[KUALA LUMPUR] Malaysia on Wednesday implemented a six percent consumption tax aimed at plugging a leaky tax-collection system and addressing a widening fiscal deficit, but which has sparked opposition protests over the past year.
The government and economists say the Goods and Services Tax (GST) will help address an inadequate revenue-collection system under which income tax is currently paid by only an estimated 11 per cent of registered companies and 14.8 per cent of employees.
But the GST has prompted demonstrations by opposition parties, who say consumers were being left with the bill for government mismanagement of the economy.
Prime Minister Najib Razak on Monday said the GST - which does not apply to staple food items such as rice, sugar and cooking oil, as well as some medicines - would not overburden consumers.
"At the same time, we will raise the nation's revenue, and this is for the people's good," he was quoted as saying by Malaysian media.
The government says the GST will raise an estimated RM22 billion (S$8.15 billion) in additional revenue each year.
It hopes to trim its fiscal deficit to 3.2 per cent of GDP in 2015, compared to 3.5 per cent last year. An earlier 2015 target of 3.0 per cent was scrapped in the wake of the global oil price rout that set in last year.
Malaysia is a net oil exporter, and a 60 per cent drop in crude prices in the latter half of 2014 prompted the World Bank in January to shave its 2015 GDP growth forecast for Malaysia to 4.7 per cent from an earlier 4.9 per cent.
The ringgit currency has also plummeted on oil-linked concerns, as well as investor fears for the stability of a troubled government investment fund, 1Malaysia Development Berhad (1MDB), which is mired in US$11 billion of debt.
Kenanga Research economist Wan Suhaimi Saidi said the GST would broaden the tax base.
"But whether it would help to reduce the deficit depends on many other factors, especially on how the government would tackle leakages," he said.
Opponents say billions of dollars are wasted by the government or go missing each year and that deep reforms are needed before introducing the sales tax.
In concert with the GST, corporate, business, and personal income tax rates are to be slightly reduced.
Fabian Leo, who runs a Kuala Lumpur car-rental company, said he fears for his bottom line.
"There has been a lot of unhappiness from my customers who want me to absorb the six per cent," he said.
"On the other hand, if I don't, my existing clients may stop renting from me." AFP