This article first appeared in Forum, The Edge Malaysia Weekly on March 11, 2024 - March 17, 2024
The raising of taxes has always been a bitter pill to swallow. It’s akin to pulling off a Band-Aid — a necessary pain for the healing to begin. Malaysia’s recent service tax rate hike from 6% to 8% and its scope expansion have sparked heated debate, with concerns swirling about potential price spikes and the ripple effects throughout our economy. However, amid the clamour, it should be noted that it is not as damaging economically as most people would think. Though unpopular, the service tax hike is also an inevitable step, given Malaysia’s low tax base. Higher taxation is necessary to steer us towards a brighter fiscal and economic future.
Many have voiced valid concerns about potential consumer price increases and the cascading effects of a service tax through our supply chain. Critics point out the lack of an input tax credit mechanism in the current sales and service tax (SST) system, which could result in multiple collections of service tax along the value chain. This “double counting” effect would have been addressed by the more efficient and transparent goods and services tax (GST) system, which I discussed in my op-ed last year entitled “GST not scary if implemented well”. The bad reputation surrounding GST was primarily a result of poor implementation, rather than inherent flaws in the system itself. This potential unintended policy effect could have been avoided had we not made the U-turn in 2018, but I will stop my rambling for now.
Nevertheless, in the short term, we must make the best of the tools we have at hand. Vigilant monitoring and surveillance are crucial to prevent excessive profiteering, ensuring that these price-increase effects are manageable.
Although there may be some unavoidable cascading effects, the direct impact on consumer prices is not as significant as previously feared. The SST regime covers a smaller portion of the CPI basket compared with the broader GST system. The GST covers around 60% of the CPI basket, while the SST covers only approximately 38%. Moreover, the proportion of the service tax component within the SST is estimated to be even smaller at around 10%. The sales tax, the other half of the SST regime, remains unchanged. Based on my rough estimate, the change in service tax is projected to moderately increase headline inflation by circa 0.3 percentage points.
Critics argue that increasing the service tax rate may bring about a broad-based inflation acceleration through cascading effects. This is a fair point, given the resultant increase in cost for services and some segments of the economy will be disproportionately affected. However, it is unlikely to be as widespread as it was when GST was first rolled out in 2015. According to the government’s estimate, the widening of the tax base in this round will only generate an additional RM3 billion worth of revenue, which pales in comparison to the RM20 billion generated when GST replaced SST (GST in 2016: RM41.2 billion; SST in 2014: RM17.2 billion). This suggests that the service tax hike is unlikely to spark the massive inflationary pressures that were seen during the implementation of GST.
Although no one enjoys paying more taxes, it’s a necessary step. Our tax coverage is low compared to neighbouring countries, sitting at just 11.2% of GDP in 2021, down from about 15% in 2011. In comparison, the Philippines, Singapore and Thailand had higher tax revenue respectively at 14.1%, 13.1% and 14.3% in 2021. The falling tax revenue indicates that implementing measures to increase taxation is inevitable.
Given that expanding our tax base is crucial for Malaysia’s future, instead of debating whether the government should raise more taxes, the focus should shift to how the revenue should be spent. Taxation itself is not the problem — even Singapore, which runs fiscal surpluses year after year, has raised its GST rate this and last year to shore up its tax revenue base. The extra revenue is intended to be redeployed into important areas such as healthcare and social welfare. I believe for Malaysia, the public would also want to see that extra revenue used productively. This could be done by directing more funds into developmental spending, cutting wasteful spending and plugging leakages. The extra revenue can help to improve the standard of living, increase income levels and promote economic development. At the same time, the government should prioritise the curbing of spillover effects and mitigating negative impacts on inflation and the economy.
In conclusion, although the service tax hike may present some challenges, it is part of Malaysia’s journey towards fiscal resilience. As Malaysians, we should embrace this necessary but unpopular tax hike as an investment back into the nation for our collective growth and prosperity. Now that we have paid the tax, it is the government’s responsibility to ensure transparency and efficient spending, ultimately making Malaysia a stronger nation for everyone.
Woon Khai Jhek, CFA, is a senior economist and head of the Economic Research department at RAM Rating Services Bhd
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