GST could save Malaysia from RM1.6tri black hole

GST could save Malaysia from RM1.6tri black hole

The GST was dropped like a hot potato by the newly elected Pakatan Harapan government in 2018. (Bernama pic)


PETALING JAYA: The controversial goods and services tax (GST) remains the best option to broaden the tax base to mitigate the fall in government revenue as well as the crippling RM1.5 trillion national debt, says an economist.

Bank Islam chief economist Firdaos Rosli said despite its flaws, GST was a much more robust system for indirect tax compared with the current sales and service tax (SST).


“The idea is not to have the perfect system, but to improve, adopt and adapt the existing system of GST,” he said, adding that its effectiveness also depends on the tax design.

GST was implemented on April 1, 2015 by the Najib Razak government and included everyday necessities, such as fresh food and utilities. The customs collected RM41.2 billion in 2016, and RM44.3 billion in 2017.


Firdaos Rosli.


However, it was like a poisoned chalice to Najib’s government as Pakatan Harapan whipped up public discontent, causing Barisan Nasional to be defeated at the 2018 general election.

The new PH government dropped GST like a hot potato in June that year, replacing it with the SST.

Anwar’s dilemma

The current government led by Prime Minister Anwar Ibrahim increasingly finds itself between a rock and a hard place.


He revealed on Jan 17 that Malaysia’s national debt, including liabilities, had reached RM1.5 trillion. If liabilities were included, the total amounted to more than 80% of the country’s gross domestic product GDP.

He acknowledged the issue should be “addressed urgently” and indicated the figure suggested that Malaysia’s budget deficit would widen further than the earlier estimate of 5.8% of GDP for 2022.

The government’s major problem is that it spends more than it collects from its sources of revenue. In the proposed 2023 budget tabled by the previous government, tax revenue was forecast at RM171.34 billion and operating expenditures at RM233.5 billion.

“GST may not be introduced this year, but we would expect the government to sprinkle some clues as to where this is going,” Firdaos said at a media briefing.

He said there is room to play with the timing of GST’s reintroduction, as well as setting a low initial rate (of 2%-3%) instead of returning immediately to a 6% rate that was imposed previously.

“For context, Indonesia raised its GST last year to 11%, whereas, Singapore started its GST at 2%, and continued to gradually increase it over (the years),” he said. On Jan 1 this year, Singapore raised its GST rate from 7% to 8%. Its next GST hike will take place on Jan 1, 2024, when it will be raised from 8% to 9%.

Statutory debt on the rise

The worrying trend is that government debt has been rising over the past 15 years. In 2008, debt service charges (DSC) made up just 8% of federal government revenue, but by 2022, it had almost doubled.

According to the finance ministry’s debt report, the government’s debt service charges for 2022 is estimated at a whopping RM43.1 billion or 15.1% of revenue. For context, the government collected RM44.3 billion from GST in 2017, an amount that would cover its DSC.

However, this is just servicing interest on the debt, and the ministry has been reticent on how the over trillion-ringgit debt will be reduced.

Bank Islam expects that statutory debt will creep towards the 65% of GDP limit at 64.1% in 2023, compared with 63.3% in 2022.

Statutory debt is composed of Malaysian Government Securities, Malaysian Government Investment Issues and Malaysia Islamic Treasury Bills. This does not include current liabilities, which would raise the debt-to-GDP ratio to over 80% at RM1.5 trillion.

However, Firdaos noted the level of debt is less significant than the growth generated by accumulating that debt.

Goh Lim Thye.

Universiti Malaya senior economics lecturer Goh Lim Thye said Singapore has a debt-to-GDP ratio of 187%, while Malaysia has a ratio of around 80% (including liabilities), which is not too bad. “But the only thing we don’t have in common is (in terms of) total assets,” Goh said in an interview with Bernama.

He concurred that focusing on improving the nation’s productivity and tax base collections would set Malaysia on the right path to service its debts.

“While everyone is concerned about paying more taxes, there are actually many aspects when it comes to increasing the tax base revenue,” he said.

Alternative methods of indirect taxation that have been proposed include the low goods value tax on imported goods, and a 6% digital tax.

“We are confronted with a very difficult situation. Without GST, we have to scrape the bottom of the barrel for revenue sources,” said Firdaos.

“There will be a lot more peripheral tax coming into play if we continue to delay re-introducing GST. If you put taxes on low-value goods, I’m sure you can think of many ways to go around it. With GST, it’s more resilient. As you consume, you pay.”

The phrase ‘GST’ will not induce positive sentiments in the hearts of most Malaysians. Ironically, while GST was buried by the PH government in 2018, it may now be up to PH chairman Anwar to resurrect it to save the government from its RM1.5 trillion debt black hole.

Nevertheless, the reintroduction of GST by itself is not the panacea that will keep Malaysia from falling into the abyss of financial ruin. It needs to be accompanied by concrete moves to rein in government spending, plug the leakages in government contracts, and downsize the bloated civil service, among others.

Whether Anwar and the unity government have the political acumen and will to make the hard decisions for the good of the nation will be the acid test of his leadership.