Friday, October 19, 2012

Is Malaysia Income Tax Rate Reasonable?

Malaysia has lower income tax rate if you compared to most Europe countries (e.g. look at the Irish tax scheme that I posted quite sometime ago), United State and Australia and you should feel grateful for it.

However, when you come to compensation we're at the losing side. We pay taxes but we do not get back any compensation from the government especially for the middle income group people like me. So technically speaking, our low tax rate has been offset with the compensation that western countries offer.

That is also why personal finance is more important here in Malaysia as compared to those countries! :) For instance, we can't rely on government to plan for our retirement, you can't totally rely on EPF which is not enough in most of the cases.

Having said so, if we compare to Hong Kong and Singapore where compensation is similar to Malaysia, our income tax rate can not be considered low anymore. In fact, it is pretty high comparatively. Let's see the table below where I get it from Personal Money magazine:

Hong Kong Tax Rate (2011/2012)

Income Bracket (HK$)  Tax Rate
1 - 40K 2%
40K - 80K 7%
80K - 120K 12%
> 120K 17%

Singapore Tax Rate (2012)

Income Bracket (S$) - 2012 Tax Rate
1 - 20K 0%
20K – 30K 2%
30K - 40K 3.5%
40K - 80K 7%
80K - 120K 11.5%
120K - 160K 15%
160K - 200K 17%
200K - 320K 18%
> 320K 20%

Malaysia Tax Rate (2011)

Income Bracket (RM) - 2011 Tax Rate
< 2.5K 0%
2.5K - 5K 1%
5K - 20K 3%
20K - 35K 7%
35K - 50K 12%
50K - 70K 19%
70K - 100K 24%
> 100K 26%

Well as you can see from the table above, Malaysia tax rate is higher than Hong Kong and Singapore based on the income bracket. Let's take an $100K income as example for comparison:

Income Tax Rates Comparision with $100K Income

Hong Kong Singapore Malaysia
Income HK$100K S$100K RM100K
Marginal tax rate 12.0% 11.5% 24.0%
Total tax payable HK$5.2K S$5.1K RM14.325K
Effective tax rate 5.2% 5.1% 14.3%

As I commented in my previous post on 3 thankful things of Malaysia 2013 budget, most tax scheme is progressive tax scheme:
Which means, if you earn RM50K, it doesn't mean you will get taxed at 12% for all RM50K but only RM20K. For the rest of the RM30K it gets taxed at lower tax rate than 12% based on the tax income bracket scheme.

That's why if you look at the table above, there is marginal tax rate and effective tax rate. The effective tax rate is the actual tax rate. So for $100K, the effective Malaysian tax rate is 14.3/5.2 = 2.75 time higher as compared to Singapore and Hong Kong.

Also, few interesting facts that you MUST KNOW where I read an article recently from
  • Less than 10% of workforce in Malaysia pays tax
  • Number of taxpayers represent 5.6% of the population
  • 19.9% of Hong Kong population pays tax
  • 20.7% of Singapore population pays tax

These facts conclude that number of individual tax payers in Malaysia is extremely low and most importantly is:
"The burden of personal income tax is disproportionately borne by a small group"

A comment from facebook reader on the recent Malaysia 2013 budget saying the the individual tax rate is too high because the maximum tax rate(i.e.26%) is even higher than the corporate tax rate (i.e.25%).  Well, I think he has a very good point. Either we tax too low for corporate or we tax too high for individual.

So now, do you still think Malaysia income tax rate reasonable given that only 5.6% of population pays tax? Something is very wrong, in my opinion. What do you say?


Kris said...

If GST is implemented while lowering the tax bracket, then at least it make some sense. If without a lower tax bracket, then it is problematic.

ChampDog said...

Yes but even from my point of view, the tax rates should also be reduced without the GST implementation.

Ultimately, they should increase number of population who pay tax. Now if you earn 100K, you pay the same tax rate (i.e. 26%) for those who earn 320K.

Alvin Lim said...

i think the best approach is to introduce gst while reducing tax bracket so that the gov will still hv proper income.

and also learn to tax the rich.

ChampDog said...

Just read a news that Malaysia is the second lowest tax rate in south-east Asia, should we be happy about it?

The lowest one should be Singapore.

LCF on Personal Finance said...

Champ, wrong example - yours should be in the 26% bracket :)

Anyway, this is very true, by the time GST come, those who are in 30 or 40s are the one suffering the most all throughout the adult working years.

My CFP lecturer joked that at least now not only the legal professions feel the tax. Ah Long and hookers also feel it when GST comes :D

ChampDog said...

Which example? You mean the $100K income example? lol Mine is slightly there too. Hahaha....

Depends how much they lower down the tax when GST comes and also how high is the GST. :)

Will the tax rate same with Singapore?

Anonymous said...

can government give out status of what races paying the most taxes?

I want to know why only small percentage paying taxes.

