Opinion: Why a capital gains tax is good for the rakyat and the country

By P Gunasegaram

It’s a tax on profits and therefore unpopular with the moneyed class

Nothing gets the heckles of those making quick money up than the mention of a capital gains tax (CGT). The decibel level of those opposed to this is greater than even for the goods and services tax or GST.

However, it is rather difficult to understand the screeching high opposition to this tax, which affects only those who have substantial assets to trade and therefore are mostly wealthy, often very much so.

In fact, in Malaysia, there is a CGT - the real property gains tax (RPGT). That makes it even more difficult to understand why there is so much opposition to CGT which is an extension of the RPGT to other assets besides property.

A CGT will have little impact on the general population but is a major source of additional tax from profits which currently go untaxed for inexplicable reasons but for the inevitable conclusion that powerful lobby groups connected to the powers that be are opposed to it.

The oft-quoted “reason” is that it will discourage foreign portfolio investment. That is nonsensical since almost all developed countries have a CGT which has been in place for years, is well established and a useful source of income.

They, including that self-professed bastion of free trade and markets the US, are none the worse in terms of foreign investment, both portfolio (shares, bonds and other “paper” or electronic investments) and direct investments (property, buildings, factories, other facilities and so on). The US is currently the largest recipient of fund flows in the world.

Less than 30 countries in the world have no CGT and that includes Singapore, Hong Kong, Switzerland, Andorra, Bermuda, Barbados, Grenada, UAE, Bahrain, Thailand and Malaysia.

Many of them are tax havens or countries which have very strong incomes such as major oil producers who do not need tax income. Malaysia, currently struggling with deficits, high debt, and crimped tax revenues, does not fall into either category.

It needs to cut costs and raise revenue to strengthen its financial position. It therefore should introduce a CGT, a painless way with little impact on the general populace. All that is needed is to extend the RPGT to other asset classes - it really is as simple as that.

An example to follow is the US where a CGT has been in operation for decades. There is a good explanation here of the US system which is straightforward and simple.

The US CGT has three classes of tax - 0%, 15% and 20%. But if the asset is sold for a profit within a year, then it is classified as an income in the year it is sold and will attract the rate of tax under taxable income.

The other three rates are for various annual income bands - 0% for those earning below about US$40,000 per annum, 15% for those earning between about US$40,000 and US$460,000 and 20% for anything above that.

These are very modest rates on actual profit. The impact on those involved is minimal - they give up only a fifth of profit, less than the income tax rate.

Other countries charge much more, with Scandinavian countries at the head, charging between 30-60% . Also, there is a mechanism to carry forward capital losses to future years if they are incurred.

There are different ways to structure this but the point is that CGT covers an untaxed area now and it is useful to expand the tax base. It must not be ignored for the parochial interests of a few.

Further, like GST, as we explained here, there is a record-keeping trail which will help to show how wealth was accumulated thus reducing corruption, money laundering and illegal activities.

While there are suggestions to only tax capital gains on unlisted assets, that’s a terrible mistake because there is really no reason to give listed assets that exemption. Initial market weakness can be expected, but once the market adjusts, there will be no problem after that as shown in the developed economies.

Besides, excluding listed assets can result in a large amount of revenue foregone. The table shows the value and volume traded on the Kuala Lumpur stock market. Last year, the value traded was over RM500 billion.

If we assume that just five per cent of this was profit and hence taxable, the taxable income would be RM25 billion. Assuming a 20% CGT, the tax would be RM5 billion, which is significant. In a rising market this would be much more. And we have not included bonds and other assets yet.

This is my third article on the budget. Besides the GST article referenced above, the other one was the abolition of approved permits (APs) and import duties, and the reduction of red tape towards a more competitive economy and lower prices.

Thus my 3-pronged approach for the current budget is as follows:

1. Removing approved permits, import duties and red tape to make the economy more competitive and plugged in to the world.
2. Imposition of a goods and services tax to expand the tax base and reduce tax evasion.
3. Imposition of a capital gains tax to tax profits which are currently not taxed at all.

These together with a near-certain subsidy rationalisation scheme in the budget this Friday, will help increase revenues, cut costs and reduce corruption which combined with higher standards of governance that the Madani government has repeatedly stressed and promised can produce a game-changing deal for Malaysia - finally.

But it will require courage and the ability to stand up against a lot of opposition not only from influential people outside government but those within the ruling coalition, especially those from the most corrupt party this country has ever seen - Umno Baru.

PMX and finance minister Anwar Ibrahim has nothing to lose and everything to gain by going ahead with a truly bold and reformist budget and showing that he is capable of acting in the interests of the rakyat even as he juggles with political “realities”.

(P Gunasegaram says that too many people, especially politicians, jump at their own shadows - and fall down - never to get up again.)

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