A brief look at Malaysia’s removal of GST

by Chris Kuan

Malaysia removing Goods & Service Tax (GST). Dr. Mahathir said there are sufficient revenues but we shall see. Removal of GST does not mean the new government won’t increase other taxes or impose new ones. This is politics after all and the comparison to Singapore is interesting.

The reason why I mention this is because Malaysia’s fiscal position does not paint a pretty picture after the GST removal because their GST is a bigger chunk of revenues than ours.

As a proportion of GDP, Malaysia’s GST is 3.8% of Gross Domestic Product while ours is 2.6%. Theirs is 17.5% of total revenues, ours 14.5%. Malaysia’s long-run budget deficit is around 4% of GDP although in recent years the deficit has narrowed to 3%. So a removal of GST without other measures will take the deficit up to 6.8%, exceeding the 6.1% during the Global Financial Crisis.

But the removal of GST can boost GDP growth which delivers higher tax takes. Offsetting to some extent the loss of GST revenues. The Tun can also cut expenditures but a corresponding reduction by 3.8% of GDP to match the loss of GST revenue will be painful and cuts in expenditure can dampen GDP growth which then reduces tax takes, therefore offsetting the savings from the expenditure cuts.

Where it may be comforting though is that Malaysian government indebtedness is low, 51% of GDP which is only half of Singapore’s (ours is high largely due to CPF). There is a good amount of fiscal space for the new government to finance the fall in revenues due to the removal of GST through an increase in net debt issuance.

Unlike Singapore, Malaysia isn’t constitutionally constrained by the prohibition against deficit financing. Our friends up north have more flexible arrangements. We can also have the same but we don’t.

Now shouldn’t we have this kind of debate in Singapore, eh?

This was first published on Chris Kuan’s Facebook page and reproduced with permission

Editor’s note – Note that GST is replaced with its old Sales Tax and its revenue from consumer goods and services is not completely removed. The difference between the GST and the Sales and Service Tax can be seen in the chart below.

When GST was first mentioned in 2013, Royal Malaysian Customs (RMC) senior assistant director in-charge of GST Mohammad Sabri Saad said, “We expect at 6%, an additional of RM5 billion to RM6 billion will be raised. This additional amount will actually flow back to the people through incentives and cash aids.” Targeting a revenue of up to RM22 billion to the government’s coffers annually.

Based on the historical exchange rate, the difference is about SGD$2 billion to SGD$2.4billion. But by 2017, Malaysia government collected RM43.8 billion via GST.

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