Malaysia to impose consumption tax as debt clouds gather

Malaysia to impose consumption tax as debt clouds gather

KUALA LUMPUR - Malaysian Prime Minister Najib Razak announced on Friday his government would levy an unpopular consumption tax starting in 2015 as it seeks to ease growing concern over the country's soaring debt.

Following years of massive populist spending, Najib also announced key subsidies would be slashed as he unveiled his 2014 budget.

Economists welcomed the measures but the opposition said it would stage protests over the Goods and Services Tax (GST), which it says will unfairly force consumers to bear the burden of government corruption and fiscal irresponsibility.

"With the implementation of GST, the government will be able to address the weaknesses in the current taxation system," Najib told parliament, to loud groans in the chamber.

The GST is unlikely to please a populace that economists say has become accustomed to generous subsidies.

Malaysia has one of Asia's highest debt-to-GDP ratios.

It reached 54.8 per cent in 2013, a government report said Friday, just a hair below a red line drawn by Najib at 55 per cent, which he reiterated on Friday would not be crossed.

Debt clouds have been gathering over Southeast Asia's third-largest economy, with Fitch ratings agency in July warning Malaysia to get its financial house in order or face a possible sovereign-debt downgrade.

"As a whole, the budget is for growth and fiscal discipline," said Lee Heng Guie, chief economist with Malaysia's CIMB Investment Bank.

Lee said the GST could bring in up to 12 billion ringgit (US$3.8 billion) more revenue than an existing sales and service tax system, which will be replaced.

"There are detailed plans to broaden the tax base and for fiscal consolidation that would ease investors' concerns. The reaction will be positive," Lee said.

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