ONCE again, the debate on goods and services tax (GST) was reignited when the prime minister said that the government is studying the possibility of reintroducing the targeted consumption tax.

       Economists are not surprised by the move as GST is needed eventually to fund the government’s efforts to accelerate Malaysia’s recovering economy from two years of pandemic effects.

       Given the ongoing external volatilities that pose unforeseen and unpredictable impact on our economy, which is trade dependent and still fragile, the GST re-implementation should help provide further impetus to the local economy through a stronger fiscal position and eventually, a more robust safety net.

       Underpinned by uncertainties with downside risk on global economic growth, we must be mindful of a period of “financial turbulence” for Malaysia and the global economy.

       The ongoing Ukraine crisis, China’s zero-Covid policy and aggressive monetary tightening by central banks will have consequences on the global economy, including Malaysia.

       As we emerge from the pandemic, Malaysia is also grappling with the opening of the economy – rising underlying inflation, greater demand for jobs, and a growing emphasis on digitalisation, technology advancement and automation to move up the value chain.

       At the same time, we also need to address labour shortages and improve competitiveness, sustainability and inclusiveness as we aspire to become a high-income nation. And undeniably, all these things will cost a lot of money.

       Specifically, several crucial programmes and subsidies in Malaysia such as the ongoing blanket oil subsidy, the healthcare sector and retirement payment are becoming increasingly costly as the country heads towards an ageing society by 2030.

       Other underinvested sectors such as agriculture (which is especially important for food security) need to be improved.

       The GST was first implemented on April 1, 2015 involving most everyday necessity such as fresh food and utilities, including electricity and water.

       During the first nine months of the GST implementation, the government collected around RM27bil, RM41.2bil in 2016 and RM44.3bil in 2017.

       The GST was zeroised in June 2018, after the change of government, and eventually replaced by the sales and services tax (SST) at 6% and 10% respectively. Prices for most goods and services did go down, temporarily. But after around seven to nine months, prices bounced back to the GST level.

       The prime reason for GST is to reduce Malaysia’s dependency on petroleum. Due to the narrow tax base, back in 2009, petroleum-revenue was 41.3% of the government’s overall revenue. In 2021, the share declined to 19.2%.

       As the world is shifting towards renewable and sustainable energy, reducing our dependency on oil is key to strengthening the government’s fiscal position.

       According to data, global governments’ income from oil and gas-related taxation fell to as low as in 2020 of around US$560bil (RM2.46 trillion), as production and prices tumbled due to the outbreak of Covid-19.

       Before the pandemic, oil and gas taxes usually exceeded the trillion-dollar mark.

       Furthermore, the movement of oil prices is volatile and mostly affected by external factors such as geopolitical dynamics and supply and demand notion.

       Also, the need for GST is to fund crucial areas in Malaysia including healthcare.

       The government is expected to spend RM28bil on healthcare operating expenditure and another RM4.4bil for development for the year 2022, as we need to bolster the healthcare system following the Covid-19 outbreak.

       The GST will benefit consumers in two different ways. First, under the SST, businesses must have the approval to get tax-free materials and special exemption for capital goods. Under the GST, this system was abolished as businesses can offset GST on inputs in their returns.

       Second, the GST is taxed on the consumer level instead of input level. So, the GST will be able to avoid prices from being double taxed under the SST.

       One major debate on the reintroduction of the GST is that it could exacerbate inflation, especially in this environment where prices for basic food items and cost of living are rising.

       According to the Statistics Department, around 30.9% of Malaysians’ overall spending is on food and petrol. These two items were exempted during the previous GST implementation.

       Therefore, the impact of GST on inflation could be muted or minimal, assuming these items will continue to be exempted under GST 2.0.

       However, do expect that prices of several items and services will increase, assuming GST 2.0 is the same as GST 1.0, including textile products, clothing, footwear, games, toys, sports equipment, accommodation and communication.

       The urgency to reintroduce GST is mainly because of the volatile oil price movement. Intuitively, if prices for oil rise, then revenue from petroleum will be higher.

       However, this is not the case this time around. This is because higher oil prices mean the amount of subsidy needed for RON95 and diesel will increase too.

       Last year, the price for RON95 was averaging at RM2.05 per litre when oil prices were averaging around US$70 (RM308.14) per barrel. In Budget 2022, the government was projecting oil prices to average at US$67 (RM294.93) per barrel this year.

       Due to the war in Ukraine, supply constraints in the oil market, and China reopening its economy, oil prices are expected to stay elevated this year.

       The risk is, if oil prices continue to rise, the cost needed to subsidise fuel, including RON95 and diesel to keep the retail prices at the current level, will balloon.

       Having the GST is not just about compensating the increasing cost of subsidy that the government is facing right now.

       As a matter of fact, most economists would agree that petrol subsidy should be removed since it is only benefitting the middle and upper-income households.

       It will make more sense for the fuel subsidy to be channelled to the lower-income households directly through cash transfers.

       Reducing our dependency on petroleum revenue would provide the government some balance in generating revenue.

       Recently, oil prices have become too volatile to predict, as they are driven by key geopolitical development and market sentiment.

       Over the long run, as more economies are embracing the green agenda and zero-carbon emission, the need for oil will only decrease, which means oil prices in the future will slowly but surely fall.

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