This article first appeared in Forum, The Edge Malaysia Weekly on October 6, 2025 - October 12, 2025

In the last two years, the government has reaped almost all the low-hanging fruit available to increase its revenue.

The Sales and Service Tax (SST), which replaced the Goods and Services Tax (GST) in 2018, has gradually been expanded to include more goods and services. The last round of expansion, which took effect on July 1 this year, saw the inclusion of a wide array of consumer and luxury goods and 30 services. The rate was also increased from 6% to 8%.

The subsidy rationalisation exercises for diesel and electricity were expanded to include petrol effective Sept 30 this year. Under the exercise to do away with blanket subsidies, which is a cornerstone policy of Prime Minister Datuk Seri Anwar Ibrahim’s administration, the government expects to save between RM2.5 billion and RM4 billion per year from rationalising the subsidies on petrol.

The increase in revenue from the expanded SST is expected to increase the government’s coffers by between RM6 billion and RM10 billion. The targeted subsidy for diesel in Peninsular Malaysia and differential pricing for electricity are expected to contribute between RM5 billion and RM7 billion to the government’s Federal Consolidated Fund.

The government has more or less maximised its strategy to cut expenditure through the subsidy rationalisation schemes. Further tweaking of the system — for instance, reducing handouts to the T20 income earners — will not add much to its coffers.

As for SST collection, the additional accruals will be relatively less than that of the previous years.

To improve tax collection and reduce leakages among private companies, the government started implementing e-invoicing in stages last year. By next January, all companies with revenue of more than RM1 million will need to adopt e-invoicing in their billings.

The implementation of the e-invoicing system helped the government improve its collection of corporate income tax to an estimated RM106 billion this year.

For now, companies with revenue of less than RM1 million are exempted. The government may reduce the threshold to RM500,000 in the future. But this could invite political backlash as it involves the majority of small businesses, the owners of which are an important vote bank for the present government.

So, what’s left to extract from the economy?

In Budget 2026, which is to be unveiled on Oct 10, the government still has the option to expand the SST. For instance, the medical profession and other sectors could be folded into the SST.

The government could review the Real Property Gains Tax, introduce the dreaded inheritance tax or estate duty and increase the rates on capital gains from the disposal of local companies’ unlisted shares.

Although there is room to increase revenue from existing taxes, the incremental rise in collection will not be much. Moreover, it will still be taxing the same groups of people who have been diligently paying their dues.

In fact, expanding the SST further will only be viewed critically as it would add to the cost of doing business due to its cascading effect. Finally, it boils down to higher prices for consumers.

Already, tax consultants contend that the expanded SST, which includes a wide array of goods and services, is actually a backdoor implementation of the dreaded GST. The only element missing is input tax. The consultants feel that the government should simply incorporate an input tax into the SST to eliminate the cascading effect and reduce the cost to consumers.

As for an inheritance tax, it will slow down the process of transferring wealth within a family. And it would result in only a marginal increase in the government’s revenue and be seen as targeting the rich, who already pay heavy taxes.

As for expanding the SST to include the medical profession, the cost will ultimately be borne by the patients, which will not go down well with the population at large.

Budget 2026 is not expected to spring any surprises. Unless, the government decides to tackle leakages from illicit trades, which the authorities are well aware of but find it difficult to plug them due to poor enforcement.

For instance, illicit trade involving cigarettes alone is estimated to cost the government about RM4 billion in revenue annually. The legalised industry players estimate that more than 50% of the cigarettes consumed in the country are smuggled and sold with fake stamps.

The illegal smuggling of alcohol has created another big hole. According to the brewery industry, the avoidance of tax costs the government an estimated RM1.5 billion or more annually.

The combined loss of tax revenue from illegal cigarettes and alcohol amounts to an estimated RM5.5 billion a year. It is more than the savings that the government accrues from the transition of blanket subsidy to targeted subsidy for petrol.

Tackling illicit trades is not as tedious as implementing the petrol and diesel subsidy programme. All that needs to be done is to ramp up enforcement. And it has been proved that the existing enforcement agencies can cripple the syndicates.

For instance, the Malaysian Anti-Corruption Commission (MACC) has been going after e-waste operators for eluding taxes. They have also busted a syndicate that is involved in the smuggling of tyres.

These illegal activities have been going on for years. But the local enforcement agencies are probably compromised or sleeping on the job. The same applies to the illicit trade of cigarettes and alcohol. The existing enforcement teams are probably unable to identify the storage areas or there may be rogue officers involved.

If the government wants to increase revenue, it should start thinking out of the box on how to curb prohibited operations, especially those involving cigarettes and alcohol, which are expensive items and will make a difference to the government’s coffers.

One probable way out is to come up with some kind of amnesty programme for the operators. Alternatively, MACC should start flexing its muscles.

Budget 2026 could be the last for the Anwar administration before the next general election. The present government’s five-year term ends in November 2027 and it is highly unlikely that Anwar will wait until the last few months of his term to call an election.

Certainly, he cannot afford to tighten the screws on the legal businesses and individuals in the upcoming budget. It will not be well received.

But Anwar does have ample headroom to curb unlawful activities to raise revenue.

M Shanmugam ([email protected]) is a contributing editor at The Edge
 

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