Malaysia's new govt scraps 6% consumption tax

Kuala Lumpur

MALAYSIA scrapped a 6 per cent rate on the goods and services tax (GST), fulfilling a campaign promise by Prime Minister Mahathir Mohamad that gave him an unexpected win in last week's election.

The tax rate will be set at zero per cent from June 1, the Ministry of Finance said in an emailed statement.

All businesses must comply with the ruling, it added.

Dr Mahathir's coalition pledged to replace the tax - which disgruntled voters blamed for their rising living costs since it was imposed in 2015 - with a more modest sales and services levy.

Economists and credit ratings companies like Moody's Investors Service have warned the move would cut government income and widen the budget deficit if not offset by other revenue-raising measures.

"It's good and bad," said Sanjay Mathur, an economist at Australia & New Zealand Banking Group Ltd in Singapore. "If it's just the GST, of course, the budget deficit will widen. But I'm hopeful that they will take compensating measures that will ease the pain."

The government earned RM43.8 billion (S$14.8 billion) in revenue from GST last year, or 18.3 per cent of tax income, making it the largest contributor after corporate tax receipts. That helped the ousted government of Najib Razak to steadily narrow the fiscal deficit over time to 3 per cent of gross domestic product (GDP) last year.

Moody's said this week that Malaysia's government debt of 50.8 per cent of GDP is higher than the median for A-rated peers and without inflows from GST, would remain elevated and be negative for the credit rating. Fitch Ratings has raised similar risks.

"As the situation is still fluid, Fitch will continue to monitor and review the developments to ascertain the implications for Malaysia's sovereign ratings," Sagarika Chandra, Fitch's sovereign analyst for Malaysia, said in an email after the GST announcement.

"While revenue losses this year will be offset to some degree by higher oil prices, this is unlikely to be structural or act as a permanent substitute for GST itself," said Anushka Shah, sovereign risk analyst at Moody's. "The extent to which offsetting measures, if any, will help recover the revenue loss from GST will allow us to determine the exact impact on the fiscal position going forward. On the plus side, the move may help spur consumer spending and ease inflation in an economy that's already booming."

Oxford Economics said on Tuesday that the new government's policies, which include scrapping GST, re-introducing fuel subsidies and raising minimum wages, will boost GDP by 0.2 to 0.4 percentage points.

As a net energy exporter, Malaysia is also benefiting from rising oil prices, which may help to offset a drop in tax income. Oil is trading near US$71 a barrel and with geopolitical tensions high, prices are set to remain elevated.

"The GST was key to Malaysia during the worst period" for the budget when oil had bottomed at US$37 a barrel, said Trinh Nguyen, a senior economist at Natixis Asia Ltd in Hong Kong. With the tax being repealed, Ms Nguyen said she's "not particularly concerned," and it "will be very positive for the consumer sector."

Zeti Akhthar Aziz, a senior adviser to the government, said on Tuesday Malaysia would be able to reduce the fiscal deficit by controlling expenditure in the absence of GST. Ms Zeti, a former long-serving central bank governor, said the government would re-prioritise projects, increase efficiency and reduce wastage in the public sector. BLOOMBERG, REUTERS