KUALA LUMPUR, Oct 6 — Malaysia needs tax reform to address a structural decline in its tax revenue-to-gross domestic product (GDP) ratio, which has fallen to 12.7 per cent from 15 per cent 15 years ago, according to the World Bank lead economist Apurva Sanghi.

He said the federal government debt has risen to over 65 per cent of GDP although the fiscal deficit has been contained, however, this would not be enough to bring the debt-to-GDP ratio down to the target of 60 per cent by 2028.

“Federal government debt rose despite the contained deficit and now stands at 65.2 per cent.

“The cost of servicing debt is also increasing, with 17 sen of every ringgit in revenue raised spent on debt servicing,” he told the media during a briefing on October 2026 East Asia and Pacific Economic Update here today.

Yesterday, the Auditor General’s Report 2/2026 reported that federal government debt stood at RM1.32 trillion in 2025 compared with RM1.24 trillion in 2024, while the statutory debt stood at RM1.295 trillion, comprising Malaysian Government Securities, Malaysian Government Investment Issues and Malaysian Islamic Treasury Bills.

Apurva said that while increasing tax rates would be difficult, there were ways to raise tax revenue without doing so.

Responding to a question on taxation and Budget 2027, which will be tabled this Friday, he said simplifying the corporate tax system for small and medium enterprises (SMEs) by consolidating the tax structure would benefit businesses.

“Apart from that, when an SME grows and becomes a non-SME, its favourable tax rate is suddenly taken away. We call this a tax curve, and it reduces the incentive for SMEs to officially grow bigger. As we know, about 98 per cent of Malaysian companies are SMEs. Changing the incentive structure to encourage firms to graduate from SME status can help,” he added.

He also said that it would be good to see the budget make the tax system more supportive of investment.

“To be precise, consider allowing qualifying investments to fully cover 100 per cent of the investment cost,” he said. — Bernama