AT the federal government level, the 12th Malaysia Plan made no specific reference to nor gave any timeline on the reintroduction of the goods and services tax (GST) from now until 2025.

       At the ministerial level, the Finance Ministry recently announced that it is “not the right time yet” for the reintroduction of the consumption tax. Will there ever be a “right time”?

       My position on GST has been consistent since day one. It is not a question of “when”, but rather “what”, “why”, and “how”.

       This piece is yet another attempt to explain the rationale of reintroducing GST in light of the federal government’s growing operating expenditure, particularly the financing sustainability of universal cash transfers (UCT).

       In 2012, the initial objective of the 1Malaysia People’s Aid (BR1M) programme was to complement the then government’s fiscal consolidation and subsidy rationalisation agenda.

       During its pilot programme, a one-off RM500 payment was handed out to households with a monthly income of less than RM3,000.

       Today, the People’s Welfare Aid (BPR) even covers M40 households, as it intends to supplement household incomes during prolonged lockdowns.

       If one were to combine these UCTs into an account, it would cost the government RM17.1bil this year, covering about a third of the Malaysian population, up from RM2.2bil with 4.3 million recipients nine years earlier.

       This represents a compounded annual growth rate (CAGR) of 25.6%.

       Following the 14th General Election (GE14), the Pakatan Harapan (PH) government unveiled its maiden budget, where it rebranded BR1M as Cost of Living Aid (BSH) with a smaller budget and number of recipients.

       In the same year, the government also overturned GST in favour of an outdated indirect tax system.

       It halved the government revenue coming from GST, which was also almost 10% of the total revenue collected in 2018.

       The abolishment of GST has negatively affected the sustainability and effectiveness of BSH (later rebranded again by the Perikatan Nasional government as BPR).

       When subsidies for major consumer goods – such as cooking oil, sugar and petrol – were fully eliminated, low-income and vulnerable groups continued to feel the pinch.

       The PH government had little fiscal room to expand the BPR’s coverage due to a narrower tax base, straining the present government’s fiscal position as well.

       In addition, the reintroduction of subsidies following GE14 and subsequently, the prolonged lockdowns, have complicated the inter-agency coordination for future fiscal reforms.

       Considering that both sides of the parliamentary aisle decided to continue with BPR and its iterations, any alternatives in pursuing UCT without expanding the tax base would be detrimental and regressive: it negates the first-best outcome, increases the deadweight loss to the economy, leads to an inefficient allocation of resources and encourages agencies’ “turf” which will impede effective public sector coordination.

       UCT has now fallen into a no man’s land, where it is neither a sustainable policy for income support nor a subset of subsidy rationalisation.

       Since UCT appears to be a permanent policy feature, the right thing to do is to reinstate the GST but at a much lower rate without exemptions.

       The main idea here is to implement a comprehensive indirect tax system for future revenue expansion and not to achieve a tax neutral position at its reintroduction.Singapore made a similar move in the early 1990s.

       The Singaporean government introduced the GST at 2%, covering all goods and services.

       The rate then gradually increased over time, in line with the growing economy.

       By setting GST at the floor rate, the government could expand the existing tax base without putting much pressure on inflation while achieving a tax neutral position later.

       Once the tax base is broadened, the programme must be redesigned to be more effective and progressive over time.

       Income support is a noble idea and should be extended to individuals and households that cannot actively participate in the labour market for structural reasons like health-related issues and infrastructure deficit. It should not, however, be an excuse for the private sector to suppress wages.

       Future revenue generation is of utmost priority.

       As many have rightly pointed out, the government should progressively scale down its heavy reliance on petrol dividends from Petronas over time, in hopes that any volatility in global oil prices in the future would leave minimal impact on the government’s fiscal position.

       In turn, this will allow the government to offer a short-term UCT to vulnerable groups to mitigate any unforeseen temporary income cliff.

       I totally understand that GST can be a politically sensitive move for businesses and the public.

       Since Malaysia is fast approaching GE15, it is logical to reintroduce GST in the coming political cycle.

       This will provide ample time for the government to lay out the required groundwork to be rolled out in the first budget after GE15.

       Therefore, the government has to make a more explicit stance on the rationale of reintroducing GST in the upcoming Budget 2022 and not so much on its timing.

       Businesses will likely resist the switch due to changes in business operations as well as higher set-up and tax compliance costs.

       There will be upward pressure on prices that are currently not subject to sales and services tax, mostly that of food-related products.

       This can be tricky when the global economy is experiencing persistent inflationary pressure amid post-lockdown supply constraints.

       Most profoundly, this will create discomfort among low-income groups.

       The government should power through the tough choices for the sake of the country’s future growth and prosperity. Tax reform is not, and should not, be an experiment.

       There are times when we need to focus on the things we are fighting against – hyperinflation, rising inequality, high unemployment, etc.

       The tough choice of reintroducing GST, in my view, is worth fighting for because political correctness cannot overcast rationality.

       To be clear, the economics of UCT is easy, but the politics surrounding it is highly problematic.

       It is urgent to ensure that the continuation of UCT considers the critical aspects of financial sustainability and, more importantly, the basic needs of low-income and vulnerable groups.

       Studies have shown that UCT still brings tangible benefits as recipients have little incentive to shirk from purchasing basic necessities.

       Bring GST back, and UCT can be an effective government intervention in providing income support to the deserving lot.

       Firdaos Rosli is chief economist at Malaysian Rating Corp Bhd (MARC). The views expressed here are the writer’s own.