Income tax reforms

The DAP welcomes the long overdue separate income tax assessment for working wives and the removal of the absurd arrangement whereby a married couple pays more tax than two single persons with the same earnings. We are particularly happy because this had been one of the issues in the DAP 1974General Elections Manifesto.

However, the income tax laws need a thorough overhaul if it is to serve the objective of creating a more just and equal society through a fairer distribution of wealth and income.

I am told that compared with other countries like India and Pakistan, the average tax rates applicable to a single person at low levels of income, say below $10,000 per annum, are higher in Malaysia while beyond a level of income equal to $15,000 a year, average tax rates in Malaysia are lower than other countries. In other words, the lower incomes are taxed at a higher rate while higher incomes are taxed at a lower rate, compared to other income tax structures. This is surely inequitable and not in accordance with the declared objective of creating a fair and just society.

Thus, in removing totally the abatement of income tax in Sabah and Sarawak, as proposed in the present budget, what is introduced is not so much harmonization of taxes as the extension of an inequitable income tax to our brethrens in Sabah and Sarawak.

Despite the separate assessment for income tax for working wives, therefore a complete restructuring of the Malaysian income tax laws is urgently needed. Such restructuring should provide for an enhanced rate for persons drawing $20,000 and above per year, while those below $15,000 or less should have their income tax burden reduced.

One great injustice is the antiquated income tax for individuals and their dependants. When explaining the reasons for the $10 increase for the motorcycle road tax from $40 to $50, the Minister of Finance said that the old rate had been in force since 1959.

But income tax reliefs had remained unchanged since 1947 when the Income Tax laws were first enacted. In fact, the position had worsened.

At present, the income tax relief for an individual is $2,000 (and 10% of earned income not exceeding $1,000 in the case of business partnerships), $1,000for the wife, $750 for the first child, $500 each for the second and third children and $300 each for the fourth and fifth children.

A person who earns $2,000 a year, or roughly $167 a month, in 1947 is a very different kettle of fish from a person who earns $2,000 a year or $167 a month today.

I have been told by the older generation that a person who earns $167 a month in 1947 is a fairly high-grade and important person, who is equivalent, in purchasing power to a person who is drawing $800 a month or $10,000 a year.

A person who draws a monthly salary of $167 a month in 1947 could not only support a big family including his aged parents but also employ two servants. At that time, rice was about 28 to 30 cents a gantang, as compared to $3.60 today; sugar 12 ½ cents a kati as compared to 55 cents today and a tin of milk 15 cents as compared to 75 cents today.

In other words, a person drawing $167 a month in 1947 belonged to a well-to-do class who can well afford to pay income tax, while a person who draws a salary or income of $167 a month in 1974 belongs to the lower and poorer strata in society who have great difficulty in making ends meet, let alone daring to think of employing any servants!

Yet, a person who earns $167 a month today has to begins to pay income tax if he is not married while a person who in 1947 draws $167 a month (which is equivalent to about $800 a month income today) need not to pay income tax.

This was because in1947, when the income tax was first introduced, the relief for an individual was $3,000, with a $2,000 relief for the wife, $750 for the first child , $500 each for the second and third children, $300 each for the fourth and fifth children and $200 each for the sixth, seventh, eighth and ninth children.

It was in 1960 that the rates of believes for individuals and the dependants were slashed to the present levels and in spite of the ravage of inflation on the purchasing power of the incomes of the low-income groups, no adjustments have been made to alleviate the burden of the low-income groups.

The antiquated income tax relief system is the most glaring injustice in the country’s taxation laws, and which should be updated and increased without any more delay, to keep faith with the government objective to build a more just and equal society.

It is my party’s view that the income tax relief should be increased drastically to provide the low-income groups with a sufficient margin of retained earnings to keep falling living standards at bay. The income tax reliefs for individuals, their wife and children should be doubled, if not trebled, so as to increase minimally, the relief for individuals to $4,000, the wife’s relief to $2,000 a year and for the first child, $1,500 the second and third children each $1,000 and the fourth and fifth children each $600.

I need only to give one further instance to show the urgency and equity of such income tax reforms. At present, a wage earner will have to spend between $2,500 to $ 3,500 to pay for his child’s post-secondary education, in private in institutions (and there are more and more such cases with limited school places) like form six classes and it is only equitable and just that the income tax relief should bear a realistic relation to such expenditures which will in the long run be beneficial to the country.

In fact, I would seriously suggest that there should be a more enlightened and liberal tax rebate for education of the young and the present restrictive system in this regard should be completely restructured to embrace all the legitimate educational expenses of dependent children.

Human beings are economic agents and their productive efficiency depends on what has been invested in them to develop and train their innate skills and abilities; more than this, their contribution to the social well-being of their fellow citizens depends on their social training and development. When the responsibility for ensuring that the abilities of children are developed to the full rests with parents, and this is becoming more and more so at the post-secondary and tertiary levels of education, there is an overwhelming case for the State to create conditions in which as far as possible the lack of parental income is not an obstacle to the achievement of social objectives.

DAP call for a Royal Commission on Taxes

It is clear that despite the oft-declared objective of the Second Malaysia Plan to ‘eradicate poverty’, the tax system in the country has not been restructured to play an active and dynamic role to redistribute wealth and income to bring about a more equitable society.

In this connection, I seriously call on the Minister of Finance to introduce to wealth tax for the excess profits tax for instance does not take into account properties and holdings and does nothing, therefore, to redistribute wealth.

The DAP proposes the establishment of a Royal Commission on taxes which should study and recommended drastic structural changes in the tax system ensure that it becomes a dynamic and active instrument in bringing about a fairer distribution of wealth and income; propose new taxes which can be levied to shift the taxation burden to the higher income groups as at present only 28% of the total taxation is accounted for by direct taxation. The Royal Commission should in particular recommend restructuring the income tax laws and reform the income tax reliefs and rates to ensure that income tax should not be levied on any income which is insufficient to provide the recipient with subsistence at a level to sustain health, efficiency and well being for himself and his family.

(Speech by Parliament Opposition Leader, DAP Secretary-General and MP for Kota Melaka, Lim Kit Siang, in Dewan Rakyat on the 1975 Budget on November 20, 1974)