I am paying high tax but I do not see improvement in the country and a better comfortable living life. I do not see improvement in traffics. Traffic police are not working or efficient even when they see drivers or motorcyclist that do not follow traffic rules.
Look at motorcyclist crossing traffics /beating red lights like nobody. I do not see security in the country improved, why people need to employ 3rd party security firm to look after their family house/home. The guarded and security is not a theme in selling properties..WHY is this shit happening - Meaning homeland security is shitty.

ChampDog said...

I’m not sure if there is such data and it will be very interesting. I don’t think they will publish it but I will bet the race who pay the most taxes is Chinese, I’m speculating here but I believe you can probably guess too.

I”m not happy with some of stuff in Malaysia too but I do believe we have made certain improvements. I think it is matter of comparison with other countries in Asia, you will find that we’re generally falling behind. That’s why a lot of Malaysians who stay in overseas for quite sometime will usually has culture shock or un-satisfaction when they come back to Malaysia. It takes certain of time for time to get used to it (e.g. closed one eyes) or they can’t, they will usually move back to overseas.

Honestly speaking about violating traffic rules (e.g. beating red lights), I seldom see it here. I seldom see it here in Penang unless you talk about midnight where those “Mat Rempit” are having their party. Do you mean those? Where do you stay? In rural area, I see that a lot of village people actually do not give a damn about it.

Home or general security is another issue which I agree too. We used to be a very safe country and nowadays this is getting worse. I’m speculating here again, where I believe the reasons of this are caused by the both illegal and legal immigrants in Malaysia which comprise a substantial portion of the Malaysian population now.

ChampDog said...

Look at it positively, we are the second lowest tax rate country in Asean, we are one the lowest unemployment rate (check out my latest post) in most countries. :)

Politically Incorrect said...

Can some please help me with a doubt?

I couldn't submit my incme tax returns for year 2011 and 2012 and I am no more working in Malaysia. I was there until August this year. Now I have another offer in Malayisa but for employment pass, I need to submit the copy of BE 2011 form.

Can I submit the income tax returns for 2011 and 2012 now so that I can get their copies? What will be the procedue since I am not in Malaysia right now.

I have the copy of CP21 (Leaver's form) with me.

kit said...

To be fairer, Hong Kong has generous tax allowances or reliefs for self, wife, kids, parents, grandparents, in-laws living together...

ChampDog said...

How much? Is that reasonable enough?

kit said...

using 1:1 comparison similar to your 100k table, for self, it's 120K versus malaysia's tiny 9k. another 240k for being married, each child 70k, parent/grandparent 19k to 38k each.

hong kong's allowances still trump malaysia's even after exchange rate conversion.


ChampDog said...

Wow, that is really a lot!!! Not sure how is Australia. :D

ChampDog said...

The only one thing is living standard in HK is much higher than Malaysia.

Btw, are you from Hong Kong?

maveric said...

When I retired slightly more than 3 yrs ago,one of the final task that needed to be done was actually going to the Income Tax Dept to get my 'Clearance' letter..! or else the entitlements and your last salary would be held back.

As a wage earner for all my employment life...30+ years,the emotion was a complete financial relief.I remembered that I needed to 'top' up a couple of hundreds due to some discrepancies too...readily paid for really good riddance of.......'

Other than the EPF,the people @ the Income Tax Dept I remembered actually 'smile'...while serving you..which is to be expected..!

I am of course part of the small minority (became aware just recently) that paid taxes & the amount is significant with the accumulation over the years...!You guys can project your tax forecast forward & it feels sinful at times...!As an employee,' die-standing' lar as there is no way to run... special treatment as a 'tax payee' retiree what so ever not even with the hundreds of K's paid ; no privileges even for medical services..!

The moral of the story is that you need to take care of yourself...get medical coverage & get your financial in order.. The authority expect you to contribute to their well being during your productive years but once you are old..I quote...'you become a dispensable diaper' :p :D

ChampDog said...

Hey maveric, how are you doing lately? So far so good?

Very well said, Maveric. I absolutely agree with you especially we're in Malaysia.

As a matter of fact, everyone is now dispensable. My company just had a retrenchment lately. Those young one asked how can a company do that? I just told them, this is just business. When you're no longer productive, you can be dispensable anytime. You just want to be prepared for that day. Retrenchment is very common nowadays.

One very important note (which many may not aware) is, you can be productive today doesn't mean you can be productive after 10 years. Good luck!

Same to in personal finance, don't expect country or government will take care of your retirement.

maveric said...

Hi CD,

Thanks for your greetings..I am well & things are pretty plain sailing probably thanks to some positive karmic acumen.

Retrenchment and VSS became the 'in-thing' sometime in the late 90's & I was a victim/benefactor in one I recalled back,it was both psychologically & mentally devastating.Look ..I was in my mid 40's ; too young to retire & too old to learn a new trade..& of course,some dependents at home added to the pressure too especially on the financial side..!!

Other than a perceived unproductive perception of you by the retrenchment people,it is normally a case of one being in the 'bad book' & need to be gotten rid off...

All I can say is it helps that you have the substance,experience followed by a 'reputation'in your own sphere or market place..: a friendly competitor of your ex-company would take you in & that was how I survive this episode.

