GST in Malaysia is gone and whether it is good news or bad for economic sustainability in the Southeast Asian country is yet to be decided.
Acting with aplomb and keeping his top campaign pledge, Malaysian Prime Minister Mahathir bin Mohamad scrapped the Goods and Services Tax (GST), which stood at a single rate of only 6 per cent, just days after being sworn into office. The country, which implemented the GST on April 1, 2015, will bring back the sales and service tax regime. Despite criticism, the government believes the move will ease rising inflation and boost consumption.
Introduced by former Prime Minister Najib Razak in 2015, the GST was extremely unpopular among the masses from inception. The single rate model followed by Malaysia may have helped the government reduce the fiscal deficit to 3 per cent, but it also made goods of mass use more expensive. Small businesses suffered as they were new to the system of taking credit for taxes paid previously.
All these factors dealt a fatal blow to the Najib Razak government, and Mahathir Mohamad, who promised to remove GST, returned to power.
Mahathir Mohamad’s swift action to abolish GST was welcomed by businesses and consumers alike in Malaysia, but the move is fraught with difficulties. The GST was the one of the highest sources of income for the government, second only to corporate tax. In 2017, GST contributed a revenue of RM44 billion ($11 billion), which is 18 per cent of the total revenue. With this gone, the Malaysian coffers will feel the pinch. The reintroduction of the sales and service tax by the government is seen as a positive move, but is expected to generate revenues of about RM30 billion.
A good news for the government is that the oil prices have firmed up and Malaysia being the fourth largest oil producer in the Asia-Pacific region can reduce fiscal deficit with the money earned from oil. Mahathir Mohamad’s party Pakatan Harapan had also outlined in its political manifesto that it would set up a sovereign fund using the profits from the state-owned oil company Petronas. However, there are doubts on how long the high oil prices will sustain.
Meanwhile, the government has asked businesses to transfer the benefits of zero GST to the consumers with immediate effect from June 1. Another treat for the consumers will come as a tax holiday as the government would take another two to three months to formulate and re-introduce the sales and service tax. These factors are likely to boost spending in the upcoming months.
Fears of a ratings downgrade by international rating agencies have also been eased by economists who believe Malaysia’s strong macro-fundamentals, improving economic outlook and steady increase in foreign exchange reserves would support its current rating.
For several countries including India, which introduced the GST after Malaysia, the move may have come as a surprise. But now, they will watch with caution if the Southeast Asian nation is able to compensate its revenue loss and sustain the new regime.