Possibly Lower GST If Oil Price Increases To Above US$55?

According to MIDF Research, if the oil prices rises above US$55 per barrel, the Government will have room to reduce the goods and services tax (GST) rate by more than 1%.

A report estimated that if the oil prices averaged at US$55 per barrel next year, the Government could reduce the GST rate to 5% from 6%.

At a more ambitious price of US$75 per barrel, another 1% could be reduced from the GST rate, making it 4%, while still maintaining the current fiscal consolidation target.

“The Government has made its intention clear that the GST implementation last year was to broaden its tax base and continue with its fiscal consolidation plan.

“The move, though unpopular, manages to mitigate the shortage in federal revenue due to the rout in global oil prices starting mid-2014 and received global affirmation from international rating agencies such as Moody’s and Fitch Ratings,” the report stated.

In the first half of 2016, that the Brent crude oil price averaged at US$39 per barrel, which was higher than the imputed price in 2016’s recalibrated budget, the research house noted.

Year-to-date, oil prices have risen by 40.8% to reach a 2016 high of US$52.50.

“If the price momentum continues, the higher oil price should therefore translate into higher oil-related revenues to Malaysia,” MIDF said.

Lee Heng Guie, an independent economist told The Star that the Government would need to consider its committed expenditures before deciding to cut the GST rate.

“Yes, no doubt the oil price has gone up substantially, but we will need to also evaluate how sustainable is this oil price rise. My take is that if it stays above the comfort zone of US$60 per barrel, then the Government will have further leeway in terms of fiscal space,” Lee said.

“I believe the rationale behind the idea to reduce the GST is to boost consumer spending since the consumer sentiment index is at its historical lows, but I doubt it will be done by the Government,” he added.

Instead, the Government should highlight prudent spending and not immediately reducing the GST rate, Lee opined.

“I believe the Government is walking on a tightrope in terms of revenues and commitment on the expenditure side. The possibility of the Government doing that is quite remote and I am not sure if it can be sustained,” Lee said.

According to the research house, reducing the GST rate could also boost higher private consumption.

“According to a Bank Negara estimate, on average, the GST contributed 0.7 percentage points to the inflation level, while our own estimate was higher at 1.1 percentage points.

“Although we are not expecting a significant reduction in the price level if the GST is being reduced, we believe the inflation level could be suppressed,” it added.

[Source]