A Tax-Returns Based System For Targeted Fuel Subsidy

A simpler, more cost-effective and less ambitious targeted fuel subsidy program can be based on tax-returns whilst maintaining the same pump prices for all consumers.

For example, if a T20 car owner (earning above RM10k and owns two cars) spends RM4k pa, he/she has to collect all receipts and declare on the tax form at the annual filing to the Inland Revenue.

Assume he ought to pay a flat RM5k to Inland Revenue based on a computation of the subsidy vs prevailing market price of petrol. 

To reduce his tax liability, he has to use his receipts to deduct RM4k from the RM5k liability on his income. Then he is only liable to pay RM1k to the Inland Revenue instead of RM5k (with no receipts declared). 

The key challenge of this system is getting the average annual fuel spending for T20 and M40 consumers right. And this computation can be facilitated by data analytics on household spending, car ownership types and income groups.

The advantages of this system are: 

(a) it is cost effective as there is no need for the government to spend and implement an expensive smart card system. 

(b) it minimises loopholes. The alternative proposals for smart cards can be transferred between relatives. 

(c) Furthermore, even if Touch & Go e-wallets are linked to income groups, it will pose security and privacy issues.

(d) Last but not least, if we have different retail prices for different income groups, Malaysia will be the first to pioneer such an ambitious project. If it fails, the new unity government may be the laughing stock of the world.

However, my tax-returns system may have a few loopholes: 

(a) the authenticity of receipts, which can be duplicated. But why would consumers bother if its for the good of the country? 

(b) it may encourage overspending on fuel in order to reduce the fixed tax liability. However, it is the same cash outflow for the user whether it is for the petrol kiosk or the inland revenue.

(c) only 10% of income earners in Malaysia pay taxes. So this system would have to ensure that the M40 group pay their fair share of the subsidy. The B40 are totally exempt. 

Meanwhile, the former governments' incentives for car buyers to switch to EV (Electric Vehicles) and hybrid cars should be increased to reduce pollution and save money on the petrol subsidy. 

Incidentally, the government's total subsidy expenditure on petrol is estimated to be about RM37.3bil this year. Under the tax-based returns system, the petrol subsidy bill can be reduced by half and the actual amount to be charged on T20 and B40 car owners can be more accurately synchronised with the actual movement of oil prices by the end of the calendar year.

From an economist's principles, there ought not to be any substantial subsidy on petrol over the long term as this distorts the supply and demand dynamics of fuel. 

But from the social-political perspective, Malaysia is a net oil exporting country and the benefit of high oil prices for the overall economy should not lead to higher cost of living for Malaysian citizens.

Eventually, whatever the new subsidy scheme, the current unity government has to overhaul the tax system by rebranding the re-introduction of the Goods & Services Tax (GST) one way or another.