Malaysia has a few ways to make good revenue shortfall from zero GST

THE groundbreaking general election in Malaysia on May 9 has thrown up many new paradigms and possibilities which investors could never have calculated even the week before.

Not unexpectedly, policy reversals have become somewhat of a norm under the "new normal" in Putrajaya. One of the most significant will be the new government's decision to "zero rate" the Goods and Services Tax (GST).

Not surprisingly, it was greeted with glee by the populace, who feels that the 6 per cent tax exacerbates the already-high and rising living costs in the country.

However, financial markets have been less welcoming of the announcement - perhaps for good reason. The GST brings in some RM40 billion (S$13.6 billion) to the government coffers, thus playing a huge part in balancing the overall budget and reducing national debt, which new Prime Minister Mahathir Mohamad says is RM1 trillion.

Zero rating - GST cannot be scrapped without an Act of Parliament, hence the zero rating - means the government will have to find something else to fill the gaping fiscal hole.

Ratings agencies, in particular, are not pleased. But is the financial market over-reacting to the move?

One has to bear in mind that the GST was introduced in 2015, when the prices of crude oil worldwide had fallen by half, dealing a huge blow to the country's earnings.

A lot has changed since then.

Oil prices have gone up some 30 per cent this year; international benchmark Brent crude prices have risen more than 51 per cent over the last year, and the cost of US crude is up nearly 45 per cent.

And there is more upside to come.

By even by some conservative estimates, the pick-up in oil prices could make up almost a third of the fiscal shortfall arising from the reduction of the GST.

On its part, the Malaysian Ministry of Finance has acknowledged the need for fiscal reformation and restructuring to make up for the removal of the GST. "The reduction of income as a result of the GST being reduced to zero starting June 1 will be offset by specific income and expenditure-focused procedures that will be announced soon. The Sales and Services Tax (SST) will be reintroduced," it said in a statement last week.

Indeed, if implemented properly, the SST could rake in some RM20 billion in revenue, filling half the hole created by the GST's disappearance.

There are also other areas where the shortfall can be made up.

Profligate government spending, an over-blown bureaucracy, mismanagement at government-linked entities and endemic corruption are obvious candidates for close attention. Also, one has to bear in mind that Malaysia is an export-driven economy that is robust enough to deliver strong tax revenues, if tax policy is enforced optimally.

The bottom line is this: favourable global market conditions, recovering commodity prices and more efficient economic management can more than make up for the shortfall in the GST.

Investors should also take heart from the fact that Prime Minister Mahathir himself has had a long-standing reputation for being "market friendly". This is a critical attribute at a time when the country needs to maintain its close links with the financial markets as it undergoes massive political and economic transition.