International rating agency, Moody’s Investors Service expects the removal of the Goods and Services Tax (GST) will have a net negative effect on revenue unless the government announces specific measures that could cushion any shortfall.
“Unless the government introduced other offsetting measures at least over the next one to two years, the GST’s removal will have a net negative effect on government revenue, even accounting for some budgetary cushion from higher oil prices,” it said in a statement in Kuala Lumpur.
Last Wednesday, the Finance Ministry announced that the six percent GST would be voided from June 1, and indicated it would reintroduce the Sales and Services Tax (SST) that was in place before the introduction of GST in 2015.
“Most likely, legal formalities including the repeal of the GST Act and proposing a new SST Act will wait for the next Parliament sitting, which we expect at the end of June or early July,” said Moody’s.
In 2017, GST revenue was RM44.3 billion, or 3.3 percent of gross domestic product (GDP).
“Assuming a stable share relative to GDP, and taking into account seasonal patterns, we estimate the revenue loss from the voiding of the GST at around 1.9 percent of GDP this year.
“We also estimate that if the SST, which yielded revenue of around 1.6 percent of GDP before the GST replaced it, takes effect in July, the revenue loss would narrow to 1.0 percent of GDP for this year,” said Moody’s.
While these losses can be mitigated by the higher oil price, this, however, is not a permanent substitute for the GST, and is not a reliable offset to lost revenue given the volatility of prices.
Citing an example, Brent crude oil, which was at US$78.50 per barrel on May 18, was well above the price assumption of US$52 per barrel in the government’s 2018 budget.
And, assuming oil prices average US$70 this year, oil revenue gains will be about 0.4 percent of GDP, bringing net revenue losses to 0.6 percent of GDP.
“Indeed, the introduction of the GST in 2015 sought to reduce Malaysia’s reliance on oil-related revenue, which it successfully achieved,” it said.
Furthermore, beyond 2018, the reintroduction of the SST will create a revenue shortfall of 1.7 percent of GDP if the GST remains at zero.
According to the government, the rationale for eliminating the GST is that it will ultimately boost private consumption and economic growth, adding to the tax coffers through improvements in corporate and motor vehicle taxes and excise and import duties.
“We do not include these effects in our assumptions because we do not expect a sizeable multiplier effect,” said Moody’s.
- Bernama
