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Malaysia starting sales tax in Sept to shore up Budget

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Dr Mahathir is seeking more fiscal space to fulfil election pledges that include fuel subsidies and reducing the cost of living.

Kuala Lumpur

MALAYSIA will implement a new sales tax in September to replace the consumption levy that it is scrapping next month as new Prime Minister Mahathir Mohamad seeks ways to temper concerns on the nation's budget.

The government is studying a 10 per cent rate for the sales and services tax, he told reporters in Putrajaya on Wednesday after chairing a Cabinet meeting.

Ministers also agreed to cancel a proposed multi-billion dollar high-speed railway (HSR) link to Singapore and the third phase of a mass rapid transit line in the capital Kuala Lumpur, he said. Dr Mahathir is seeking more fiscal space to fulfil election pledges that include fuel subsidies, reducing the cost of living and abolishing toll fees, after finding the state saddled with contingent debt that push total liabilities to exceed 1 trillion ringgit (S$336.7 billion). The government satisfied a major promise when it cut the Goods and Services Tax to 0 per cent from 6 per cent, with effect June 1.

"We find that the situation is worse than we thought when we were preparing the manifesto," the 92-year-old Dr Mahathir said. "That is why the promises will be fulfilled, but they must take into account the financial situation."

The government will review the Bandar Malaysia property project conceived by 1MDB, while the HSR and other major projects will be revisited when the country is in a better financial position, Dr Mahathir said.

Commenting on the scrapping of the HSR, Harrison Cheng, a senior analyst at Control Risks, said Malaysia's decision reinforces the "heightened risk" of state suspension and cancellation of infrastructure projects that have been proposed but not initiated, or are in the very early stages of construction.

"Mahathir's announcement has also sent an early and strong signal to the Singapore government that bilateral relations are unlikely to be 'business as usual', in that future bilateral projects will face greater scrutiny than before to ensure that Malaysia gets a good deal," he said.

"Mahathir is also likely to stomach a greater degree of bilateral tensions than (his precedessor) Najib Razak to show his domestic constituents that Malaysia will not 'bow down' to Singapore."

As a celebration marking the end of the Muslim fasting month approaches, Dr Mahathir said civil servants will get a 400 ringgit bonus payment, while road users will enjoy a 50 per cent discount on tolls in the two days leading up to the Eid al-Fitr festival, which is set to fall in mid-June.

The government will keep prices for diesel and RON95 gasoline unchanged, while the RON97 grade of petrol will move according to market prices, the premier added. BLOOMBERG

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