MALAYSIA - With Prime Minister Najib Razak consolidating his power in the recent Umno party elections, the stage looks set for the government to introduce the controversial goods and services tax (GST) in next year's Budget to be announced on Friday.
On the back burner for years because new taxes are unpopular, the Malaysian government is expected to table the GST to raise revenue and reduce its long-time budget deficit, said economists briefed by government officials.
The new tax is likely to start at 4 per cent and may possibly rise to 6 per cent later. It will be levied on all goods and services except for essential food items such as cooking oil and rice.
The GST will replace the 16 per cent sales and services tax now levied on certain goods and services such as food and beverages in restaurants and hotel services.
Malaysia is among the last few ASEAN countries - including Myanmar and Brunei - that do not have the GST. Indonesia introduced it in 1985, Thailand in 1992 and Singapore in 1994.
With the government having run a budget deficit for the past 15 years and public debt at 53 per cent of gross domestic product (GDP), economists say the government must cut spending and raise revenue or risk credit downgrades by international rating agencies.
In August, Fitch Ratings downgraded Malaysia's credit outlook from stable to negative on concerns that it has not reined in spending. Last year, the budget deficit was 4.5 per cent of GDP.
Observers said with the general and Umno elections over, there is no reason to delay further.
Datuk Seri Najib's key allies retained their posts in Umno party elections last Saturday. In May, the Umno-led Barisan Nasional won the general election with 133 out of 222 parliamentary seats.
Mr Lee Heng Guie, chief economist of CIMB Investment Bank, told The Straits Times on Monday: "The fact that Mr Najib has a stronger mandate now gives him the clearance to implement the economic reforms that the country needs."
According to a DBS report last Wednesday, a GST of 4 per cent will bring in RM20.5 billion (S$8 billion) of additional revenue for the government, which has been relying mainly on oil revenue.
The GST will also greatly expand the number of taxpayers. Currently, only 1.7 million of the country's population of 29 million pay income tax.
The opposition Pakatan Rakyat coalition says the burden of the GST will fall mostly on the poor and middle class, and has threatened nationwide protests. In its alternative budget proposal announced on Monday, it said the GST should not be rolled out unless the low- to middle-income groups receive income tax relief.
Some economists say the GST will take a toll on the majority of households, which earn below RM5,000 a month, and especially on the bottom 40 per cent living on less than RM1,800 a month.
They say the government should save money instead by requiring competitive bidding in procurement. "The GST will only stifle domestic spending and lower economic growth," said Dr Lim Kim-Hwa, an economist at the Penang Institute.
The government has said it will increase cash aid for the poor.
More public education on the GST would help, said Datuk Paul Selvaraj, president of the Federation of Malaysian Consumer Associations. "It is such a major policy and yet, the government has not gone to the ground to talk to the people about it," he said.
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