The new government in Malaysia has moved rapidly to deliver on its promise to abolish the 6% goods and services tax (GST), announcing a zero rate beginning June 1, 2018.
Prime Minister Mahathir Mohamad, who pulled off a surprise win in last week's elections, said "the directive has been issued so that we do not collect anymore GST." He added that the government will try to reimburse excess GST collected from companies and individuals.
Impact on the fiscal position
Some analysts fear that the decision would worsen Malaysia's fiscal position, including blowing up the budget deficit, currently at 3.1% of GDP.
But others are more sanguine, noting that GST was introduced in part to make up for the the significant fall in oil prices in recent years. Now that oil prices have recovered, GST proceeds are no longer as important.
While Malaysia's oil and gas exports become more valuable, however, higher oil prices could also mean higher subsidies for domestic use. Mahathir has promised that "present prices will stay" even if the government has to subsidize.
Mahathir plans to reintroduce the sales and services tax (SST), which is imposed on companies, as opposed to GST, which is a tax on consumption.
"We argue that the repealing of the GST is not as negative as many analysts have feared as it is offset by the re-introduction of the SST and the rise of oil prices," argues Trinh D. Nguyen, Senior Economist, Emerging Asia, at French bank Natixis. "Our analysis shows that both the increase of subsidy and repealing of GST would cause the deficit to widen only to 3.7% in 2018 from 3.1% in 2017 and to 4.2% in 2019."
Nguyen does not expect the return of the SST "to materially impact Malaysian exporters' competitiveness or that of the economy," because the country's top 30 largest firms are overwhelmingly domestic-dependent, except for the basic materials, diversified, and cyclical consumer sectors.
"Indeed, the repeal of GST, while only marginally negative for the fiscal deficit, will be a boon for consumers, who have been upset that they bear the burden of poor fiscal management and came out to vote against the establishment," she adds.