INTRODUCTION OF

TAXATION
LEARNING OUTCOMES

▰ At the end of this topic, you should be able to:

▻ Understand the concept of taxation
▻ Know the tax system in Malaysia
▻ Taxation from Islamic perspectives

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INTRODUCTION

▰ Tax is an important element of government revenues

that used to fund the government expenditure
▰ Tax must differ in every country and it depends on the
country economic structure.
▰ There is a need to have an effective tax system to not
only gain efficient revenue, but also govern the
economy.

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DEFINITION ON TAX

▰ Tax generally defined as an obligatory charge imposed by the government

to individuals or corporation in order to support and finance the government
activities (public services) which enforceable by law.
▰ Tax law are designed and used in the carrying out fiscal and economic
policies of Malaysian government.
▰ Taxation is an approach by government to raise national monetary source
from individual and corporation.
▰ Tax is depending on our level of income; we may pay more or less income
tax every year.
▰ There are two types of tax in Malaysia:
▻ Direct tax (tax levied directly on income or wealth)
▻ Indirect tax (tax levied on the price of a good or services)
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OBJECTIVES OF TAX

▰ To nurture money for services provision including defence,

healthcare, education and so on.
▰ To restructure income and wealth, whereby the higher income will
pay more tax than lower income
▰ To dampen unsafe good consumption like cigarettes and alcohol.
▰ To enable diversified trade between different countries that offer
free movement of goods, capital and people among them.
▰ To manage the economy well as it is important for savings and
investment planning and developing the country.
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TYPES OF TAXES

Income tax

Corporate
Direct Taxes
Income Tax

Stamp Duty

Type of
Taxes Excise Duty

Custom Duty
Indirect
Taxes Sales and
Service Tax
(SST)
Good and
Services Tax 6
(GST)
 TYPES OF TAXES

▰ Direct Taxes ▰ Indirect Taxes

Taxpayer Tax Collector Registered Person

(Income Tax Collection Office)

Pay GST Collected and remit

Customer Royal Malaysian Custom

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TYPES OF TAXES (DIRECT TAX)

▰ Taxes are commonly levied on total personal net income of the

taxpayer (which may be an individual, a couple or a family) in
excess of some stipulated minimum.

▻ Corporate Tax
▻ Individual Tax
▻ Petroleum Tax

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TYPES OF TAXES (INDIRECT TAX)

▰ Tax is levied on the price of a good or service.

▻ Custom Duties (Tariff)
Imposed on imports and exports of goods.
▻ Excise Duties
Imposed on manufactured goods which is levied at the moment of
manufacture (specific goods)
▻ Sales Tax (1972)
Levied at the point of sale, collected by the manufacturer and
passed on to the government
▻ Services Tax (1975)
Levied on services providers on certain service transactions, actually
borne by the customer
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TYPES OF TAXES (INDIRECT TAX) – CONT’D

▻ Good and Services Tax (GST)

Levied on most transactions in the production process, but is
refunded with exception of Blocked Input Tax, to all parties in the
chain of production other than the final consumer
▻ Sales Tax (2018)
Single stage tax charged and levied on taxable good
manufactured in Malaysia by a registered manufacturer and sold,
used or disposed of by him; OR imported into Malaysia by any
person.
➢ Service Tax (2018)
Levied on specific prescribed services provided by a taxable person
in the course or furtherance of a business in Malaysia. 10
PRINCIPLES OF GOOD TAX POLICY

EQUALITY &
1 FAIRNESS
CERTAINTY
2
3 CONVENIENCE OF PAYMENT

4 CONVENIENCE / SIMPLICITY

NEUTRALITY
5

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PRINCIPLES OF GOOD TAX POLICY – CONT’D

