Politicising tax hike affects consumer, investor confidence, says economist

 

Economist Yeah Kim Leng said although the service tax hike would affect all consumers, it would help to finance social assistance programmes for poorer Malaysians.

PETALING JAYA: An economist has warned against politicising the 2% hike in service tax on selected sectors, saying it will be detrimental to consumer and investor confidence.

While raising taxes was unpopular globally, Yeah Kim Leng of Sunway University said it was crucial that everyone should have a better understanding of the need for higher revenue mobilisation.

This, he said, would strengthen public finances and enable the government to improve the livelihood and social wellbeing of the people, while sustaining economic growth.

“Hence, the issue should not be politicised to the detriment of investor confidence, and ultimately the country’s growth prospects,” he told FMT.

The service tax rate on certain sectors was raised from 6% to 8% on March 1.

Yeah said the hike was necessary as the government needed to raise revenue to reduce its annual deficits and to increase spending on health, education, housing and essential services.

“The current level of taxation in Malaysia is considered low compared with its peers as well as relative to historical trends. To reduce the disproportionate negative impact on low-income groups, selected essential services such as food and beverage, telecommunications and logistics are not affected.

“While the tax rate increase will affect all consumers regardless of income levels, the less affluent segments can access various social assistance programmes that include fund transfers to cope with living cost hikes.”

Yeah said public expenditure was raised substantially to counter the Covid-19 pandemic and ensuing economic downturn, thereby leaving a substantial income-expenditure gap that was financed through increased borrowings.

With the high fiscal deficits and debt levels unsustainable in the long- term, he said the estimated RM3 billion to be raised from the service tax hike would help Putrajaya achieve a lower deficit this year compared with 2023’s shortfall of 5% of the gross domestic product (GDP).

Yeah acknowledged that the possibility of traders and businesses profiteering by hiking prices to increase profit margins is a cause for concern.

Such actions, he said, would cause inflation to spike, especially if cost-pass-through expenses are well above the 2% rise levied.

Cost-pass-through expenses are those that a third party charges a business which in turn passes them directly to the clients.

“While the overall inflation is expected to edge up marginally by 0.1 to 0.2%, profiteering, together with uncontrolled inflation expectations, may push inflation above the country’s long-term trend of 2% to 2.5%.

“Keeping inflation low and stable will be beneficial for everyone as purchasing power remains intact while growth continues and increases in wages and income outpace inflation,” he said. - FMT