Prime Minister Ismail Sabri Yaakob caused a stir last month when he said the government was studying whether to bring back the unpopular Goods and Services Tax (GST) to help prop up Malaysia ’s finances amid soaring inflation.
The news almost immediately triggered a backlash, especially from the opposition Pakatan Harapan coalition, which argued that the broad-based consumption tax would further burden a public that was already struggling with stagnant wages and surging prices caused by supply chain disruptions.
Rising living costs – which the opposition had blamed on GST – was a major factor that helped Pakatan Harapan defeat Ismail Sabri’s Barisan Nasional coalition in the 2018 general election.
Its campaign fed into popular anger over the alleged excesses and corruption of the ruling class under then-premier Najib Razak, particularly his involvement in the multibillion-dollar 1Malaysia Development Berhad (1MDB) financial scandal.
Led by Mahathir Mohamad, the Pakatan Harapan administration made good on its pledge to cancel the tax regime and replace it with the previous Sales and Services Tax (SST), in one of its first major policy moves.
“There is no point in collecting more tax if, in the end, the people’s money will be wasted due to corruption, wastages and cronyism,” Pakatan Harapan’s presidential council said in a statement earlier this month.
Malaysia’s headline inflation went up 2.3 per cent year-on-year in April, according to government data, slightly below the average rate of 2.5 per cent registered in 2021, and well within the government’s forecast range of 2.3 to 3.3 per cent for this year.
But ongoing global food supply disruptions caused primarily by Russia’s invasion of Ukraine, paired with the spike in global crude oil prices, present a difficult situation for governments around the world, including Malaysia, as they face the prospect of prolonged inflationary pressures that could bleed out treasuries already depleted by the Covid-19 pandemic.
Yeah Kim Leng, professor of economics at Sunway University Business School, said the spike in global commodity prices had been somewhat of a boon for Malaysia, a net exporter of sweet crude and also the world’s second-largest producer of palm oil.
“There has been a corresponding increase in government revenue, to the extent that it is able to sustain its subsidies,” Yeah told This Week in Asia. “The key here is that … if high prices are prolonged, it will require the government to adopt a more targeted subsidy approach in order to reduce unproductive subsidies.”
Yeah said the government also needed to raise its budget for public welfare, especially social support for the lower-income groups, who had borne the brunt of the economic fallout from the pandemic only to face even steeper living costs now.
The multiple lockdowns and ensuing loss of jobs and income over the past two years had caused many middle-income households to fall into the lower-income category, Yeah said, which means even more people will need government aid to get back on their feet.
“From a longer-term perspective, the government has to increase its revenue sources including broadening the tax base and diversifying its revenue sources.”
After a week of criticism over his announcement, Ismail Sabri said the government had yet to make any decision about the GST issue and that it was only looking into the possibility of bringing it back, considering the country had lost an estimated 30 billion ringgit (S$9.5 billion) in annual revenue since reverting to the SST in 2018.
But Finance Minister Tengku Zafrul Abdul Aziz has already been dropping hints that the government is looking to restructure its spending, with the goal of shifting to more targeted subsidies instead of the current blanket coverage for fuel at the pump and key food items.
Earlier in June, he said the government had sufficient funds “at this moment” to continue giving out subsidies, according to a Bernama report. The payouts were expected to cost the Malaysian government 70 billion ringgit this year, of which 30 billion ringgit will be for oil subsidies, he added.
Hafidzi Razali, Malaysia senior analyst with political risk consultancy BowerGroupAsia, said for now, “the government is trying to diversify its income stream, particularly from tax revenue”.
“They want to be less reliant on fuel as a main source of income. While prices are high now, they won’t be high for a long time, especially with the shift to renewable energy,” he said.
“GST has been done before and the system is already in place. There are a lot of other options, but those will take more political will,” he said. “For example, inheritance tax, capital gains tax … those are more sensitive. It will be harder to do that considering the political climate. GST is already in place and it would be much simpler for the government to reintroduce it.”
But the push for GST is likely to come after the national election, which must be held by the third quarter of 2023, said Shazwan Mustafa Kamal, associate director at corporate advisory firm Vriens & Partners.
“While the idea of a GST could potentially impact Barisan Nasional’s chances in the 15th general election, businesses and the general public are also cognisant of the need for a more equitable and effective tax regime to be in place other than SST,” Shazwan said.
“In 2018, the overarching narrative was that of GST versus the spectre of 1MDB – making people pay and at the same time excess funds were being misappropriated,” he said.
“The realities of a post-Covid economy as well as a need for additional revenue-making on the government’s end should make the argument for GST more palatable this time around.”