KUALA LUMPUR (Feb 5): The World Bank has recommended that Malaysia reinstate the goods and services tax (GST) to bolster the nation's tax revenue, as it noted that the country's tax collection remains lower than the average lower middle-income country, and is limiting the government's capacity to spend for the country's development.

The bank made the recommendation in a new report released on Wednesday, titled: "A Fresh Take on Reducing Inequality and Enhancing Mobility in Malaysia".

"Malaysia's revenues not only lag the revenues of upper-middle-income-country and high-income-country peers, but also the lower-middle-income-country average. The biggest consequence of low revenues is that they limit what a country can spend," the bank said.

"Consideration should be given to the reintroduction of the GST (or value added tax), since it is widely regarded as one of the most efficient taxes in a country’s toolkit and can be implemented widely and swiftly," the global lender said.

Replacing the current sales and service tax (SST) with a 10% GST, which the bank noted will be in line with the East Asia and Pacific regional benchmark, could generate additional revenue equivalent to 1% of gross domestic product (GDP), with minimal impact on inequality, based on a simulation the bank conducted.

It acknowledged the potential burden on lower-income households, but believes it can be mitigated by measures, such as better-targeted social assistance and a GST rebate. Any increase in indirect taxes will place some burden on poorer households and underscores the need for measures to address this impact, it added.

"Better targeting of social assistance towards the poorest households in the bottom 40%, along with a tax rebate, would offset the impact of a GST increase on poverty, have no impact on inequality, and still leave additional fiscal savings equivalent to 2% of GDP," the bank said.

This isn't the first time that the World Bank has talked about the merits of the GST for Malaysia. In June 2022, the World Bank's lead economist for Malaysia Dr Apurva Sanghi had stated that the GST is a more efficient tax system compared to the SST currently in place, and that it would broaden the country's tax base and generate more revenue. Apurva had also acknowledged that the GST could increase compliance costs for businesses, particularly small and medium-sized enterprises (SMEs), and suggested that the government provide a sufficient transition period and streamline the tax refund process to mitigate these challenges.

Read also:
Economic disparity persists for Bumiputeras in East Malaysia, says World Bank
World Bank: Untaxed capital income, low tax rates for the upper income among key weaknesses in Malaysia's tax system
Rafizi: Trade war will not hinder Malaysia's GDP growth target of 4.5%-5.5% for 2025
Rafizi: Carbon capture, utilisation, and storage regulatory framework bill to be tabled in early March
GST better than SST ⁠— World Bank