PUTRAJAYA needs a long-term plan for government revenue instead of relying on oil earnings and dividends to head off the shortfall of tens of billions after writing off the goods and services tax (GST), said economists. 

The GST, introduced in April 2015, was zero-rated on June 1 and the sales and service tax (SST) bill is set to be reintroduced on September 1.

For the SST, the government has proposed 5% and 10% rates for the sales tax, and 6% for the service tax, similar to the tax regime retired after the introduction of GST by the previous administration.

SST will target a narrower basket of goods and services and is expected to bring some relief to households. However, the government would only be able to raise RM21 billion this year, as compared with RM44 billion if GST was continued.

“We all know SST will collect less revenue than GST. Even the ruling government has admitted to it. That is a fact and no one can change that,” said economist Adli Amirullah of the Institute for Democracy and Economic Affairs (IDEAS). 

“As of now, yes, Malaysia can manage with the SST and less government revenue from indirect taxes. But I am sceptical of this solution for the long term.” 

Vulnerable to depend on oil

Adli said that Putrajaya will be left vulnerable from its reliance on government-linked companies (GLCs) and oil revenue. 

“As mentioned by Finance Minister Lim Guan Eng this week, the PH government will cover the loss of revenue with dividends from GLCs and oil related revenues. But these solutions are only for the short term. 

“Can the government ensure that in 10 years, GLCs will still be profitable and pay dividends in a consistent manner? 

“And can the government ensure that oil prices remain the same as we see today, at about US$70 (RM280) per barrel? These questions are crucial for the government. It has to make sure it has a plan for the long term.”

The SST will only be imposed on 38% of the Consumer Price Index (CPI) basket of goods, as compared with 60% in the GST, Lim said yesterday. Cars, selected building materials, processed food and beverages and services are likely not exempted from SST.

In a report published yesterday, CIMB Research said that while higher oil-related revenues are a good temporary buffer, maintaining fiscal discipline hinges on the new government’s ability to rapidly rationalise unproductive expenditure and reduce revenue leakages.

“Alongside these fiscal reforms, we believe a comprehensive tax reform over the medium term, which helps simplify tax structures and broaden the tax base, is equally critical to ensuring fiscal and debt sustainability,” it said. 

Abolishing GST was a key election pledge during PH’s campaign in GE14, with PH blaming the tax for undue hardship among the people.  

The Centre for Public Policy Studies senior policy analyst Jarren Tam said the PH government could have looked at lowering the GST rate instead.

“The issue is more rooted in fulfilling manifesto promises than about striking a balance for the economy.

“The SST is to make up for the shortfall in the promised abolishment of GST during the election campaign.”

Tam said the government could save significant administrative and business costs, while keeping a highly efficient and transparent system by setting the GST rate to 3%, since the government intends to collect the targeted amount of RM21 billion. 

“It serves the exact same purpose as its current move to reintroduce the SST. Hence, the SST policy can be described as just a fulfilment of political promises,” he said. 

Tam added that the issue of what constitutes a sufficient tax rate depended on how much the government actually intended to collect: “The tax rate can always be changed to accommodate collection needs.” 

Impact on growth

Economic growth, projected to be more than 5% this year, may be affected by the SST and the government’s austerity drive, as Putrajaya aims to cut spending and renegotiate mega projects.

“Growth may depend on whether the SST causes prices to increase or not. If it does, we might see less consumer demand. But if prices are unchanged, or if we get lucky and prices decrease, then we might see economic growth remain as expected,” Tam said. 

Adli said it was important for the government to commit to signing trade deals, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP), to curb growth issues related to austerity. 

Socio-Economic Research Centre executive director Lee Heng Guie said, however, the key lies not in austerity measures, but expenditure reforms.  

“The fiscal condition that we are in now is not about acute austerity but more of rationalising or prioritising capital expenditure and operating spending. 

“Cost savings and expenditure efficiency derived from projects with value for money will bring wider economic and multiplier impacts on the economy, people and businesses.” 

Lee also called for an overhaul of inefficient GLCs for more efficient use of resources and creation of a level playing field for the private sector.

These, he said, would lead to a more competitive business operating environment. – July 21, 2018.