Write an article about Explained: Where do your taxes go? .Organize the content with appropriate headings and subheadings (h1, h2, h3, h4, h5, h6), Retain any existing tags from The finance ministry is projecting revenue from the SST collection to rise by RM5 billion to RM51.7 billion in 2025, and by RM10 billion in 2026. (Facebook pic)
PETALING JAYA: Malaysia is in a rather unusual position where its tax revenues are relatively low in comparison with economic output, yet it has provided increasing welfare support to financially vulnerable citizens.
The country’s tax revenue is an important source of funding for initiatives aimed at supporting the poor and reducing income inequality. These include direct cash assistance, subsidies, and various social programmes.
However, the government’s resolve to help the lower income groups has been hobbled by the country’s narrow tax base, with tax revenues hovering around 12% of gross domestic product (GDP), the lowest in Asean apart from Indonesia.
FMT takes a deeper look into the government’s strategy to increase tax collections to provide more financial assistance to Malaysians.
Reforming the tax structure
The government recognises the need to reform Malaysia’s tax structure in order to broaden the tax base.
The narrow tax base stems from the fact only about 15% of the workforce and around 20% of registered companies are paying income taxes.
Tax experts point out the government’s revenues are largely derived from direct taxes such as income and corporate taxes. It also gets a sizeable chunk from resource-based revenue via Petroliam Nasional Bhd (Petronas) in the form of taxes and dividend.
However, the contribution from consumption taxes is significantly lower. The government sought to balance this out under Budget 2024 by increasing the tax rate for most taxable services under the Sales and Service Tax (SST) from 6% to 8%.
It went one step further in Budget 2025 by introducing several tax reforms, including an expansion of the SST, a new 2% dividend tax on individual shareholders, and a carbon tax that will come into effect in 2026.
The SST was broadened from July 1 to include additional services and non-essential goods. New categories of taxable services will be included under the SST regime while imported premium and non-essential goods will be subject to higher tax rates.
The expansion of the SST regime will certainly add to the government coffers, with the finance ministry projecting revenue from the SST collection to rise by RM5 billion to RM51.7 billion in 2025, and by RM10 billion in 2026.
Fiscal consolidation
The tax reforms are part of the government’s broader fiscal reform initiatives to tackle the rising national debt which hit RM1.22 trillion or 63% of GDP as of April 2024.
The then Perikatan Nasional-led government’s Covid-19 pandemic response had ramped up the national debt as it deployed over RM530 billion in stimulus and recovery packages during 2020–2022.
The fiscal deficit — which occurs when a government’s total expenditures exceed its income — widened from 3.4% of GDP in 2019 to 6.4% in 2021, the highest since 2009.
However, the fiscal deficit has been declining since the unity government under Prime Minister Anwar Ibrahim took power in late 2022. The administation has taken the bull by the horns by instituting initiatives such as fuel subsidy rationalisation and tax reforms.
Its fiscal consolidation efforts are starting to bear fruit with the fiscal deficit falling to 4.1% of GDP in 2024 from 5% in 2023. The government is projecting a further drop in the deficit to 3.8% in 2025.
The government’s fiscal reform initiatives have been given the thumbs up by the International Monetary Fund (IMF) and major international credit rating agencies, which reaffirmed Malaysia’s investment-grade ratings in 2024.
Scaling up assistance to B40 and M40 groups
Unlike the Goods and Services Tax (GST), the SST remains more targeted, minimising the burden on lower-income individuals.
The finance ministry has assured that the SST expansion targets only non-essential goods and services, ensuring that daily expenditure for families in the B40 and M40 groups remain largely unaffected.
More importantly, a significant portion of the increased revenue generated by the tax initiatives will be ploughed back to assist those in need.
Treasury secretary-general Johan Mahmood Merican said 5.4 million Malaysians in lower- and middle-income households stand to benefit from an expansion to the SST regime.
He said the expected boost in revenue will enable the government to scale up its financial assistance to members of the B40 and M40 income groups, such as the monthly Sumbangan Asas Rahmah (Sara).
The number of recipients for the Sara programme has expanded significantly to 5.4 million since April, compared to just 700,000 previously.
Here is a rundown of the unity government’s main welfare initiatives:
Sumbangan Tunai Rahmah (STR): Malaysia’s main cash aid programme provides financial assistance to eligible low and middle-income households, senior citizens, and single individuals. With a focus on easing the cost of living for Malaysians, it provides cash transfers to 5.4 million recipients, particularly B40 households, and families can receive up to RM2,000 annually.
Sumbangan Asas Rahmah (Sara): The STR programme also includes Sara which provides monthly subsidies of up to RM100 to low-income families through the MyKad to ease the cost of living for these families.
The government has increased the budget for STR and Sara in 2025, allocating RM13 billion to support nine million beneficiaries.
SejaTi Madani Initiative: RM1 billion allocated to empower rural and urban poor communities, with special attention to Orang Asli and marginalised groups.
Program Perumahan Rakyat (PPR): RM100 million allocated to improve living conditions and create job opportunities in PPR communities.
Other aid programmes
There also are other forms of aid, such as special assistance for civil servants and pensioners, the disabled individuals, senior citizens, single mothers, and allocations for the Social Welfare Department.
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