MINIMUM TAX GAP

6
ECONOMY COLLECTION
7
ECONOMIC GROWTH & EFFICIENCY
8
TRANSPARENCY & VISIBILITY
9
APPROPRIATE GOVERNMENT REVENUES
10

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1. EQUITY AND FAIRNESS

▰ Taxpayer should be taxed similarly

▰ Horizontal and vertical equity
▻ Horizontal Equity: Those who have the same amount of
wealth or similar level of income should be taxed at the
same rate as other within the same income bracket
▻ Vertical Equity: Those who earn more money or have more
economic resources should be taxed at higher rates than
those who are earn less income.
▰ Tax should be imposed fairness on individual or corporation

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2. CERTAINTY

▰ Tax rules should specify when the tax is to be paid, how is to be

paid, and how the amount to be paid is to be determined.
▰ Tax amount should be certainty rather than ambiguity.
▰ Ability to determine the tax base rate
▰ The calculation of tax should be calculated correctly

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3. CONVENIENCE OF PAYMENT

▰ A tax should be due at particular time or convenient for taxpayer

▰ Helps ensure compliance
▰ Appropriate payment mechanism depends on amount of liability
and ease of collection

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4. ECONOMY OF COLLECTION

▰ The cost to collect a tax should be kept to a minimum for both

the government taxpayers
▰ How many revenue officers needed?
▰ This principle is closely related to simplicity principle.

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5. SIMPLICITY

▰ The tax law should be simple so that taxpayers can understand the
rules and comply with them (Tax Board) correctly and in a cost
efficient manner.
▰ Reduce the amount of errors.
▰ Increase respect for the system.
▰ Enables taxpayers to understand tax consequences of their
transaction.

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6. NEUTRALITY

▰ The effect from the tax law on a taxpayer’s decision for the minimum
transaction of taxation
▰ Taxpayers should not be encouraged or discouraged from engaging
any activities due to tax law.
▰ Main purpose of tax system is to increase the government revenue, not
to change the tax payer behaviour.

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7. ECONOMIC GROWTH & EFFICIENCY

▰ The tax system should not impede or reduce the productivity and
economy capacity
▰ Tax system should be aligned with the economic goals of the
jurisdiction imposing the tax
▻ Eg: the tax should be aligned with jurisdiction’s economic goal for
economic growth, capital formation and international
competitiveness.
▻ Should not favour one industry or type of investment at the
expense of others.

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8. TRANSPARENCY & VISIBILITY

▰ Taxpayers should know that a tax is exists and how and when it is
imposed upon them and others
▰ Enables taxpayers to know the true cost of transactions.
▰ Enables taxpayers to know when tax is being assessed or paid and to
whom.

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9. MINIMUM TAX GAP

▰ A tax should be structured to minimise non-compliance.

▰ Tax gap = amount owed less amount collected.
▰ Procedural rules needed to attain compliance.
▰ Generally, is need to strike balance between:
▻ Desired level of compliance
▻ Costs of enforcement and the level of intrusiveness of the tax
system

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 DEGREE OF PROGRESSION TAX

▰ Proportional tax ▰ Progressive tax

▻ Income tax system where ▻ Tax that imposed a lower
the same percentage of tax tax rate on low-income
is levied on all taxpayers earners compared to those
regardless of their income with higher income
▻ Applies the same tax rate ▻ Making the ability to
across low, middle and high- taxpayer pay the tax
income taxpayers
▻ It takes larger percentage
▻ Eg: Sales tax also can be from high income earners
considered a type of that it does from low-income
proportional tax since all individuals
consumers, regardless of
earnings are required to pay ▻ Eg; Malaysia (LHDN) (T=20Y) 22
the same fixed rate (T=20)
DEGREE OF PROGRESSION TAX – CONT’D

▰ Degregressive tax ▰ Regressive tax

▻ Tax does not increase in the ▻ Tax apply uniformly
same proportion as the
increase in income ▻ Taking a larger percentage
of income from low-income
▻ Rate of tax increase up to a earners than high income
certain limit after the earners
uniform rate is charged.
▻ Effects people with low
▻ Combination of progressive incomes more severely than
and proportional taxation people with high incomes
because it is applied
uniformly to all situations.

