6 days ago
Towards economic resilience: Malaysia's SST expansion is a tough but necessary step if done right — Goh Lim Thye
JULY 7 — On 1 July 2025, Malaysia implemented a revised and expanded Sales and Service Tax (SST) under the Madani economic framework. While this move had been anticipated by policymakers and industry players, it nevertheless sparked considerable public backlash, particularly among middle-income and urban households already coping with rising living costs. Such frustration is understandable. However, it is also crucial to examine the rationale, intended outcomes, and broader implications of the revised SST through a clear, evidence-based lens. 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.
The SST, reintroduced in 2018 to replace the GST, has been criticised for its narrow tax base and inefficiencies in enforcement. The revised SST seeks to correct some of these weaknesses. The new measures include an increase in the service tax rate from 6 per cent to 8 per cent for selected sectors, excluding essential services such as food and beverage, telecommunications, logistics, and parking. It also expands the scope of taxable services to include private clubs and karaoke centres. Importantly, the government responded to public sentiment by exempting daily essentials such as rice, vegetables, fish, eggs, and certain imported fruits like apples and oranges from sales tax. Additionally, the threshold for SST registration for financial and rental services was raised from RM500,000 to RM1 million, shielding many MSMEs from the expanded tax burden.
Malaysia climbed 11 positions to 23rd in the 2025 IMD World Competitiveness Ranking, its highest placement since 2020. Fiscal management is one of the key pillars in this ranking. A stronger tax structure that supports reduced fiscal deficits and sustainable debt management sends a positive signal to investors and rating agencies. — Unsplash pic
From a macroeconomic standpoint, Malaysia's tax-to-GDP ratio was just 12.2 per cent in 2022 and has since risen modestly to 13.2 per cent as of Q3 2024. This remains significantly lower than Thailand (16 per cent) and well below the OECD average of over 30 per cent. Such a low tax base constrains the government's ability to fund development expenditure and social protection sustainably. The 2025 Budget estimates an additional fiscal revenue of RM5 billion from newly included items under the revised SST, helping to close the fiscal gap. With Malaysia's national debt standing at RM1.22 trillion — around 63 per cent of GDP as of April 2024 — and the fiscal deficit narrowing from 5.0 per cent in 2023 to 4.1 per cent in 2024, enhancing domestic revenue mobilisation is not a policy choice but a necessity for fiscal resilience. The government has targeted a further reduction in the deficit to 3.8 per cent by 2025.
This strategy is not unique to Malaysia. Many economies have broadened their indirect tax systems in the wake of the pandemic. Singapore currently imposes a 9 per cent Goods and Services Tax (GST) as of January 2024, having increased it from 8 per cent the year before. This rate is higher than Malaysia's and reflects a commitment to broad-based consumption taxation while maintaining redistributive policies through schemes like the GST Voucher and permanent U-Save utilities rebates. Indonesia applies a Value Added Tax (VAT) of 11 per cent as of 2022, up from 10 per cent, and is considering increasing it further to 12 per cent by 2025. This reflects an ongoing effort to strengthen revenue mobilisation and support long-term fiscal sustainability. New Zealand runs a 15 per cent GST with minimal exemptions but offsets regressivity through targeted welfare transfers and a progressive income tax system. These international examples underscore that indirect tax systems can be sustainable if designed and implemented within a broader framework of redistribution and transparency.
Nonetheless, the regressivity of indirect taxes remains a valid concern. Lower-income households tend to spend a larger portion of their income on consumption and are thus more vulnerable to price hikes. To address this, it is essential that part of the revenue generated from SST expansion be reinvested into targeted assistance. Strengthening direct cash transfer schemes like Bantuan Tunai Rakyat (BTR), expanding food and transport subsidies, and enhancing public healthcare accessibility are crucial to offset the distributional impact of the tax. Moreover, policymakers must ensure there are no leakages in revenue deployment. Effective monitoring by the Auditor General and the Public Accounts Committee (PAC), alongside the use of digital public finance dashboards, would enhance accountability and trust.
An often overlooked dimension of tax reform is its contribution to macroeconomic stability and global competitiveness. Malaysia climbed 11 positions to 23rd in the 2025 IMD World Competitiveness Ranking, its highest placement since 2020. Fiscal management is one of the key pillars in this ranking. A stronger tax structure that supports reduced fiscal deficits and sustainable debt management sends a positive signal to investors and rating agencies. If the additional SST revenue contributes to narrowing the deficit from 5 per cent to the targeted 3.8 per cent of GDP over the medium term, it could enhance Malaysia's sovereign credit outlook and investor confidence.
Still, effective policy implementation requires clear and consistent communication. The government's decision to reverse the taxation of beauty services and exempt select fruits after public outcry shows policy responsiveness but also highlights the need for better stakeholder engagement. Economic policy, particularly one that affects consumer behaviour and firm-level pricing decisions, must be grounded in transparent consultation. Deliberative dialogue with civil society, chambers of commerce, and think tanks can help preemptively identify blind spots and build public buy-in.
Ultimately, the revised SST is a step toward fiscal sustainability and institutional maturity, not an endpoint. It must be accompanied by broader structural reforms improving tax administration efficiency, reducing procurement leakages, and adopting medium-term expenditure frameworks. Equally important is ensuring that taxation is linked to visible and equitable service delivery. Citizens are more likely to accept taxation if they see tangible returns in the form of improved infrastructure, quality education, and accessible healthcare.
In conclusion, while the expanded SST is far from perfect, dismissing it outright would ignore the urgent fiscal imperatives confronting Malaysia. The challenge lies in translating tax collection into inclusive development. If additional revenues are allocated with integrity and directed toward closing equity gaps, the SST reform could represent not merely a tax hike, but a pivot toward a more resilient and just economic model.
* Dr Goh Lim Thye is a senior lecturer at the Department of Economics, Faculty of Business and Economics, Universiti Malaya, and may be reached at [email protected]
** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.
