PRIVATE consumption would likely see a dip after the sales and services tax (SST) comes into effect as scheduled next Saturday, with consumers expected to make bulk purchases in the final days of their tax holiday.

However, analysts say a drop in demand would likely flatten out over the long-term as consumers adjust to new prices from the proposed scheme, where a 10% sales tax will be imposed on taxable goods manufactured domestically and imported goods.

Under the proposed SST, a 6% service tax will be levied on taxable services rendered through business transactions.

Over the past three months, consumers have been enjoying a tax holiday after the goods and services tax (GST) was zero-rated on June 1.

“Consumers would have bought their big ticket items during the period, so short-term consumption would see a drop, possibly till the end of the year,” said Jarren Tam, senior policy analyst at the Centre for Public Policy Studies.

“But consumption typically smoothen out over a long period and it should not show a large divergence from annual consumption trends.

“Since consumption is a variable of growth, it might show slower growth in the last two quarters of 2018 and pick up after the New Year. This is the time period when people get used to the new prices from the SST implementation,” he told The Malaysian Insight.

A total of 6,400 goods will be taxable under the SST, compared with 11,197 under the GST, according to the customs department.

The SST will apply to 38% of the consumer price index basket of goods and services, compared with the GST’s 60%.

The customs department expects up to 80,000 companies to be registered under the SST. A total of 470,000 companies were registered under the GST.

During the tax break period, auto sales hit its second highest monthly level on record with total industry volume (TIV) in July recording 68,000 units.

Finance Minister Lim Guan Eng said this week that the government hopes that consumers would “enjoy” the RM17 billion to be returned to them this year, and a further RM23 billion next year.

Putrajaya hopes to collect up to RM22 billion from SST this year compared with a full year revenue of RM44 billion for 2017 when GST was in place.

“Yes, GST abolishment is a big downside because it removes an almost perfectly efficient tax system which captured most of the goods and services and improves transparency and accountability,” said Tam.

Malaysia’s GDP growth is expected to slow to 5.2% in 2018 and 4.8% in 2019 in line with its narrower revenue based, according to Fitch Ratings. However, Malaysia’s average GDP growth for the five years to 2018 will remain above peer medians.

The ratings agency last week affirmed the country’s “A-” credit rating with stable outlook despite the rollback of the goods and services tax, citing the upside of Putrajaya’s stated intention to reduce fiscal deficits and improve governance.

Whether any shortfall can be closed through better efficiency or reducing wastage as the government maintains, remains to be seen.

“It would be simple to say that the shortfall can be covered by tackling corruption but that is rather subjective and difficult to gauge,” Tam said.

Fitch raised its estimate of central government debt at end-2017 to around 65% of GDP, from 50.8%, following the government’s recognition that it will need to service a large share of explicitly guaranteed debt.

However, it warned that growth projections could still be affected by accelerated spending cuts, disruption to capital projects or slowing investment in the event of prolonged policy and political uncertainty. – August 22, 2018.