Ahead of Budget 2027, the World Bank urged Putrajaya to expand national tax revenue without raising rates, proposing lower income thresholds for high earners and simplified corporate tax structures for small businesses to combat a structural decline in tax collections relative to GDP.
Currently, Malaysia’s individual income tax threshold is relatively high compared to many other countries.
Dr Apurva Sanghi, World Bank Lead Economist for Malaysia
Malaysia faces a growing fiscal challenge as its tax revenue-to-GDP ratio has fallen to 12.7 per cent from 15 per cent fifteen years ago.
Lowering Individual Income Tax Thresholds and Relief Limits
The multilateral institution suggested that the government could enhance revenue mobilization without increasing tax rates by lowering the income thresholds where higher marginal individual income tax rates apply. Sanghi noted that the country’s individual income tax threshold remains relatively high compared to international peers.
For example, shifting a higher marginal tax rate to take effect at an earlier income bracket would broaden collections among higher earners. Additionally, Sanghi suggested clearer limits on tax reliefs and deductions, particularly for high-income groups, noting that upper-income earners capture the bulk of government relief benefits.
Simplifying Corporate Tax Structures for Small and Medium Enterprises
The recommendations also target corporate taxation for small and medium enterprises. Sanghi proposed simplifying the multiple rate structure into a single preferential corporate tax rate. Under current definitions, services and other sectors operate under a threshold of RM20 million in sales turnover or up to 75 employees.
A key structural hurdle identified by the World Bank is the tax cliff
created when a growing firm abruptly loses its favorable SME tax rate upon crossing the threshold. Because approximately 97 to 98 per cent of businesses in Malaysia are made up of SMEs and micro, small, and medium enterprises, this abrupt loss acts as a major deterrent against smaller firms formally scaling up into larger corporations.
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.
Dr Apurva Sanghi, World Bank Lead Economist for Malaysia
Furthermore, the World Bank proposed making the tax system more supportive of investment by allowing qualifying investments to fully cover 100 per cent of the investment cost.
Federal Debt Reaches RM1.32 Trillion in 2025
Underpinning the fiscal recommendations is rising federal government debt, which has climbed to 65.2 per cent of GDP. In 2025, federal debt reached RM1.32 trillion—an increase from RM1.24 trillion in 2024—while statutory debt totaled RM1.295 trillion, which encompassed Malaysian Government Investment Issues, Malaysian Government Securities, and Malaysian Islamic Treasury Bills, according to the Auditor General’s Report. Debt servicing costs have likewise escalated, consuming 17 sen of every ringgit raised in revenue.
While the fiscal deficit remains contained, Sanghi noted these measures will be necessary to help bring the debt-to-GDP ratio down toward the target of 60 per cent by 2028. Beyond taxation, the World Bank advised the government to increase assistance amounts per recipient under existing social protection schemes like Sumbangan Asas Rahmah and Sumbangan Tunai Rahmah, noting that benefits remain spread thin across too many recipients despite expanded coverage.
Additionally, Sanghi proposed extending coverage under the Employment Insurance System to gig workers through government-matching grants to encourage participation, and strengthening social protection for senior citizens as the nation approaches aging nation status
.