World Bank urges Malaysia to reform tax system ahead of 2027 budget

KUALA LUMPUR — Malaysia faces a structural decline in tax revenue relative to economic output, prompting the World Bank to suggest fiscal reforms focused on expanding the tax base and strengthening collection mechanisms rather than raising rates.

The international financial institution's recommendation addresses a persistent challenge for Putrajaya: maintaining adequate government revenue to fund public services and infrastructure while managing fiscal sustainability. Tax revenue as a percentage of gross domestic product has contracted over recent years, constraining the government's fiscal flexibility.

The World Bank's analysis suggests that Malaysia can improve its revenue position through measures such as widening the tax base, enhancing compliance, reducing exemptions, and improving tax administration efficiency. These structural reforms would generate additional revenue without increasing the burden on existing taxpayers.

The guidance is particularly relevant as the government prepares the 2027 budget. Policymakers face competing pressures to fund growing expenditures, including civil service wages and development programmes, while maintaining investor confidence and economic competitiveness in the region.

Broader tax reform could also help address Malaysia's medium-term fiscal challenges, including managing debt levels and ensuring long-term economic resilience. The World Bank's recommendations align with ongoing discussions within government circles about modernising Malaysia's tax system.