Tough for Malaysia to manage without GST revenue, says report

Opinion piece in Singapore's Straits Times says it is a bad idea to drop GST and the new government does not have an alternative revenue measure to match it.

By returning to the sales and services tax, Malaysia will have a shortfall of RM25-RM30 billion per year in collection, affecting economic activities.

KUALA LUMPUR: The decision to drop the goods and services tax (GST) may have serious implications for Malaysia’s fiscal position and economic future, according to an opinion piece in Singapore’s The Straits Times.

Straits Times associate editor Vikram Khanna described the move to do away with the 6% GST as driven more by “populist politics than by sound economics”.

He said it would also limit the ability of the new Pakatan Harapan government to push ahead with what seemed a progressive and inclusive agenda.

The GST, he said, had long been regarded by economists as the most comprehensive, transparent, fair and efficient form of consumption tax. It was one of the best fiscal measures the country had ever enacted, he said.

He said by returning to the pre-GST sales and services tax (SST) regime, Malaysia stood to lose RM25 billion to RM30 billion per year in collection.

“So far the Malaysian government has not come up with any alternative way of replacing the revenue that will be lost by the abolition of the GST.

“This would have negative implications for Malaysia’s fiscal position as well as national debt, which Finance Minister Lim Guan Eng says exceeds RM1 trillion, or 80% of GDP.

“Credit rating agencies Moody’s and Fitch have already warned that the abolition of GST will be ‘credit negative’ for Malaysia.”

The government, he noted, planned to improve the fiscal position by controlling expenditure, including by re-prioritising projects, increasing efficiency of the government and reducing wastage in the public sector.

However, Khanna said, the cutbacks in expenditure would hurt Malaysia’s economy by lowering economic activity and creating “unnecessary job losses”.

Also, he said, the cost of abolishing the GST would extend to “the forgone projects that would have been financed by the higher revenues that the GST generated, and which Malaysia would no longer be able to afford”.

He said the government might have to raise MRT and LRT fares.

“While today’s relatively high oil prices, at close to US$80 per barrel, will provide Malaysia with some fiscal cushion in the short term, oil-based revenues are, as seen in the last decade, fickle and volatile. Malaysia cannot depend on them for the long term.

“After the GST is abolished, the government will eventually need to come up with new taxes — either on income or capital gains, or higher user charges.”

Khanna said the GST also became a scapegoat for other issues such as the financial scandals relating to 1MDB and Felda.

“In some voters’ minds, the issues came to be linked: the GST was viewed as a means to recoup revenues that were lost to Malaysia because of mismanagement and corruption.

“What was essentially an economically sound tax became tainted and politicised.”

He concluded: “Abolishing it is relatively easy. But now comes the hard part: the new government has the unenviable task of managing Malaysia’s finances without the GST — and without an alternative revenue measure that can match it.” -FMT