KUALA LUMPUR, Nov 6  --  Although the shadow economy (SE) in Malaysia has been on a declining trend, its presence is still significant and deters the development of an inclusive economy.

In its Economic Outlook 2021 report released today, the Ministry of Finance (MoF) said the SE deprives the government of potential high tax revenue collection to finance development projects such as healthcare, education and public transportation.

According to the report, the SE is defined as legal productive economic activities which have not been reported to the authorities to circumvent government regulations, tax obligations and social security contributions

The ministry said a study estimated that the SE’s average size in Malaysia stood at 31 per cent of gross domestic product (GDP) between 1991 and 2017.

Its size had fluctuated to around 50 per cent of the GDP from 1990 – 1999, and had further contracted to about 30 per cent of the economy from 2000-2009.

From 2010-2019, it had declined to about 21 per cent of the GDP (2019: -18.2 per cent).

The MoF said heightened activities in the SE would likely boost currency demands as transactions tend to be in cash or cryptocurrencies -- difficult to detect, and does not leave any paper trail for the authorities.

It noted that measures which could help to reduce the size of SE include adopting advanced technologies, higher data sharing among government agencies, emphasising the rule of law and stringent enforcement.

“Advanced technology can also help to reduce tax evasion, as the emergence of the sharing economy and gig economy allows the migration from cash to digital transactions and creates digital footprints,” it said.

Data sharing among government agencies, such as registration of properties and vehicles, as well as the introduction of tax identification number, will provide information on the expenditure patterns of individuals and businesses, MoF said.

This would enable the government to analyse the collected data effectively and enable the identification of fraudulent tax activities.

“Moving forward, the government will enhance efforts to make working in the formal sector more beneficial, for example, by improving efficiency in the labour market and simplifying tax compliance procedures with greater adoption of technology.

“Efforts will be continued to enhance and emphasise the rule of law and enforcement, rather than increasing the number of regulations,” said the ministry.

-- BERNAMA