KUALA LUMPUR: Malaysia’s low tax revenue relative to those of regional peers is driven by income constraints rather than insufficient taxation, Deputy Finance Minister II Liew Chin Tong said today.
And expanding consumption taxes prematurely could disproportionately affect lower-income groups, who spend a larger share of their income and therefore bear a higher effective tax burden than wealthier households, he added.
“Consumption tax is inevitable, but it is not the main pillar of taxation. Such taxes are regressive and disproportionately affect lower-income groups,“ Liew said at the ACCA Mid-Year Tax Focus Conference 2026.
His remarks come amid ongoing debate over whether Malaysia should broaden its tax base, including recurring discussions on the possible reintroduction of the Goods and Services Tax (GST), which was abolished in 2018.
Liew pushed back against the notion that consumption taxes such as GST could serve as a “silver bullet” for revenue generation, noting that such taxes have historically been used in some countries to offset reductions in income tax.
He said this has led to uneven distributional outcomes, as consumption taxes tend to place a relatively high burden on lower-income households than on wealthier groups.
All forms of consumption tax are inherently regressive as lower-income individuals tend to spend a larger proportion of their earnings, resulting in a higher relative tax burden, Liew said, adding that relying excessively on such taxes could create social strain if not accompanied by sufficient income growth.
“The better way is to ensure that people earn enough and earn more than enough to pay tax,“ he said.
Malaysia currently relies on the Sales and Service Tax (SST), which is a more targeted form of consumption taxation than the broader GST systems used in many countries. Its structure shapes the role of consumption-based revenue within the country’s overall tax mix.
Liew said the broader objective is to build a more prosperous society where more people earn enough to contribute to the tax system, rather than relying on tax policy changes alone to increase revenue.
This approach, he added, reflects a longer-term strategy to strengthen fiscal sustainability by improving economic fundamentals, including wages, productivity and the breadth of the tax base.
Malaysia’s tax-to-gross domestic product (GDP) ratio stands at 13.1%, significantly below the Asia-Pacific average of 19.5%.
However, Liew said the gap should be interpreted with caution, noting that cross-country comparisons can be affected by differences in how tax data is measured, particularly whether social security contributions are included.
He said that when such differences are adjusted, the gap narrows, and this shows that the issue relates not only to performance but also to how it is measured.
A breakdown of the data presented showed that Malaysia collects a relatively higher level of income tax than its regional peers, with income tax contributing 8.7% of GDP, compared with the Asia-Pacific average of 7%.
Corporate tax contributions are stronger, with Malaysia’s corporate tax-to-GDP ratio at 6.6% compared with the Asia-Pacific average of 3.9%.
At the same time, consumption-based taxes account for a smaller share of revenue at 3.4% of GDP compared with 9.8% in the wider region.
The figures reflect the composition of Malaysia’s tax system, where income taxes play a larger role, while consumption-based revenue contributes a more modest share of overall revenue.
However, Liew cautioned against interpreting this gap as a basis for immediate tax expansion, stressing that Malaysia’s fiscal dynamics are closely tied to income levels, which determine the size of the taxable population.
He said the country’s relatively low median wage, which hovers just above RM3,000, limits the number of individuals who qualify to pay income tax, thereby constraining revenue collection despite existing tax mechanisms.
“Why are there so few people paying income tax? Because the median wage is still around RM3,000. If people do not earn enough how can they pay tax?”.
Liew pointed out that only about 12% to 15% of Malaysians currently fall within the taxable income bracket, reflecting a structurally limited tax base and highlighting how income levels shape the number of individuals who can contribute to tax revenue.
He said this is driven primarily by income constraints rather than by gaps in tax policy, and warned that raising taxes without addressing underlying income levels would place additional pressure on households without delivering meaningful revenue gains.
“We should not put the cart before the horse. Raising incomes is a prerequisite for meaningful tax reform.”
Malaysia’s fiscal strategy should focus on expanding the tax base organically through income growth rather than introducing higher taxes prematurely, Liew said.
Higher wages would allow more individuals to move into the taxable bracket, improving fiscal capacity sustainably while maintaining affordability.
“If we reach a median wage of RM4,000 then we can open up the debate on broader tax reforms. Any reconsideration of consumption-based taxation would depend on stronger income fundamentals,“ said Liew.
