Combining GST and SST is not the answer

 The government must choose the one with the stronger, more tangible track record, and implement it in a way that limits the burden on households while rebuilding the revenue base.

From Mazli Noor

The prime minister recently suggested that his government might blend the sales and service tax (SST) with the goods and services tax (GST) into a single, more cohesive system. It is understandable why the idea appeals to policymakers keen to have it both ways. But it is crucial that we recognise two structurally different taxes rarely combine into something better than either on its own. What the country needs today is a clear choice, made without any form of hedging, for whatever reason.

The case for GST rests on more than a simple preference. Most tax professionals agree that it is the sounder system – it is overtly broader in coverage, applying to roughly 60% of goods and services, and structured around consumption rather than production. Because businesses can claim input tax credits at each stage, GST avoids the cascading effect that has long weighed the SST model down.

The nation’s own records back this up. Between April 2015 and May 2018, GST amassed a total of RM184.8 billion for the government, averaging just over RM61 billion a year. SST has not come close to matching that, charting RM44.7 billion in 2024, RM49.7 billion in 2025, and a projected RM54.7 billion in 2026, figures that fall far short of what GST achieved nearly a decade ago. More than 176 countries have made GST their standard, making Malaysia’s continued hesitation increasingly out of step with the rest of the financial world.

There is also a strong case to be made for its role as a catalyst for growth. Computable general equilibrium modelling of Malaysia’s earlier GST period found that real GDP growth rose by an average of 2% relative to the previous system.

Much of that gain traced back to lower input costs for businesses once the tax cascade was removed, which in turn strengthened domestic manufacturing and made exports more competitive. Because firms could reclaim their input tax, their capital structures stayed largely intact as well, and while prices and household spending did come under some pressure in the early months, that eased noticeably as the economy adjusted, allowing a new equilibrium to be established fairly quickly.

As in any adjustment to the nation’s financial equation, inflation deserves the most careful treatment, not least as it is where public anxieties tend to concentrate. When GST was launched in April 2015, Bank Negara Malaysia (BNM) recorded a clear one-off rise in the consumer price index (CPI) of between 0.7% and 2.0%, as businesses passed costs on through their supply chains. That effect was real and should not be minimised.

Tellingly, however, it was also short-lived; in the next several years the inflationary impact settled at just 0.11%, and when GST was zero-rated in June 2018, headline inflation dropped to 0.8%, its lowest level in three years.

The honest argument for GST, therefore, is not that it comes without any cost; rather it is that while these costs are temporary, the benefits are significant and lasting.

Given this, the more productive question is not whether to bring GST back, but how. There is a strong case for its reintroduction at a lower rate – between 2% and 4% – rather than the original 6%, which would soften the inflationary shock significantly.

It bears noting that comprehensive tax reforms such as this typically reduce real inflation by 0.25% to 1%, well below the 0.7% impact recorded in 2015. It generally also leaves households with more disposable income, which tends to feed fairly quickly into retail spending, providing an additional 0.2% to 0.4% growth to GDP.

That said, a lower rate also carries a very real fiscal cost. Setting GST between 2% and 4% would reduce government revenue by roughly a third compared to 6%, with an estimated contractionary effect on GDP of around 1%. Lower revenue means less room to fund infrastructure, healthcare, and subsidies, and it raises the risk of a wider fiscal deficit or forced spending cuts. Between the two ends of that range, a rate closer to 4% offers a more sustainable balance than 2%, easing the burden on households without hollowing out government finances.

Some of the shortfall would close on its own – a lower GST means more household spending, which tends to raise income and corporate tax collection as sales and hiring pick up. A cut from 6% to 4% could release an estimated RM15 billion in additional liquidity to Malaysian households. Because middle and lower-income families spend a larger share of their income on the necessities, that liquidity would show up quickly in nationwide consumption, and from there to manufacturing, retail, and eventually tax receipts.

However, it is not possible for any tax policy to do all the heavy lifting. Malaysia’s productivity growth still sits well below the roughly 3% that is considered standard for an upper middle-income economy, and rising household spending without matching productivity risks feeding inflation rather than genuine growth.

Higher output and stronger competition would help keep prices in check and reduce the risk of concentrated market power, which tends to leave consumers paying more for less. These gains will take time to appear – typically one to three years – before emerging as stronger margins, lower costs and room for businesses to raise wages. That lag is the biggest reason for us to begin now.

In this regard the prime minister has both a genuine opportunity and responsibility. Malaysia does not need a compromise between two incompatible systems. It needs a government prepared to choose the one with the stronger, more tangible track record, and to implement it in a way that limits the burden on households, while rebuilding the revenue base the country depends on.

Every month this decision is deferred makes the eventual transition harder to manage. This is not a choice that can wait for a more convenient time. - FMT

Mazli Noor serves on the boards of several public and private companies and is an FMT reader.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.