This article first appeared in The Edge Malaysia Weekly on November 4, 2024 - November 10, 2024

AMONG the surprises sprung by Budget 2025 were the silence on the previously planned high value goods tax (HVGT) on luxury goods and that avocado and salmon would be among “non-essential items” and “imported premium goods” taxed under the expanded sales and service tax (SST) from May 1, 2025.

Treasury Secretary-General Datuk Johan Mahmood Merican said something akin to an open-ended reply when asked why the government had chosen to tax avocado and salmon but not jewellery and handbags. Does that mean luxury goods can still be part of the expanded SST, given that only “basic food items consumed by the rakyat” have been exempted from the sales tax expansion?

“I’m in a situation where I can neither confirm nor deny [the statement],” Johan tells The Edge.

“As part of the expansion of sales tax, we are definitely not imposing it on basic goods, but we’re certainly still reviewing areas that we feel [SST] can be imposed,” he added, declining to offer further details.

According to him, salmon and avocado were chosen as examples of what would be taxed because they are “not food consumed by the masses”.

A tax on luxury goods is not entirely out of the question, but policymakers want to make sure there are no unintended consequences.

“Unlike, say, in the West, where jewellery is seen as quite a luxury, gold in the Asian or Malaysian context is so culturally ingrained. Gold is given at weddings, when children are born and even your Makcik Kiah or Kelantan trader could use it as part of their working capital. And once you impose a tax, it covers not just the first sale but also the secondary transactions as well. So, that was among the considerations in looking at HVGT,” Johan says of the luxury tax that was announced in the revised Budget 2023 tabled in February 2023 but was not enforced as scheduled on May 1, 2024, following disagreements over what would be taxed.

He adds that the government also took into consideration the “mixed results” seen in introducing luxury taxes in other countries.

“Especially if it concerns small items, say, a watch or jewellery. The problem is that, for a RM100,000 watch or jewellery, the person might just fly off to Singapore or Hong Kong, buy it and then bring it back. So, then, you’re potentially undoing the sector that has grown here … I’m told the segment of luxury watches sales and luxury goods is quite a thriving market here. So, why would you want to affect them? So, we then need to rethink what would then be the best items for luxury? Let’s say it’s not something so moveable; for example, a car, but road tax is already quite high; so, how do we make sure it’s effective?” Johan elaborates.

Given that basic food items and goods were also tax-exempted or zero-rated when the Goods and Services Tax (GST) was implemented, observers reckon there is a chance that the SST will be gradually expanded to mirror the GST in every way except in name. After all, the government is already looking to expand tax bubbles to eliminate the problem of cascading or double taxation and has been open to the possibility of allowing input tax credit claims. And Prime Minister Datuk Seri Anwar Ibrahim’s stand is that GST is the more efficient and transparent tax, but the government wants the people to first have higher incomes.

Economists and observers know, however, that politics is the biggest hurdle to a comeback of the demonised GST.

“SST could well be the new GST, eventually. The question is the speed at which policymakers can push things forward, basically political will, just like [the case] for RON95 fuel subsidy rationalisation,” a local economist says.

Apart from expanding the scope of sales tax, currently imposed at 5% or 10% (with essential items exempted at 0%), Budget 2025 also announced the expansion of the service tax of 6% or 8% to include new taxable services such as commercial service transactions between businesses.

The government expects RM1.3 billion in additional indirect tax collection from sales tax on imported goods, RM0.9 billion in additional collection from sales tax on local goods and RM2.8 billion in additional collection from expanded service tax, according to 2025 revenue estimates post-budget announcement. This means the expanded SST will not be morphing into the GST next year.

Pending a greater increase in revenue collection, Johan says, the government has other avenues to increase development spending to bolster the economy.

Here, he is referring to the collective pledge by government-linked investment companies (GLICs) on RM120 billion worth of domestic direct investments over the next five years under the first phase of the Government-linked Enterprise Activation and Reform Programme (GEAR-uP), where RM25 billion will be invested in 2025 (see Table 1).

On top of this, Khazanah Nasional Bhd and Retirement Fund (Inc) (KWAP) have pledged up to another RM10 billion investments in private markets (see Table 2).

These investments (RM25 billion + RM10 billion) bolster development expenditure of RM86 billion earmarked in Budget 2025 to just over RM120 billion. Without going into the size of the potential boosts to the economy, Johan also speaks of the capacity by individual ministries and agencies to raise revenue to fund additional development programmes. What is certain, he says, is that the government is mindful of its commitments and taking steps towards stretching its resources to deliver its promises.

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