Economist: SST reform may be unpopular, but it's what Malaysia needs

New Straits Times

6 hours ago

KUALA LUMPUR: The government's decision to expand its Sales and Service Tax (SST) this month should not be viewed as merely a tax hike, but rather as a critical step toward long-term fiscal sustainability, according to economist Dr Goh Lim Thye.
This, he said, is especially relevant given Malaysia's low tax-to-gross domestic product (GDP) ratio, which limits the government's ability to sustainably fund development and social protection.
"Though not without flaws, the policy represents an important step in Malaysia's broader effort to strengthen fiscal stability and could deliver long-term benefits if implemented thoughtfully and fairly," Goh wrote in a commentary.
The revised SST, implemented on July 1, includes an increase in the service tax rate from six to eight per cent for selected sectors and an expanded list of taxable services, such as private clubs, karaoke centres and professional services.
Essential services including food and beverage, telecommunications, logistics and parking are excluded.
Goh noted that Malaysia's tax-to-GDP ratio stood at just 13.2 per cent as of the third quarter of 2024 — significantly below Thailand's 16 per cent and far below the Organisation for Economic Co-operation and Development average of over 30 per cent.
He said the 2025 Budget estimates an additional RM5 billion in revenue from newly included taxable items, helping to close the fiscal gap.
With national debt standing at RM1.22 trillion, or about 63 per cent of GDP as of April 2024, the government has also targeted a reduction in the fiscal deficit from five per cent in 2023 to 3.8 per cent by 2025.
"Enhancing domestic revenue mobilisation is not a policy choice but a necessity for fiscal resilience," he said.
To cushion the impact, the government has exempted daily essentials such as rice, vegetables, fish, eggs and selected imported fruits like apples and oranges from the expanded sales tax.
It also raised the SST registration threshold for financial and rental services from RM500,000 to RM1 million, a move expected to shield many micro and small businesses.
Still, Goh acknowledged that indirect taxes tend to be regressive, as lower-income households spend a larger share of their income on consumption.
To address this, he recommended that part of the revenue be reinvested into targeted assistance such as cash transfer schemes, expanded subsidies for food and transport, and better access to public healthcare.
Goh added that if additional SST revenue is effectively deployed, it could help reduce the deficit and enhance Malaysia's sovereign credit outlook and investor confidence.
He also pointed out that fiscal strength was one reason Malaysia climbed 11 spots to 23rd in the 2025 IMD World Competitiveness Rankin, its highest placement since 2020.
"A stronger tax structure that supports reduced fiscal deficits and sustainable debt management sends a positive signal to investors and rating agencies," he said.
Malaysia's SST reform is not occurring in isolation. Other countries have adopted similar moves.
Singapore increased its Goods and Services Tax (GST) to nine per cent in January 2024, while Indonesia raised its Value Added Tax from 10 to 11 per cent in 2022 and may increase it further to 12 per cent.
New Zealand runs a 15 per cent GST with minimal exemptions, offsetting the burden through targeted welfare transfers and a progressive income tax system.
Goh said such examples show that consumption taxes can be sustainable when embedded within a broader framework of redistribution and transparency.
He also noted that the government's reversal on taxing beauty services and certain fruits, following public backlash, highlights the importance of better communication and stakeholder engagement.
"Economic policy, particularly one that affects consumer behaviour and firm-level pricing decisions, must be grounded in transparent consultation," he wrote.
Ultimately, he said the SST expansion should be seen not as an endpoint, but as a step toward fiscal maturity and resilience, if supported by broader reforms and visible, equitable public spending.