There Is More To Curbing Tax Non-Compliance And Formalising Shadow Economy…

Kudos to the Finance Minister II for suggesting the above to strengthen public finances. In our context, fiscal consolidation calls for revenue increases and spending cuts with due consideration on social, economic and political costs. Meantime, we also have gaps i.e. the difference between total amount owed to the government (taxes and fines) versus what is actually collected, leading to revenue shortfalls. 

To tackle tax non-compliance, the government needs to apply the latest technology to increase detection, effective enforcement, intra and interdepartment data-sharing (with proper confidentiality provisions), good international cooperation and increasing taxpayers’ trust toward public administration and the tax system through transparent actions. 

In 2023, the global shadow economy (SE) represents about 11.8% of total global gross domestic product (GDP) but Malaysia’s is at approximately 21%. This ‘underground or cheating economy’ may boost short-term economic activity but carries severe long–term negative consequences. To address it, the government needs to streamline bureaucratic procedures, eliminate red tape and corruption, simplifying tax regulations and enhancing transparency. Many are involved due to limited opportunities in the formal sector or social and economic exclusion. 

Apart from the above, we need to strengthen institutions and to upgrade competence, effectiveness and efficiency. We could have collected more fines and there are also cases where fines imposed but thrown out by the courts or involved in long-drawn cases. We also need to enhance whole-ofgovernment approaches and improve spending efficiency.

The Malaysia Competition Commission (MyCC) recently failed in its bid at the Federal Court to reinstate a “proposed” RM86.8 million Grab fines. In another case, MyCC’s “proposed” decision against five feed-millers began in 2022 with findings of an infringement that led to reduced consumer choices. The final decision to impose a RM415 million fine was made only in December 2023. An appeal made and recently a court granted a temporary stay pending judicial review. This has taken too long and the courts should expedite cases like these. 

Next, in 2024, the Domestic Trade and Cost of Living (MDTCL) ministry said the MyCC study on the paddy and rice industry was completed and the report indicated possible wrongdoings by dominant companies. In February 2025, MyCC submitted its findings to the Agriculture and Food Security Ministry with recommendations to strengthen governance. Strangely, in September, the deputy agriculture minister denied claims of market domination as baseless. There needs to be further investigation on this case.

Currently, MyCC’s focus appears to be on bid rigging cartels for public procurement tenders.  There are about 13 cases of alleged bid rigging involving 561 companies, with a value of up to RM2.3 billion and more expected in the coming year.

Another area of concern is mergers and acquisitions (M&A). M&A are not regulated under the Competition Act 2010 and it has to be addressed. MyCC launched a public consultation in 2022 and the proposed amendments have yet to be implemented.

Another sad case is the Malaysian Aviation Commission (MAVCOM), an independent authority under the Malaysian Aviation Commission Act 2015 responsible to regulate the economic, commercial and M&A exercises in the aviation industry.  It was dissolved in August and transferred to the Civil Aviation Authority of Malaysia (CAAM), under the Ministry of Transport, whereas MAVCOM previously reported to the Parliament.  

Given the above, I would suggest MyCC should be an independent authority, free from political pressure and not housed under MDTCL. That includes all enforcement agencies including the Royal Malaysian Police and MACC. This independence is crucial in maintaining a fair and competitive market.

Apart from independence, effectiveness and efficiency is crucial when actions are taken, to safeguard the people’s money and return it to them. There were allegations of the nation’s leaders stealing public funds and hiding them elsewhere but actions seems to be lethargic.

As for transparency, precise annual breakdowns for subsidies are not readily available and figures differ on total subsidies. Example, in 2022, total amount spent range from RM55.4 billion to RM77.7 billion. It is to be noted that in 2022, the average price per barrel of crude oil was USD100 (2025: USD68.89). 

We are an average earner but big spender as shown in our debt-to-GDP ratio (64.6%) which is among the highest in ASEAN. And our operating expenditure is about 80% of total expenditure, the highest among ASEAN-6 with heavy reliance on oil-related income.

Hence, we urgently need to reform our debt management. 

Highlighting reduced borrowings is not the cure for fiscal consolidation. The subtle symptom that signals a major disease is on the way is the RM1.3 trillion debt (excluding guarantees) which is very close to the ceiling of 65% of GDP. Further, employing GLCs and GLICs in public programmes are weak contributors to the fiscal buffer and seems like trying to pull wool over peoples’ eyes. 

Kenanga Research, in its May report noted that government debt to gross domestic product (GDP) ratio in 1Q25 expanded to 65.5% from 64.6% in 2024.

What is startling is the debt service payments are expected to reach RM58.3 billion (2022: RM40.5 billion) in 2026 or about 44% increase compared to 2022 when the amount of new debts shows a trend of gradual reduction.

Moody’s flagged that Malaysia’s revenue growth has trailed the pace of economic expansion. Therefore, the gains in fiscal consolidation have not been sufficient to reverse the ongoing deterioration in debt affordability. 

The government debt is “still above the median for Fitch-rated ‘BBB’ category sovereigns”. According to Fitch’s forecasts, savings from subsidy rationalisation of about RM15.5 billion annually represent about 0.8% of 2025 GDP, compared with total expenditure which is expected to grow about 1.7%.

We should also avoid reactionary “appreciation packages” or quick fixes which could undermine fiscal credibility and seen as political compromises.

The task now is not only to steer the economy on a steady course, but also restore dignity, uplift the quality of life and ensure progress is shared. ‘Raising the Ceiling and ‘Raising the Floor’ is just not enough, we must also cut the grass.

Good governance should not be a glorious rhetoric. Efforts to combat corruption may have shown some results but systemic corruption remains a major issue.

The time to put blame on past governments has expired. There’s a need to increase rakyat’s confidence in the government’s integrity. One of the key steps is to be transparent with accurate and timely information on the country’s income and expenditure.

We have to spill the beans as transparency is central to problem solving and democratic accountability.

What say you…

 

Saleh Mohammed