Among the proposals contained within Pakatan Rakyat’s 6th Alternative Budget which was released on the 9th of October, 2014, none received more attention from the press as well as from the Barisan Nasional (BN) than the Capital Gains Tax (CGT).

Not surprisingly, Prime Minister Najib criticized this proposal by arguing that it will cause capital outflow as well as decrease the dividends to pension and investment funds such as EPF and PNB.[1]

Why did Pakatan decide to propose this tax in our Alternative Budget? How is it different from the GST? What are some of the pros and cons of this tax?

The concept of the CGT is very simple. Any profits which are made from the buying and selling of capital assets should be subject to a capital gains tax. CGT is not a new tax in Malaysia. The Real Property Gains Tax (RPGT) which is incurred if a property is sold within 5 years of the date of purchase is a form of CGT. The exercising of stocks which are given as part of an Employee Stock Option Scheme (ESOS) also incurs a capital gains tax in Malaysia.[2] As the proponents of the GST would like to say… this is not a new tax.

What Pakatan is proposing is to extend the CGT to cover other asset classes including financial assets such as stocks and bonds and even companies.

The difference between the CGT and the GST is that the burden of taxation for the CGT falls predominantly on the wealthy whereas the introduction of the GST shifts the burden of the taxation to the middle class and the poor. In other words, the CGT is a progressive tax while the GST is a regressive tax.

In the context of Malaysia, the GST is made even more regressive by the reduction of the income tax rate in conjunction with the introduction of the GST. Income tax rates will be reduced by 1% to 3% in 2015. So someone with an income of RM250,000 will see his tax bill reduced by RM4950 while someone who is earning RM35,000 a year will see his tax bill reduced by a mere RM300. For the 20% of Malaysians who pay taxes, they will benefit from the reduction in income taxes especially those earning more than RM100,000 a year. But for the 80% of Malaysians who do not pay taxes, the reduction in income tax brings no benefits to them while the introduction of the GST will inevitably decrease their disposable income.

Pakatan is proposing the CGT as an alternative to the GST because it will impose less of a burden on the poor. But it has to be said that the expected revenue to be raised by extending the CGT will not be as much as what the GST is capable of raising. Our initial estimates puts the CGT revenue at RM3 billion per annum compared to RM5b to RM10b for the GST. As Pakatan has stated many times in the past alternative budgets, the rest of our ‘revenue’ will be obtained by savings in reduced wastage through corruption and via open tenders.

We are also aware of the potential volatility of revenue derived from CGT. For example, when the stockmarket is performing well, CGT will inevitably increase but when the stockmarket is performing poorly, CGT derived revenue will decrease thereby causing a big hole in the budget. This was experienced by the California state government as a result of the 2008 economic crisis. With this in mind, we have proposed that the CGT in Malaysia will take into account worldwide ‘best practices’ including measures which can stabilize the collection of CGT such as the rainy day fund that was recently approved in California.[3]

The criticism that the CGT will impact the returns of pension and investment funds such as the EPF and PNB is easily answered. Most government owned pension funds are exempted from paying capital gains tax. For example, Norges Bank Investment Management manages The Government Pension Fund Global (formerly the Government Petroleum Fund), the largest sovereign wealth fund in the world with assets of more than US$900 billion, is not subject to tax in Norway although it is subjected to capital gains tax in other countries. The Australian Future Fund is also exempt from capital gains tax. Under Pakatan, the big government pension and investment funds such as EPF, PNB, LTAT and KWAP will be exempted from paying CGT.

One additional benefit of the CGT is that it can be structured to discourage the flow of hot money into the country which can be potentially destabilizing as we found out during the 1998 Asian economic crisis. A higher CGT rate can be imposed on short term gains e.g. capital gains on financial assets held for less than one year while those which are held for longer periods can have a much lower CGT rate. CGT can also be linked to a person’s income tax bracket to increase its progressive nature.

For example, in the United States, short term gains on assets owned for less than one year plus one day are taxed at your ordinary income tax rates. For long term gains for assets held for more than one year plus one day, the CGT rate is 0% for the 15% and below marginal income tax bracket, 15% for the brackets between 15% and 39.6% and for those in the highest marginal income tax bracket of 39.6%, the CGT rate is 20%.

Najib and the BN often use the argument that the GST is already implemented in over 100 countries to support the implementation of the GST in Malaysia. But if that argument is used, then he must also consider implementing the CGT which also have been implemented in over 100 countries including Australia, Austria, Brazil, Canada, Denmark, Finland, France, Germany, Iceland, India, Ireland, Italy, Japan, Norway, Poland, Portugal, Russia, South Africa, South Korea, Spain, Sweden, United Kingdom and United States, just to name a few.

Pakatan Rakyat has put a clear alternative tax on the table for the consideration of Najib and his administration. The debate on the CGT has been started by us. We need to continue to exert pressure of the BN to introduce the CGT as a means of delaying or decreasing the GST so that the poor and the middle classes are not unfairly and heavily burdened.

Dr. Ong Kian Ming is the Member of Parliament for Serdang and part of the Pakatan Rakyat 2015 Drafting Committee.