KUALA LUMPUR (Oct 8): Budget 2025, which is set to be tabled in Parliament next week, presents a good opportunity for the government to reintroduce the goods and services tax (GST) as the economy is stable, with an outlook bullish for 2025 and no significant political concerns, said an industry think tank.

The return of the broad-based consumption tax would be crucial to bolster Putrajaya's coffers, according to the Associated Chinese Chambers of Commerce and Industry Malaysia's Socio-Economic Research Centre Malaysia (SERC), which has long advocated for the reintroduction of the GST.

SERC noted that the country's tax revenue stood at only 12.6% of gross domestic product (GDP) in 2023, one of the lowest among Asean peers.

"Obviously, we need to broaden the tax base, and a consumption tax would be more appropriate. I do not think you can go wrong with so many countries worldwide having implemented GST," said SERC executive director Lee Heng Guie during a media briefing on Malaysia's quarterly economic tracker for July to September 2024.

Malaysia first implemented GST, levied at a blanket 6%, in 2015 under Datuk Seri Najib Razak’s administration. It was later abolished by the Pakatan Harapan (PH) government led by Tun Dr Mahathir Mohamad in 2018.

In place of the GST, the sales and services tax was reintroduced, which is a single-stage tax at a rate of 6% imposed on goods and services at the provider level. The service tax was later increased to 8% — except for businesses in the food, beverage, and telecommunications sectors, which remained at 6%.

The business community has been increasingly calling on the government to reintroduce GST ahead of the presentation of Budget 2025.

Lee suggested that the government reintroduce GST at a 4% rate and consider exempting more essential items to address concerns about the tax’s regressivity, which could disproportionately affect lower-income groups.

The government may also follow Singapore's example by providing additional cash handouts, Lee suggested. "Once the system runs smoothly and transparently, I believe concerns about regressivity can be mitigated."

Lee, however, isn't optimistic about the government reintroducing GST — not if it plans to further roll back the fuel subsidy it provides. The government spent RM81 billion on subsidies last year, with the bulk of it going for fuel, including subsidising RON95 to keep the price at the pump at RM2.05 per litre.

The potential removal of the subsidy for RON95, part of the subsidy rationalisation announced under Budget 2024, has drawn significant attention, especially after the removal of blanket diesel subsidies in June. The government has mostly been silent on the rationalisation of subsidy for RON95.

"If you look at the prime minister’s recent speech, where he emphasised keeping the cost of living under control, it is hard to expect the government to introduce both GST and changes to the RON95 subsidy simultaneously," Lee noted.

Still, should the government decide to float RON95 prices, Lee believes it could help offset operating expenditure related to civil servants' pay hikes, which will take effect at the end of this year and are expected to cost the government over RM10 billion.

"Although GST is a better option for sustaining long-term revenue, if the government opts to rationalise the RON 95 subsidy, even by staggering it, they can still offset the expenditure for civil servant pay hikes," Lee added.

Another item on Lee’s wish list for Budget 2024 is to reduce the cost of doing business for micro, small, and medium enterprises (MSMEs), particularly in light of the upcoming adjustment to minimum wages.

While acknowledging the need to increase wages for low-income workers, Lee said the government should consider that wage increases must not be too steep to avoid overburdening MSMEs. Currently, the national minimum wage for private sector employees is RM1,500 per month or RM7.21 per hour.

He also proposed that the government reconsider implementing different minimum wage rates by region, taking into account less developed states, rather than applying a blanket rate across the country.

Lee also expressed hope that the government would raise the threshold for MSMEs to enjoy the preferential tax rate of 15%, increasing it from the current RM150,000 to RM500,000.