2022 to October 2022 (for indirect taxes).
‘A high level of tax compliance is attainable by making the process as pleasant as possible’
Although it can be argued that handing out sweeteners to persuade people to comply with the law sets an unhealthy precedent, there is no doubt that people do respond to such inducements. The VDP brought in RM7.88bn (US$1.78bn) in taxes and penalties for the Inland Revenue Board (IRB) and helped the board to grow its total tax collection in 2019 by almost 6%. It is no surprise then that there will be a VDP 2.
In his Budget 2023 speech in February, Anwar Ibrahim (the finance minister as well as the prime minister), said the IRB and the Royal Malaysian Customs Department will run the tax amnesty scheme again, from June 2023 to May 2024, this time covering both direct and indirect taxes.
Unlike in the first round, VDP 2 promises zero penalties across the board, which is a strong reason for people to come forward to report previously undeclared income and transactions. But will it be enough to motivate non-taxpayers to willingly participate in the income tax system?
Digital self-employed
It is an important question because a rising proportion of the labour force comprises those who are not in traditional full-time employment.
Typically, tax authorities have information on employees through the returns and notices submitted by employers. The law also requires employers to deduct tax from salaries. Few full-time employees can therefore dodge their responsibilities as taxpayers.
Many gig workers, influencers and online businesses operate outside the tax net
On the other hand, many gig workers, influencers, online businesses and content creators operate outside the tax net even though they earn business revenue that may amount to chargeable income under the law.
It is telling that IRB’s CEO, Mohd Nizom Sairi, has made special mention of social media influencers as among those the board hopes will register as taxpayers and disclose unreported income during VDP 2.
Tax responsibility
The new class of self-employed in the digital economy has to understand the roles and duties of taxpayers, which extend to furnishing tax returns and keeping records and documents. They must also get to grips with some taxation basics such as what constitutes taxable income and deductible expenses. And of course, they should be aware of the consequences of ignoring the tax laws.
This calls for a lot of outreach, engagement and education. It is a good thing the IRB is keen to do exactly that. In a 15 March tweet, Mohd Nizom wrote: ‘I firmly believe that a high level of tax compliance is attainable not through punitive measures, but rather by making the whole process or journey of compliance as pleasant and seamless as possible. This is possible by focusing on AES (awareness, education, services) and the board will continue its role as a facilitator of compliance.’
At the same time, accountants and accountancy firms can provide vital support by writing and speaking on why gig workers, influencers and other self-employed workers in the digital economy need to participate in the tax system. The messages should include practical advice such as how to avoid common pitfalls and how to minimise tax liability legally.
Nobody enjoys paying taxes, but when we do so, we should be equipped with adequate knowledge and an appreciation of how tax revenue matters to the nation.
