Is Malaysia Considering Bringing Back Consumption Tax?

Malaysia is weighing the return of a broad-based consumption tax instead of implementing subsidy cuts for a commonly-used gasoline as the government seeks to bolster its finances, according to some news reports. The Prime Minister’s Cabinet has been discussing the viability of bringing back the goods and services tax (GST) but no decision has been reached.

There is an emerging view in the government that imposing the GST may be politically easier than removing subsidies for the popular RON95 petrol. But bringing in a consumption tax is a political minefield for governments in Malaysia that have struggled for decades to boost tax collection rates, which are among the lowest in Southeast Asia.

PMX has reason to be cautious in bringing back the GST, which was first introduced by former leader Najib Razak back in 2015 at 6% and partly led to his downfall in elections three years later. The subsequent government, led by Dr Mahathir Mohamad, repealed the unpopular consumption tax, and his finance minister said it was used to partly cover up the multibillion-dollar 1MDB scandal.

Malaysia’s government wants to cut its budget deficit to 4.3% of the gross domestic product (GDP) in 2024 from 5% last year by phasing out broad subsidies. Any signs of a shift in government thinking may come when PMX, who is also finance minister, presents the 2025 budget on Oct 18. However, Anwar’s administration is already lifting spending by increasing civil service salaries by over RM10 billion by next year, the first revision in more than a decade.

The Organisation for Economic Co-operation and Development (OECD) recently urged Malaysia to reintroduce the GST at a low rate while compensating low-income households with targeted transfers. Malaysia’s tax revenue accounts for only 12% of GDP.

The nation needs to find additional tax revenues to meet its deficit target and finance future spending needs OECD said. The National Chamber of Commerce and Industry of Malaysia said in May that setting the GST at 4% would be the best way to boost government revenue and tax refund vouchers should be considered.

Malaysia currently uses a sales and service tax, which replaced the GST in 2018 and is not seen as broad-based. The sales tax component stands at 5%-10% for locally manufactured goods and imports, while the standard rate for the service tariff is 8%. The problem with SST is that its base and collection is smaller or lower than GST (RM25-27b vs. RM40b or more). Introducing GST at 4% does not help. Why? Government’s cost alone may add up to 4%.

Currently we have an unfair wealth/income distribution and lower taxes for rich individuals and corporations. Our gross domestic product (GDP) has grown 23 times in real terms (ie after factoring inflation) over the past 50 years. But the median wages of factory workers in real terms is only 1.4 times what it was 50 years ago.

Government revenue has dropped from about 27% of GDP in the 1980s to 12-13% of GDP now. Why? Malaysia has cut its rate of corporation tax from 40% of profits in the mid-1980s to 24% now. It is in competition with Vietnam and Thailand, both of which are taxing companies 19% of profits.

If the Government ever intends to implement GST, remember two preconditions:

(i) Malaysia has to be classified as a developed nation; and

(ii) The inequality in the current system is reduced, i.e. the Gini-coefficient is at 0.3 instead of 0.4 currently.

Meanwhile, look at a broadened “excess profit” tax, Tobin tax and/or higher T10 income tax!

Reference;

Malaysia weighs bringing back consumption tax to boost finances, say sources, FMT/Bloomberg, 28 August 2024