PAKATAN Harapan’s pledge to scrap the unpopular goods and services tax (GST) within 100 days of coming into power will result in a ripple effect on the economy because of the loss of revenue, leaving the new government to find other sources of income, according to Bloomberg.

The 6% GST currently brings in much-needed income compared to the previous sales tax, and accounts for an estimated 18.3% of overall revenue this year, according to the Finance Ministry’s pre-election estimate.

Scrapping the tax would leave a gaping revenue hole, which could possibly lead to a greater dependence on oil revenue, said the report.

As a net oil producer, Malaysia is set to benefit from the recent upswing in global crude prices, which should partly offset any loss in revenue. But a greater reliance on petroleum-related revenue will make the budget more vulnerable to swings in oil prices.

Prime Minister Dr Mahathir Mohamad has said he plans to bring back the sales-and-services levy, which he believes would provide enough government revenue alongside efforts to cut wasteful spending and root out costly corruption by the previous government.

However, Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch, told Bloomberg that the old sales-and-services tax would yield just about half the revenue coming from GST.

A GST differs to a sales tax because it’s levied at all stages of the supply chain – meaning manufacturers and their suppliers also pay tax on the goods produced, not just the consumer. It’s also charged at a flat rate compared to variable rates for a sales tax, so is simpler to manage and considered more efficient.

On the plus side, economists believe that scrapping the GST would give a boost to consumer spending, which will provide much-needed support for the economy.

The introduction of the GST in April 2015 caused a spike in inflation to 4.2% early the next year. – May 15, 2018.