Why Is The Government Considering The Return Of GST?

In preparation for the presentation of Budget 2024 this Friday, there is one question that has been lingering in the minds of Malaysians.

And that question is, will the government reintroduce the goods and services tax (GST) in this budget?

Although Malaysia’s first introduction of the GST was a short-lived measure, only lasting three years before it was abolished, currently experts and even the government themselves are looking into the possibility of reimplementing the GST.

Why is the government considering the idea?

The idea of reintroducing the GST first came about during the administration of the previous government, under former Prime Minister Datuk Ismail Sabri Yaakob.

In an interview with Nikkei, Ismail noted that while the GST is unpopular, the government’s hands were tied as abolishing the tax cost them around RM20 billion in revenue.

And this is a massive problem that has spilled over into the current administration, as Malaysia’s economy still struggles to nurse a hangover from the pandemic. At the height of the pandemic in 2021, Malaysia’s fiscal deficit widened to 6.2% from the previous year’s 6.0%, largely due to higher pandemic-relief spending and low revenue.

Although the fiscal deficit has shrunk to 5% in last year’s budget, the government is still looking for ways to reduce the fiscal deficit. And this is also exacerbated by the fact that Malaysia is also dealing with a huge national debt problem. According to recent reports, the national debt is currently sitting at a gargantuan RM1.39 trillion.

This is where GST comes in. With the correct implementation, the GST can help boost national revenue which will also reduce the fiscal deficit.

Is it the time for it?

Now that we’ve established why the GST is being reconsidered, another question needs to be asked, is it really the time right for the reintroduction of a new tax?

Some, like The Federation of Malaysian Manufacturers’ (FMM) president, Soh Thian Lai, have called for the reinstatement of GST since last year, before the revised Budget 2023 was first presented by the current government.

Similarly, the Malay Chamber of Commerce Malaysia’s (MCCM)  president Norsyahrin Hamidon said that the GST will be able to provide extra income to the national coffers, but did add that if the GST were to be reinstated, it should be at a lower rate of 2%, instead of the 6% previously.

But even though most experts believe that the reintroduction of GST might be a necessary evil that the government will have to partake in, now is not the time for it.

Sunway University Economics Professor Dr Yeah Kim Leng said that although the reintroduction of the GST can enable the government to broaden its tax base and increase revenue substantially, it’s not the right time for it.

In a report from The Star, Yeah said that the right time to reimplement GST is when conditions are more favourable for the people – when economic growth and inflation is stable, along with low unemployment rates.

The same report also quoted Malaysia University of Science and Technology economics professor Geoffrey Williams, who said that the government needs to avoid the mistakes made during the previous implementation of GST.

He said that if GST is reintroduced at this point of time, it would not only exacerbate inflation, but also disrupt economic growth and cause political instability.

Meanwhile, Michelle Chuo, Tax Director of PwC Malaysia said that before reintroducing GST, the government should make sure that the people are ready for it first.

“The country is still at the recovery stage post-pandemic, with inflationary pressures putting a dent on profits for some businesses. In addition, companies are still adjusting to a number of tax developments. 

However, a broader-based consumption tax seems to be the pragmatic way forward to address deficits, leading to a more sustainable economy. Getting various stakeholders involved in the consultation process, from businesses to civil society, is critical in understanding the sentiments on the ground, and their readiness in embracing the GST,” said Chuo.

Maybe not this year, but in the near future

With all that being said, perhaps the conclusion that can be drawn is that although GST will be a very useful tool to help the government reduce the fiscal budget and increase their revenue, now is not the right time to do it.

Due to the people feeling the brunt of inflation, economic instability, and the rising cost of living, the reintroduction of GST will create more financial pressure on Malaysians. Doing so will be akin to putting the cart before the horse.