HLIB: Expanded SST signals fiscal discipline

New Straits Times

5 hours ago

KUALA LUMPUR: Hong Leong Investment Bank (HLIB) said the expanded Sales and Service Tax (SST) reflects the government's firm commitment to fiscal consolidation, with the 2025 fiscal deficit target maintained at 3.8 per cent of gross domestic product (GDP), down from 4.3 per cent in 2024.
The government expects the SST expansion to yield RM5 billion in additional revenue in the short term (equivalent to 0.24 per cent of GDP), with a long-term annual target of RM10 billion (0.48 per cent of GDP).
Under the revised SST structure, a 5 per cent to 10 per cent sales tax will be imposed on selected non-essential goods, while the 6 per cent or 8 per cent service tax will be extended to include sectors such as rental or leasing, construction, financial services, private healthcare, private education, and beauty services.
To maintain progressivity, the government structured SST into two tiers based on necessity. Essential goods such as bread, milk, cooking oil, and medicine remain exempt. Premium products such as imported seafood and industrial machinery will be taxed.
Services mostly used by high-income groups and non-residents, like private education (annual fees above RM60,000), selected banking services, and private healthcare for foreigners, are also within scope. Relief measures include exemptions for business-to-business transactions, group relief, and residential construction or rental.
The expanded scope is part of the government's broader initiative to strengthen the fiscal position by increasing and diversifying revenue sources. A portion of the additional revenue generated will be used to enhance public services and create greater fiscal flexibility.
HLIB noted the government's plan to rationalise RON95 fuel subsidies through a more targeted framework. While the mechanism is still being finalised, the government aims to shield 85 per cent to 90 per cent of households from substantial price increases, despite concerns over its implementation complexity.
On market impact, HLIB views the SST expansion as largely neutral, as it is narrowly targeted and carefully designed to exclude essential goods and services.
"While sectors such as construction, banking, and healthcare may appear exposed, we expect any profit impact to be negligible," HLIB said in a note.
In construction services, HLIB foresees 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 the end customer.
In the financial services sector, the firm does not expect any material impact to banks, as they primarily serve as tax collection agents on behalf of the government.
"Based on our estimates, non-essential fee-based revenue accounts for only around six per cent to seven per cent of total sector operating income. Nevertheless, we believe demand for these services will stay fairly inelastic, given limited substitutability," it said.
In the private healthcare services sector, HLIB noted that the tax applies only to foreigners, and medical tourism remains a small revenue contributor (around five to 10 per cent) at this stage.
"In our opinion, demand should remain intact, backed by Malaysia's strong clinical reputation and continued pricing advantage vs regional peers, even post-SST. Moreover, healthcare services are inherently price inelastic, and we do not expect operators to absorb the tax. Net-net, we see no earnings impact to the sector," it said.