World Bank country director for Philippines, Malaysia, Brunei Dr Zafer Mustafaoglu speaks at the public launch of a joint report on Wednesday, by the World Bank and the Malaysian Ministry of Economy, titled “A Fresh Take on Reducing Inequality and Enhancing Mobility in Malaysia”. (Photo by Zahid Izzani/The Edge)

KUALA LUMPUR (Feb 5): The World Bank has identified untaxed capital income as a major weakness in Malaysia’s tax system, contributing to the country’s low revenue collection despite a progressive personal income tax (PIT) structure. Capital income, derived from the ownership of assets or investments, includes dividends, interest, rental income, and capital gains.

It also flagged that Malaysia’s PIT structure has high chargeable income thresholds, low tax rates for upper-income brackets, and provides multiple tax reliefs given without an overall cap that reduces taxable income, and a narrow tax scope.

These were noted in a new report the global lender released on Wednesday, titled: “A Fresh Take on Reducing Inequality and Enhancing Mobility in Malaysia”.

“Malaysia’s heavy reliance on direct taxation is quite progressive. But capital incomes, which are highly concentrated and still constitute a high share of the national income, are not taxed, and direct taxation through personal income tax is low, at below 3% of GDP (gross domestic product),” the bank said in the report.

“The PIT is also designed in a manner that places an inherent limit on its revenue capacity, and compromises the progressivity of the tax burden,” the report explained. The bank suggested that addressing these issues, including the taxation of capital income, would broaden the tax base, primarily affecting higher-income earners, and consequently increase government revenue.

World Bank had previously said in October 2023 that Malaysia’s PIT revenue collection is limited — standing below 3% of GDP over the past decades, and below 2% in recent years — well below most high-income countries.

At the time, it had recommended that the government reforms its PIT framework, saying it was a crucial step towards achieving a more efficient and progressive direct tax system that will help Malaysia boost its revenue collection.

In its latest report, the World Bank, using estimates from its own simulation model, suggested that reducing taxable income thresholds and applying higher rates to upper-income brackets could boost PIT revenue by RM2.5 billion to RM2.8 billion for the 2024 assessment year. Additionally, introducing a cap on overall relief claims could contribute an extra RM1.1 billion.

The Ministry of Finance has projected that total government revenue would reach RM339.71 billion in 2025, up from a revised estimate of RM322.05 billion in 2024, driven by increased direct and indirect tax collection.

While revenue has grown steadily since a near 15% decline in 2020, the revenue-to-GDP share is estimated to be 16.3% in 2025, slightly below 16.5% in 2024. This ratio has been below 18% since 2015, raising concerns about Malaysia’s increasing dependence on debt to fund its fiscal needs.