Malaysia delays GST ahead of possible snap polls in 2011

(Reuters) - The government has delayed again the introduction of a goods and services tax, avoiding a politically unpopular measure ahead of an expected general election in 2011.

The government said it wanted to engage the public before imposing the tax but did not indicate when the surcharge would be implemented, reiterating a similar statement it made in March.

“The government will take into account the interest and welfare of the society to ensure the implementation of (goods and services tax) GST is well received," the Finance Ministry said in a statement.

The postponement comes ahead of Prime Minister Najib Razak's budget announcement on Friday and analysts said it added weight to the possibility that Najib could call for polls as early as late next year.

The goods and services tax would have replaced an existing sales tax from 2011 and generated around RM8.8 billion in revenues annually.

It would also help widen Malaysia's narrow tax base which relies largely on proceeds from state oil company Petronas' oil revenues. Petronas alone accounts for up to 50 percent of the country's budget revenue.

The government has been working to consolidate its finances after running up a 20-year high budget deficit in 2009 due partly to a RM67 billion stimulus package at the height
of the global financial crisis.

Najib pledged last year to reform public finances in order to cut the budget deficit to 5.6 percent of gross domestic product in 2010 from 7 percent of GDP in 2009 and pledged to tackle a subsidy regime that accounted for 15 percent of all federal government spending in 2009.

However, the opposition has mounted a nationwide roadshow over the past few months, arguing that the new tax will punish the poor.

Analysts' reactions

Kit Wei Zheng, economist, Citigroup

"It's no big surprise. Even though nobody was expecting implementation, the fact that they have not even given a timeline is a little bit of a disappointment. It's probably necessary from a political perspective but those who are looking for a more credible fiscal consolidation commitment may be a little bit disappointed. If you are a sceptic of Malaysia, this will probably fuel the cynicism."

Alvin Liew, economist, Standard Chartered

"As confirmed by today's statement, the implementation of a goods and service tax will likely be overlooked again in the 2011 budget, as the combined burden on households of the GST and subsidy cuts may be considered too great. Political will may also be lacking to push through the GST, as elections may take place sometime next year."

Gundy Cahyadi, economist, OCBC Bank

“This move has been anticipated for some time. This opens the door for a possible early election next year. What we must note though is that the GST will get implemented, it is only a matter of time. The government obviously is looking for more time to prepare private companies for the move and get support from the people."

- Reuters