Does Cutting Income Tax Rates Help Malaysians Cope With The Rising Cost?

Does Cutting Income Tax Rates Help Malaysians Cope With The Rising Cost?

Three months short of a year after GST was implemented, people are still reeling from having to pay 6% more in ‘almost’ everything in the country, and grappling to find a balance in their finances.

The estimated revenue for the country for 2015 showed that personal income tax and GST contribute similar percentage of the year’s revenue for the country respectively. Personal income tax makes up 12.66% of total revenue of RM222,455 million, while GST makes up 12.14%.

To make the 6% hit less impactful, the Government has continuously reduced the income tax rates, and Year of Assessment 2015 (the tax you file in 2016) is the second consecutive year we see a tax cut for personal income tax.

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Does cutting income tax help with GST?

Does it really help to cut income tax rates with the introduction to GST? How does it make a difference to the country, the economy, and of course, to our wallets?

The short answer is yes, indirectly.

First, let’s see your estimated savings with the reduction in income tax rates if your annual income is RM54,000. Here’s an easy income tax calculation:

Tax savings

Find out how much you can save with the tax cut this year using our Income Tax Calculator.

This means you have an additional RM292 in discretionary income, and theoretically, higher discretionary income means higher consumer spending – which boosts the domestic economy. However, due to the sluggish consumer sentiment, consumers may continue to cut spending, and save the additional disposable income, or use it to offset the additional cost of living.

How much will this tax savings help to offset the additional cost incurred by GST? The tax savings of close to RM300 will equal the GST amount of close to RM5,000 worth of spending. It’s not much over a year, but every sen of savings count.

In this sense, tax rate cuts may encourage individuals to work, save, and invest. This may indirectly boost productivity as individuals may be more motivated as their pay is more attractive now with lower tax rates.

For the more affluent group, lower tax rates make it easier for them to reach their target income and also their financial goals.

There is much debate about the extent to which tax cuts increase productivity and economic growth. To be honest, boost in productivity and growth would probably be prominent if there is significant cut in rates. In Malaysia’s case, rates are only cut between 1% and 3%.

Progressive income tax system

Our income tax system has continuous been improved. Since last year, we can make our income tax payment using credit card. This will help us manage our payments easily, plus with the right credit card you can make additional savings via credit cash back!

What is more interesting is the additional tiers in the income brackets. In a progressive income tax system, rates on income rise with income. The more you make, the more you pay and Malaysia has one of the most progressive income tax systems in the region.

Previously there were only nine tiers, the personal income tax rates have now increased to 12 tiers and will be 14 tiers for Year of Assessment 2016. This will likely only affect the highly affluent group as they will see a much higher tax rates when they file for their tax in 2017 (YA 2016).

Here’s the difference in rates between Year of Assessment 2014 (filed in 2015) and Year of Assessment 2015 (to be filed in 2016):

Chargeable Income
(RM)
Calculations
(RM)
YA2014 Rate
(%)
YA2015 Rate
(%)
YA2016 Rate
(%)
0 – 2,500
On the First 2,500
0
0
0
2,501 - 5,000
Next 2,500
0
0
0
5,001 - 10,000
On the First 5,000
Next 5,000
2
1
1
10,001 - 20,000
On the First 10,000
Next 10,000
2
1
1
20,001 - 35,000
On the First 20,000
Next 15,000
6
5
5
35,001 - 50,000
On the First 35,000
Next 15,000
11
10
10
50,001 - 70,000
On the First 50,000
Next 20,000
19
16
16
70,001 - 100,000
On the First 70,000
Next 30,000
24
21
21
100,001 - 150,000
On the First 100,000
Next 50,000
26
24
24
150,001 - 250,000
On the First 150,000
Next 100,000
26
24
24
250,001 - 400,000
On the First 250,000
Next 150,000
26
24.5
24.5
400,001 - 600,000
On the First 400,000
Next RM200,000
26
25
25
600,001 - 1,000,000
On the First 600,000
Next 400,000
26
25
26
Exceeding 1,000,000
From 1,000,000
26
25
28

Comparing personal income tax rates for Assessment Year 2014 and 2015

According to Choong Hui Yan, a tax consultant from SIMways Formulation, the Government’s move in increasing tax tiers would only really negatively impact those exceeding RM1 million as they’ll see an additional three tiers in Assessment Year of 2015 and five tiers in Assessment Year of 2016.

“Those who earn RM250,000 and above in 2015 will be subject to 24.5% rate when they file for their taxes this year, and those earning above RM400,000 will be subject to 25% (YA 2015). Now (YA 2016), those who earn less or equal to RM600,000 will stay at 25%, but those who earn more than that will be subject to 26% and for those earning more than RM 1 million, their tax rate will increase up to 28%!” said Choong.

Chargeable income: RM54,000
Chargeable income: RM1,000,000
YA2014
7%
25%
YA2015
6%
23%
YA2016
6%
24%

Comparing tax savings between chargeable income of RM54,000 and RM1 million in YA2014, 2015 and 2016

Much needed savings

With the continuous rising of the cost of living, we need every Ringgit saved. However, will the tax savings make an impact on our bottom line – especially as we cope with higher inflation and the 6% GST?

Not necessarily. With income tax rates reduction, the more you earn the more you will save.

Income Tax Calculator

 

In terms of savings amount, the more you earn, the higher your savings amount will be. In the example above, with an annual income of RM150,000, your tax savings will be RM2,534, while annual income of RM54,000 will only be saving RM292 in tax.

However, if we look at it in percentage, RM292 savings amount to 25.35% of savings, while RM2,534 is only 11.82% in savings.

Though the amount saved is still greater for the higher income group, perhaps the impact will be felt more for the middle-income earners due to the higher percentage of savings.

Whatever it is, tax cut is better for the taxpayers, but in a nutshell, it will not help the lower-income group with coping with GST, as most of them are not taxed on their income in the first place. Perhaps BR1M will help cushion some of that rising cost.

Want to find out how much savings you will make with the new tax rates? Use the Malaysia income tax calculator and plan for your income tax filing in advance!

income tax guide malaysia 2016

Image from Taxfix

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