Why did individual income tax collection drop by RM11 billion in 2021?

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Individual Income Tax Collections Declined by RM11 Billion in 2021 Due to Covid-19 Restrictions

Individual income tax collections experienced a significant RM11 billion decrease in 2021 compared to the previous year. This substantial drop was primarily attributed to the widespread impact of Covid-19 restrictions, which led to extensive layoffs, mandated unpaid leave, and considerable salary reductions across the salaried sector. The total individual income tax collected in 2021 amounted to RM27.05 billion, representing a 30.6 per cent reduction from the RM2020 figures.
Impact of Movement Control Orders on Employment

The implementation of movement control orders (MCOs) to curb the spread of Covid-19 severely affected individuals in the salaried workforce. Many businesses were forced to implement drastic measures, including retrenching employees, placing staff on unpaid leave, or enacting across-the-board salary cuts. These employment disruptions directly impacted the income streams of a significant portion of the population, consequently affecting their tax contributions.
Effect on Monthly Tax Deductions (PCB)

The decline in individual income tax revenue was particularly evident in the collections made through monthly tax deductions, known as Potongan Cukai Bulanan (PCB). This deduction method is a crucial component, accounting for nearly 75 per cent of the total individual income tax collected. As employment conditions deteriorated due to the MCO, the consistent flow of funds through PCB was disrupted, contributing significantly to the overall shortfall in tax revenue from this category.
Overall Tax Revenue Growth Driven by Corporate Income Tax

Despite the downturn in individual income tax, Malaysia's total tax revenue saw a notable increase of 12.5 per cent in 2021, reaching RM173.7 billion. This overall growth was predominantly fuelled by a substantial rise in corporate income tax collections. Corporate income tax revenue climbed by nearly 60 per cent, from RM50 billion in 2020 to RM79.8 billion in 2021, an increase of RM29 billion. Factors such as higher commodity prices and robust demand for goods like rubber gloves and food contributed to this surge in corporate earnings and subsequent tax contributions.
Contribution of Indirect Taxes

Indirect taxes also played a role in bolstering the government's revenue, with collections amounting to RM43.5 billion in the same period. The sales and services tax formed the largest portion of indirect tax revenue, with sales tax contributing RM13.5 billion (31 per cent) and services tax adding RM12.01 billion (27.6 per cent). Additionally, excise duty generated RM10.2 billion, with the levy on cigarettes being a significant contributor at RM2.9 billion.

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Why did individual income tax collection drop by RM11 billion in 2021?

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