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FACTORS DETERMINE THE TAXABLE CAPACITY

▰ Taxable capacity is the ability of individuals and businesses to pay taxes.

▰ The maximum amount of the taxation that can be raised and spent on the
economic welfare in the community.
▰ Factors:
▻ Profile of population
▻ Size and rate of population effects the taxable capacity to a
great extent.
▻ The larger the children &old age population the lower that
taxable capacity
▻ Eg: India and China have lower taxable capacity because of
high population.
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 FACTORS DETERMINE THE TAXABLE CAPACITY
– CONT’D

▰ Factors:
▻ Distribution of National Income
▻ Taxable capacity is influenced by the distribution of national income
within a country
▻ If there is unequal distribution of wealth in the country, the taxable
capacity of the nation will be high.
▻ If the income equally distributed, then the taxable capacity will be low.
▻ Purpose of taxation
▻ If the citizen are satisfied with purposes of taxation, eg: increase in welfare
(health, education), they will show greater willingness to pay taxes to
government
▻ If they found that revenue will be spent for unproductive purposes, they 25
hesitate to pay taxes
 FACTORS DETERMINE THE TAXABLE CAPACITY
– CONT’D

▰ Factors:
▻ Psychological factor
▻ If people are satisfied that government is doing its utmost to
raise standard of living and maintaining prestigious country,
people are sacrifice to pay tax.
▻ A simple patriotism to the nation

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TAXATION FROM ISLAMIC PERSPECTIVE

▰ First View of the Tax Policy

▻ Derived from the opinions of the scholars which considered tax policy
implemented by the government as permissible.
▻ Fulfilled the needs of the nations such as poverty elimination and build
infrastructure and serves interest to the country.
▻ As an alternative source of income when collections from zakat and
sadaqah is insufficient.
▻ Prevent the government from debt.
▻ Model of fiscal policy can be imposed in Muslim countries and according
to Maqasid Shariah.

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TAXATION FROM ISLAMIC PERSPECTIVE –
CONT’D

▻ Abu Yusuf said, all four caliphs were agreed that tax should be collected
with justice and mercy and not allow the collection to exceed people’s
ability to pay and unable to meet their basic daily needs.
▻ Supported the right of authorities to raise or lower the tax burden
according to ability of person.
▻ A good tax will increase revenue and enhance development of the state.

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TAXATION FROM ISLAMIC PERSPECTIVE –
CONT’D

▰ Yusuf al-Qardawi asserts that, the tax obligations for the sake of charity:
▻ The government really needs funds and no other sources that can cover
their needs
▻ The distribution from the tax collection should be in fair and equitable
manner.
▻ Collection from tax is spent for Maslahah of the people, not to entertain
certain groups.

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TAXATION FROM ISLAMIC PERSPECTIVE

▰ Second View of the Tax Policy

▻ Tax implementation is haram.
▻ During Prophet Muhammad SAW, tax never been applied to the Muslim.
▻ Muslim only have obligation to pay zakat.
▻ Tax allowed if zakat and sadaqah is insufficient.
▻ Basically, tax in Islam applied on taxation on wealth rather than income.

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REFERENCES

▰ Abd Aziz Abu Bakar, Mohamad Amin Ibrahim and Shahizan Md Noh. (2014).
Zakat management and taxation. Kuala Lumpur: IBFIM.
▰ Ismail Ahmad & Rosalan Ali. (2020). Islamic Asset & Wealth Management.
Shah Alam: Penerbit UiTM Press
▰ Mahyuddin Khalid. (2019). Tax Planning in Islamic Financial Planning (IMU652)
Slide. Shah Alam: Academy of Contemporary Islamic Studies.
▰ Lembaga Hasil Dalam Negeri (LHDN). (2019). Slide Presentation “Bersama
Membangun Negara”. 6 December 2019. HQ Lembaga Hasil Dalam Negeri
Cyberjaya.

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“A prudent question is
one-half of wisdom.

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