THE Finance Ministry is currently studying the feasibility of reintroducing the goods and services tax (GST) and the use of other taxation models.

       It has guided that the study would consider various aspects including the weaknesses of the existing sales and service tax (SST) and the GST which was in force from 2015 till May 2018.

       As Malaysia is currently in the phase of economic recovery, the government’s announcement has yielded mixed views from various stakeholders, as the re-implementation of the GST has both pros and cons. Notwithstanding, I am of the view that it is pertinent to reintroduce the GST and my focus here is not “when”, but “why”.

       SST vs the GST

       For many reasons, I personally feel that the GST is better than the SST. For businesses, the GST is an easier process of submission of tax claims and for consumers, the implementation of the GST reduced the services tax to 6% from 10%.

       Compared to the SST, the GST mechanism has a minimal classification issue, and it eliminates cascading and compounding index.

       Most importantly, the GST was a more transparent and effective regime compared to the SST. In fact, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz had noted that many leakages occurred after the SST system was introduced in 2018, making it difficult for the government to track those who tried to evade taxes.

       In comparison, the GST would allow for better monitoring and prevention of tax evasion.

       The GST has been a favourite consumption tax for many developing countries due to the fact that it is a value-added tax, and it generates higher revenues.

       In Malaysia, when the GST was in force, it collected an average of RM42.7bil per annum in revenue between 2016 and 2017.

       This accounted for approximately 20% of the government’s annual revenue. In contrast, the current SST regime contributed RM27.9bil in 2021, shaving almost half of the GST revenue.

       Financing sustainability of subsidies and other social assistance, Malaysia feels the pinch of spiking global key commodities as domestic oil and food prices are being negatively affected, raising concerns over rising cost of living.

       Undoubtedly, this has called for the government’s intervention in terms of providing subsidies.

       This is on top of the price subsidies for liquified petroleum gas (LPG), sugar and cooking oil.

       In my previous articles, I have estimated that the government may need to allocate an additional RM25bil for subsidies and social assistance compared to the RM17.4bil initially allocated under Budget 2022.

       Notwithstanding this, it is expected that the government may be able to withstand the additional subsidies needed as it is able to yield higher revenue from the increase in oil prices.

       However, the additional revenue cannot be channelled for other purposes. In this regard, fiscal balance may worse in the medium term if subsidies offset the potential increment in oil-related revenue.

       If we were to combine the cash handouts, then the impact on government spending is large as cash handouts appears to be a permanent policy feature to support the low-income households. Hence, the idea is that to broaden the tax revenue system i.e., reimplement GST.

       In the long run, the reinstatement of GST would support the sustainability of government subsidies and other social assistance which includes cash handouts for B40/50 household groups.

       The reinstatement of GST should be assessed as a part of holistic assessment of Malaysia’s fiscal position and tax systems. It must be easily manageable and does not increase the cost of doing businesses besides being able to strengthen the country’s fiscal position. At the same time, it should also not hit the B40/50 groups too hard.

       Hence, it is suggested that the GST may be introduced at lower rate, perhaps, 3% or 4%.

       Zero-rating more items on the list and targeting more expensive luxury products is another option. Other suggestions include maintaining of the GST registration threshold at RM500,000 and the allowance of at least 6-month transition period from current SST to GST.

       Globally, GST is in practice in over 160 countries due to its fair tax structure. Among all, Singapore introduced the GST at a much lower rate of 2% covering all goods and services.

       The rate was then gradually raised in tandem with the growing economy.

       Taking cue from this, GST may be first set at a floor rate to expand the existing tax base without casting additional pressure on country’s inflation, moreover at the time of high inflation risk. It is also important to redesign the mechanism to be more effective once the tax base is broadened.

       In line with the economic growth, the government may consider to gradually raise the GST rate in future. It is worth noting that, with an efficient and broad-based GST model in place, the government may progressively scale down its reliance on oil-related revenue over time, as pledged. With that, any fluctuations in global oil prices will unlikely leave huge impact on the government’s fiscal position.

       Despite the benefits, GST has drawn quite a bit of criticism over the years and the people’s opinion has been generally evolved around the increase in prices of goods and services in Malaysia. Besides, GST refunds has been difficult – can be declined, requires annual sales of minimum RM500,000 before being claimable. There are also speculations that middlemen take advantage of GST to raise prices and use the taxes as a convenient reason to make money.

       With such flaks in place, reverting to GST may result in backlash especially when people and businesses are not confident with the time and mechanism of GST being implemented. As such, any changes in the consumption tax policy, especially one that involves all income groups, warrant a clear communication.

       People and businesses should be acknowledged about the short-term impact of GST reinstatement and the long-term solutions to mitigate those impacts. While consumer sentiment is expected to decline in the beginning, we can assure that sentiments will improve in the long-term and household spending growth should consequently normalise.

       While consumers are concerned on price hikes, business owners on the other hand would need to focus on rebuilding their businesses. In this regard, the businesses should be given ample time to prepare for the reintroduction of GST. Adding to that, the government is also urged to speed up GST refunds to ensure a total buy in from various business stakeholders.

       A clear and all-inclusive guidance should be delivered to businesses while an efficient GST filing system should be ensured.

       All in all, the support of the public and businesses is very important in the process of reintroducing GST.

       Acknowledging this, the government is highly expected to conduct a thorough study to bring in an efficient and effective mechanism to avoid any adverse repercussions in the long-term.

       It is vital for policymakers to engage industries and consumers in meaningful ways before the reintroduction of GST.

       Manokaran Mottain has served the industry as an Economist for over 30 years and is currently the Director of Rising Success Consultancy Sdn Bhd. Recently, he has been appointed as the Industrial Expert to UKM/GBS.