KUALA LUMPUR (BLOOMBERG) - Malaysia will implement a new sales tax in September to replace the consumption levy that it is scrapping next month as Prime Minister Mahathir Mohamad seeks ways to temper concerns on the nation's Budget.

The government is studying a 10 per cent rate for the sales and services tax, he told reporters in Putrajaya after a Cabinet meeting.

Ministers also agreed to cancel a proposed multi-billion dollar high-speed railway link to Singapore and the third phase of a mass rapid transit line in Kuala Lumpur, he said.

Dr Mahathir is seeking more fiscal space to fulfil election pledges that include fuel subsidies, reducing the cost of living and abolishing toll fees, after finding the state saddled with contingent debt that push total liabilities to exceed 1 trillion ringgit (S$336.73 billion).

The government satisfied a major promise when it cut the goods-and-services tax to 0 per cent from 6 per cent with effect from June 1.

"We find that the situation is worse than we thought when we were preparing the manifesto," Dr Mahathir said.

"That's why the promises will be fulfilled, but they must take into account the financial situation."

The government will review the Bandar Malaysia property project conceived by 1MDB, while the high-speed rail and other major projects will be revisited when the country is in a better financial position, Dr Mahathir said.

As a celebration marking the end of the Muslim fasting month approaches, Dr Mahathir said civil servants will get a 400 ringgit bonus payment, while road users will enjoy a 50 per cent discount on tolls in the two days leading up to the Eid al-Fitr festival, which is set to fall in mid-June.

The government will keep prices for diesel and RON95 gasoline unchanged, while the RON97 grade of petrol will move according to market prices, the premier said.