“Tax is an important tool in fiscal policy which will affect the economy of the country” Discuss the importance of tax policy to the development of Malaysian economy.

Taxation means compulsory payment to the government where in return no benefit is derived to an individual. Basically, it is used to regulate the economy. Tax is actually raising money for the purposes of government by means of contributions from individual persons. There are 2 types of tax which are direct taxes and indirect taxes. Direct taxes are tax paid directly to the government such as income tax, real property gains tax, stamp duty, petroleum income tax and also offshore business activity in Labuan. Meanwhile indirect taxes are tax paid to the government through third party such as sales tax, custom duties, service tax and also excise duties. Tax measures are among the main instruments of Malaysia\'s economic development strategy. They include a wide array of investment incentives that are offered to various manufacturing activities, including exports, agriculture, tourism, and other approved service sectors, research and development, training, and also environmental protection.

The first importance of tax policy is to grant fiscal incentive to encourage the economic growth. Tax incentives usually are given to Malaysian companies. For example according to the latest 2008 budget, there is a tax incentive for companies managing Islamic funds where it is proposed that local and foreign companies managing Islamic funds of local and foreign investors be given income tax exemption on all fees received from managing the funds from the year of assessment 2007 until year of assessment 2016 and the Islamic funds must be approved by the Securities Commission. This is for the purpose of promoting the Islamic fund management activities. This proposal is effective from year of assessment 2008 until year of assessment 2016. Furthermore, there are also additional incentives for Malaysia International Islamic Financial Centre (MIFC) where income tax exemption will be given to income received by non-resident experts in Islamic finance and the experts have to be verified by the MIFC Secretariat. Amongst the incentives are, tax deduction on expenses incurred in establishing an Islamic stock broking firm until 31 December 2009, stamp duty exemption on instruments executed pertaining to Islamic banking and takaful activities in foreign currencies until 31 December 2016 and many more. The proposal is effective from 8 September 2007 until 31 December 2016.

The second importance is to regulate the distribution of income and wealth. This is to ensure that the distribution is bias free. The Government should take the necessary steps to ensure that there is an equitable distribution of the nation’s economic by narrowing the gap between the rich and poor. Tax reform should be used as one of the ways to redistribute income and prosperity between groups and individuals in a more fair way. This is to ensure the gap between the poor and rich become smaller. When the gap is smaller, this shows that the economy of our country is good. The Islamic way of distribution of income is Zakat. This applies to all the Muslims in the country to pay Zakat as their obligation towards their religion. The government tries to help the poor so that their rights are protected. The distribution of income can help the economy by increasing the income of the people which shows the country is in good condition.

The third importance is to improve the disadvantaged sectors of society. This referred to individual who are disabled or handicap. This is where the government can increase their economic value. By helping the handicap, they can attract the handicap to work and contribute their energy for the country and they can give variation in our economics sector. The incentive given to the handicap can allow them to show the world that they are not burden to the country and society. This is to prove to the society that they can do what the normal people can do and at the same time give contribution to the country as well. Most of the handicaps are experiencing with lack of self confidence and by giving this incentive to them, hopefully they overcome their lacksture of confident in front of others. By giving this incentive, they can prove that they are worthy enough for the country and can encourage them to involve in the economic environment.

Another importance is to regulate specific undesirable activities such as gambling, smoking, drinking and many more. This is considering as bad tax which is not a form of tax. Even though it is not a form of tax, the source of tax mostly comes from these activities. For example, alcohol and cigarettes gives more than 50% from all the tax sources. It shows that these activities are important to our country. But the government has to control the activities to protect the society. In term of gambling, the Genting casino generates taxes more than most of the company in the country. The reason is to make sure that our economy is not controlled by the outsiders. Most of the activities are from outside of the country and controlling it will help to manage the economy well. By encouraging these activities, it can bring disaster to our economic systems. It is not only can affect our economics but also our social and ethics. Malaysia are known as one of the Islamic country and it’s for us to protect it. The important thing in our economy does not only in terms of monetary but also our social and ethical value.

The last importance of tax fiscal policy is to control the cash flow of our country. The tax policy is very important to control our monetary value because when tax is paid, the government knows the flow of the cash in the country, whether the country is facing inflation or deflation. By using this policy, our government can control and generate profit for the country and using the tax money to invest in projects that will generate more profits to the country. If tax policy doesn’t exist, where does the government can generate profits for the country and how would they manage the economics system? This shows how important tax policy to the economy. Without tax policy, it will be difficult for our country to generate the economy.

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