Malaysia weighs return of consumption tax to boost finances

KUALA LUMPUR – Malaysia is weighing the return of a broad-based consumption tax instead of implementing subsidy cuts for a commonly used petrol as the government seeks to bolster its finances, according to people familiar with the matter. 

Prime Minister Anwar Ibrahim’s Cabinet has been discussing the viability of bringing back the goods and services tax (GST), the people said, asking not to be identified as the information is private.

No decision has been reached given the political sensitivities, they added. But government spokesman Fahmi Fadzil on Aug 29 denied plans to reintroduce the GST.

“No, there were never discussions,” national news agency Bernama quoted Mr Fahmi as saying.

There is an emerging view in government that imposing GST may be politically easier than removing subsidies for the popular RON95 petrol, since the South-east Asian country is an oil producer and most Malaysians consider cheap petrol to be a necessity, the people said.

Still, bringing in a consumption tax is a political minefield for governments in Malaysia that have struggled for decades to boost tax collection rates, among the lowest in South-east Asia.

Passing legislation to reinstate GST is easier with a two-thirds majority in Parliament, which Datuk Seri Anwar controls through his coalition, but government lawmakers are more than likely to be against it. 

Mr Anwar has reason to be cautious in bringing back the GST, which was first introduced by former leader Najib Razak back in 2015 at 6 per cent and partly led to his downfall in the election three years later.

The subsequent government, led by Tun Dr Mahathir Mohamad,

repealed the unpopular consumption tax

, and his finance minister said it was used to partly cover up the multi-billion dollar 1Malaysia Development Berhad scandal. 

While Mr Anwar has said as recently as May that there were no plans to introduce new taxes, the people said there has been a shift within the government given stronger-than-expected economic growth, a cut in diesel subsidies in June adding to coffers and the Prime Minister’s coalition clinching a landslide win in a recent by-election.

A spokesperson with Malaysia’s Finance Ministry declined to comment, while the Economy Ministry did not respond to a request for comment.

The ringgit strengthened 0.5 per cent to 4.3230 against the US dollar, the highest since February 2023 and the best performer across emerging markets.

Economists said both subsidy reforms and bringing back GST are necessary since Malaysia wants to whittle down the budget gap and boost spending. 

“The government has already taken key steps with diesel,” said Mr Euben Paracuelles, a Nomura Holdings economist in Singapore.

“Reinstating GST is also rational from the perspective of broadening the tax base, but this could be done at a later time after careful consideration.”

Malaysia now imposes a sales and services tax, or SST, which replaced the GST in 2018 and is a one-time tariff on all goods and services with a list of exemptions for live animals, medicine and machinery.

The last time Malaysia had GST, it was a multi-stage consumption tax imposed across the supply chain with exemptions for essential items, including transportation, health and education. 

OCBC Bank said GST revenues accounted for 3.3 per cent of gross domestic product (GDP) in 2016 to 2017, compared with SST revenues of about 2 per cent in 2023. 

“Reintroducing GST will be positive for Malaysia’s fiscal consolidation agenda,” it said in a note on Aug 29. “However, the rate of reintroduction will be important.”

Malaysia’s government wants to cut its budget deficit to 4.3 per cent of GDP in 2024 from 5 per cent in 2023 by phasing out broad subsidies.

Any signs of a shift in government thinking may come when Mr Anwar, who is also Finance Minister, presents the federal budget on Oct 18. 

But his administration is already lifting spending by increasing civil service salaries by more than RM10 billion (S$3 billion) by 2025, the first revision in over a decade.

The Organisation for Economic Cooperation and Development on Aug 27 urged Malaysia to reintroduce GST at a low rate while compensating low-income households with “targeted transfers”, saying in a report that the country’s tax revenue accounts for only 12 per cent of GDP.

The nation needs to find additional tax revenues to meet its deficit target and finance future spending needs, the Paris-based organisation said.

Industry groups want to see the same.

The National Chamber of Commerce and Industry of Malaysia said in May that setting the GST at 4 per cent would be the best way to boost government revenue, and tax refund vouchers should be considered. BLOOMBERG