Manageable impact

The Star

2 days ago

PETALING JAYA: The impact from the implementation of the expanded sales and service tax (SST) is expected to be rather contained thanks to its targeted approach and relief measures in place.
Putrajaya's announcement on Monday to roll out the expanded SST on July 1 came as no surprise as the government had previously signalled their intention to gazette the bill in early June after a slight delay from the original May deadline.
The expanded SST is expected to generate an estimated RM10bil in additional tax revenue on an annualised basis.
Under the enlarged SST, essential goods like rice, cooking oil, bread, sugar, medicines and basic construction materials (cement, sand, iron) will still be exempted from the sales tax.
Luxury and discretionary items, however, such as king crab, imported fruits, truffle mushrooms and silk fabrics will be taxed at 5%, while premium goods like racing bicycles and antique paintings will face a 10% tax.
On the services side, selected segments will be taxed between 6% and 8% including rental and leasing services, construction, financial services (fees and commissions), private healthcare for non-citizens, high-end private education institutions and beauty services.
There are exemptions of course, including residential rentals, basic banking services and for smaller businesses.
Hong Leong Investment Bank (HLIB) Research had described the expanded SST as a 'non-event' from a market viewpoint, with 'limited' sector profit impact, given its targeted approach.
The research house said while sectors such as construction, banking, and healthcare may appear exposed, it expects any profit impact to be negligible.
'For construction services, we foresee limited impact on contractors as most contract structures allow for cost pass-through mechanisms and new project tenders are likely to be repriced, transferring the incremental cost to end-customers,' HLIB Research said in a report yesterday.
Meanwhile, the research firm added it does not expect any material impact to banks with non-essential fee-based revenue accounting for only about 6% to 7% of total sector operating income.
Nonetheless, HLIB Research also noted the demand for these services will stay fairly inelastic, given limited substitutability.
As for private healthcare services, given that SST applies only to foreigners, and medical tourism remains a small revenue contributor (about 5% to 10%) at this stage, the research outfit said demand should remain intact.
'This is backed by Malaysia's strong clinical reputation and continued pricing advantage versus regional peers, even post-SST.
'Moreover, healthcare services are inherently price inelastic and we do not expect operators to absorb the tax. We see no earnings impact to the sector,' HLIB Research opined.
This is largely concurred by other research houses with CGS International Research stating that in the bigger scheme of things, the rollout of the wider SST scope (previously delayed from May 1, 2025) indicates the country's 'wheels of reform remain in motion to responsibly consolidate its fiscal deficit position.'
Nonetheless, the impact on consumers remains a key concern, especially as businesses are expected to pass higher operating and input costs onto them.
On this note, CIMB Research said it remains 'slightly negative' on the expanded SST, even though various relief measures have been introduced.
The research house flagged that the expanded SST is negative for the consumer sector due to increased operating costs and weaker consumer demand.
'We expect most consumer companies will need to raise selling prices to pass on additional costs, which could further weaken spending power. The expanded SST is likely to erode wallet sizes, particularly owing to higher price points for non-essential goods and the broader range of taxed services,' CIMB Research said.
That said, Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Dr Mohd Afzanizam Abdul Rashid said there could be knee jerk reaction at the beginning for consumers, but thereafter the trend could normalise.
'Consumers will eventually get used to it because they are price takers,' he told StarBiz.
Even so, Afzanizam also noted that this 'does not mean that the market can take things for granted'.
'We have already observed that private consumption is growing below trend levels, which goes to show that consumers are selective and cautious as they balance their needs and wants,' he said.
Afzanizam is of the view that the impact from the expanded SST on inflation is likely to be manageable as there are exemptions in place.
He added that the relief measures under the revised SST structure will provide some relief to the economy, as the government has to walk on a tightrope between improving the fiscal position and minimising the impact of the expanded SST to the rakyat.
'We have seen the impact from the upwards adjustment in the service tax rate from 6% to 8% which had commenced on March 1, 2024 and the diesel subsidy rationalisation on June 10, 2024.
'Inflation rate last year had moderated to 1.8% in 2024 from 2.5% in 2023. Currently, the inflation rate has been hovering at 1.4% in April and March this year,' he said.
Meanwhile, economist Geoffrey Williams said there will be an increase in the prices of the newly added goods and since the SST has a cascading effect, this will also impact prices more broadly.
'However the new categories added only constitute a small part of the consumer price index basket of goods and services and the tax effect is one-off.
'Since inflation is low at the moment this is a good time to introduce the change,' he said.
Further, Williams pointed out that since the new products and services added to the expanded SST are luxury and non-essential goods, low-income groups should not be affected too much.
'Moreover, existing exemptions that benefit low-income groups have also been retained in a balanced way,' he said.
UOB Kay Hian Research also projects there will be a minimal impact on the consumer sector from the enlarged SST, as the increased sales tax does not apply to essential goods.
While the research house noted the service tax on sizeable rental or leasing service providers to 8% will likely have an indirect spillover effect that effectively translates to marginally revised rental rates for select outlets, it is ultimately 'very digestible' by the retailer.