The Malaysian capital gains tax regime is confined to gains made from the sale/transfer of real estate. It does not tax any other capital gains such as a sale, exchange, relinquishment, or extinguishment of rights in an asset.
If capital gains tax is extended to all capital assets, the sale of shares and any other capital instruments, and intangible property such as intellectual property rights, will be brought to tax.
In Asia, only Malaysia, Singapore and Hong Kong do not tax capital gains. All other significant economies subject capital gains to normal income tax rates or have a special rate for capital gains.
In the early days, the Malaysian economy and the Singapore economy were homogenous, and we adopted the entrepot approach of not taxing capital gains since most of the income was of a trading nature or of a transshipment nature. Now, our economic profile is much closer to the other Asean economies which is resource based.
Currently, the majority of direct tax collection comes from income tax. It is a tax on the profits from business activities or earning income from employment. The tax collected here is from active participation in the economy.
Capital gains are generated on a passive basis with very little value-add. An example would be an asset that has been held for a long time and thereafter sold for a gain. Usually the beneficiaries of such gains are rich individuals/corporations who have the capacity to hold such assets.
The Case for Bringing Such Gains to Tax
When businesses and individuals who continuously contribute to the economy have to pay tax on their profits, why should those who benefit from capital gains be exempt from tax? After all, capital gains is of a passive nature with little value add other than to take on the risk of holding the asset for a long term and financing the asset and waiting for the value to appreciate. Since capital gains is a profit from the transaction, there is a good case for these gains to be brought to tax in order to level the playing field with the others who are paying income tax.
It is time for the rich to pay their share of the tax rather than leave the burden with the ordinary folks or the businesses that actively contribute to the economy.
Where Will the Objections Come From?
You can be assured that investors in the stock exchange and the rich and powerful will object to the widening of capital gains to share transactions. This matter can be dealt with.
Other countries tax such gains but they have exemptions or they tax such gains at a reducing rate if the shares are held for a longer period. For example in certain countries, if a listed securities is held for more than one year, the gains are exempted, or if the shares are held for more than a certain period, they may be subject to a lower tax rate of, say, 10% versus the normal income tax rate.
If the government wants a robust stock market, then exceptions can be made within the capital gains tax regime.
The Way Forward
We may be late in introducing a comprehensive capital gains tax regime, but it is also an opportunity to pick the best parts from existing capital gains tax regimes around the world to align the new regime with our economic objectives. We don’t need to reinvent the wheel.
Introducing capital gains tax will not slow down our economy if it is implemented correctly. Instead, it will strengthen our economy as it will provide an additional source of revenue to the government and level the playing field for all taxpayers.
The time to ponder is over and the time to act is NOW.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).