The victim became the benefactor as the VSS quantum (dumped into EPF) helped tremendously in my quest to survive on EPF divident only plan..!

10 years is too long lar.Now days,your appraisal 'score card' is a yearly thing.. ie 12 months only.Of course,you will be readily rewarded according to you annual contribution but you start on a new slate on the 1st Jan every year....

Just as some fish hobbyist will tell you,change 20% water in your aquarium everyday & the fishes will be healthy & strong....similarly,vss the 'lower' 10% of your perceived laggards unproductive staffs every year & you will have a lean & mean company.

It was & still is a rat race out there but the RAT is very much more & ferocious nowadays...boy,am I glad to be out of it!!

Sorry for painting such a depressive scenario ...& do strive to be happy always as anything that doesn't involve a life is not worth to be worried about..!!


ChampDog said...

I'm glad that you're doing well! :)

Talking about it, most retrenchment that I have seen so far hit people in their 40+, that is probably the best age to retrench them from a company or business perspective. :D Lucky that you still get get into the competitor place. Some that I have known of, they have to switch field and start all over again.

I like the fish hobbyist analogy, that's really good one. I once a fish hobbyist before and what I did is create a complete ecosystem in the aquarium and that I manage to not changing the water for quite a very long time (I think is like 2 years), ultimately is forever. The tradeoff is cost and also your time to monitor the condition of the water. Changing water is much simple in reality. :)

In theory, it still can be done but may not be practical. That's why laying off is most companies will start doing it if they haven't started to in order to survive in long term.

P/S: Seems like this is already out of the original topic. Let me try to link it back. LoL. I do think Malaysia's tax rate is high and not reasonable, a better tax system should be implemented instead (unless you guys disagree?), but from a personal perspective, no matter how bad the condition is, we just need to survive with it and also think for the worst case (e.g. GST will be implemented and perhaps we should change our lifestyle after that?)

maveric said...

On the retrenchment/vss issue,don't you think it is 'cruel' to zoom in on the 40+ group? Firstly,most would have given at least 15 yrs of their most productive life to the organization by then...2ndly,it is at this juncture that one is fully committed ,both emotionally & financially to the family,car,house etc & 3thly,really not much of an option in the 'open job' market at that age..!

Moral of the story..; in the company you 'makan gaji' do stay alert,sharp & smart in your performance & inter-personal matters between age 40-50.It's probably too expensive to vss you once you touch 50..?! Sorry I digress too....

Aha...income tax.We know that only a minority of the working people pay tax ( less than 10% ) which means that most employee 'salary' sucks.I reckon this deficit is off-set by the corp taxes from Petronas,Genting,BAT,the 'beer' boys & blah3....

The issue here is we are also the top South East Asian country for 'household debt'(>60% av range,I think) Does it means to say that although most can't pay income tax due to low salary,they are able to somehow borrow up to their 'noses' for unproductive consumption loans..!!??

Although our central bank has the private 'household debt' information from commercial banks,apparently the 'leakages' are the 'societies & cooperatives' and what-nots in the public sectors that are dishing out the loans.. & the central bank is non the wiser on its control..!

Now I know why our country is the No 1 within Asean countries for 'passenger' car sales for the last couple of years (450-500k units per year,I think) ..salary not enough to pay tax but ok to loan maximum to buy a car..! Well..we are No 1 for the wrong stuff...!

I really do not know the economic implication of the above..but do expect social upheavals when we encounter some structural economic 'dislocation'...& for that,I do not think GST will be implemented anytime can :) a bit for now..??

ChampDog said...

Yes, that is very cruel but the fact is the productivity drops usually after 45+ or early (depends on person) and at that time, you probably have the highest pay in a company. Looking at the ROI, it is a short-term pain kind of thing start all over gain with the employee who has higher ROI. :)

Moral of the story, I guess is make sure you can be top performer all the time or else think for backup plan before company takes action on you. :)

Can't pay tax but somehow live like a rich? - it probably means corruption(untraceable income) in a country is high. They don’t pay tax doesn't mean they’re poor, it could be the other way round.

kit said...

i'm a malaysian aspiring to move to hong kong! :)

in hk, their average salaries are 3x more than malaysia's. this should be enough to make the question on cost of living moot. but when it comes to taxes, we bleed :(

ChampDog said...

When you plan to go there? Is it by PR or working visa?

I'm planning to Australia and it is going to be a lot of unknown after that move. So, I guess we can possibly share some challenges especially on what need to be prepared for. :D

kit said...

work visa. i'm job hunting..still.

go for it while you are still young, there are bound to be unknowns when you are making changes. despite the taxes, australia is a country known to have good quality of life, so don't hesitate and don't waste too much time in the country claiming to have the *second* best income tax rates in south east asia :)

ChampDog said...

Hahaha... :) Wish you can find your job very soon! :) Met a colleague today while doing a medical checkup for visa today. Guess many Malaysians are start migrating now.

Kris said...

So when are you moving? ChampDog?

ChampDog said...

Probably mid of next year. That is just a plan lar. :)

Didn't find what you want? Use Google Search Engine below: