This article first appeared in Forum, The Edge Malaysia Weekly on November 3, 2025 - November 9, 2025

At a recent budget forum organised by Hong Leong Bank (HLB), I put forth my case for a phased reintroduction of the goods and services tax (GST) after the next general election (GE16). In this article, I want to spell out the reasons for my proposal and outline a process of fiscal reform that would accommodate the proposal.

Prime Minister Datuk Seri Anwar Ibrahim and the Ministry of Finance should be given credit for their commitment to reducing the budget deficit, which had ballooned to more than 6% of gross domestic product in 2021 as a result of Covid-19-related spending, to a projected 3.5% in 2026. This has been achieved through a number of measures, including expanding the scope and scale of the sales and service tax (SST), the introduction of new targeted taxes and the shift towards more targeted subsidies.

At the forum, Choong Yin Pheng, head of fixed income and economic research at HLB, pointed out that the SST currently makes up as much of the tax revenue (as a percentage of government revenue) as the GST a few years after its implementation in 2015. Indeed, as Table 1 shows, the SST is projected to make up 17.4% of total tax revenue in 2026 compared to the projected 18.3% for GST according to the 2018 budget.

At the same time, emolument expenditure, retirement charges and debt servicing costs have slowly creeped up from 57.5% of the government’s operating expenditure in 2018 to a projected 62.2% in 2026 (see Table 2). This figure will likely creep up as more civil servants retire under the new salary scheme and as debt payments for current and future infrastructure projects such as the East Coast Rail Link, Light Rail Transit Line 3 and Penang LRT kick in.

My fear is that the government may be forced to rely on the inefficient SST to raise more indirect tax revenue (by further increasing its scale and scope) to fund the increasing operational expenditure. A better alternative would be to reintroduce a consumption tax that is not only more efficient in terms of tax collection but would also increase in a more predictable manner as GDP and consumption grow over time, giving the government more fiscal space in the longer term.

One of the main hurdles to the reintroduction of the consumption tax is the strong campaign mounted by Pakatan Harapan (PH) parties against GST in the run-up to the 2018 general election. I would argue that some of the PH campaigns against GST were valid then but, for good reasons, are less valid now. For example, there were concerns that GST would be used to cover up 1Malaysia Development Bhd-related debts.

At the same time, the median wage was only RM1,600 per month in 2015, accentuating the regressive nature of GST. Finally, once in government in 2018, it was discovered that there were billions of ringgit in GST refunds outstanding to small and medium enterprises as well as large corporations because the Royal Malaysian Customs Department suspected the presence of many fraudulent claims.

Many things have changed since 2015. First, there is more transparency and better governance over government spending via the passing of the Fiscal Responsibility Act and the Government Procurement Act under the Madani government. The full implementation of the e-invoicing system by 2026 also means better access to good-quality data on the part of the Customs Department, which should translate into a more efficient and transparent GST refund process. The median wage also increased to RM2,800 per month in 2025 (for the formal sector). Together with better subsidy targeting, this means the negative impact of GST can be better mitigated for the low- and middle-income groups.

Of course, I am not recommending that the PH/Madani government put the reintroduction of the consumption tax as part of its GE16 campaign. But it should not be something that is explicitly rejected.

The ground must be prepared soon after GE16 so that there will be greater public acceptance of this proposal. Datuk William Ng, president of the Small and Medium Enterprises Malaysia (Samenta), during the forum recommended that GST be branded as something else to avoid the stigma of the past. A “transparency tax” does sound better than GST and would be an accurate description of one aspect of this consumption tax.

Former prime minister Datuk Seri Najib Razak introduced the BR1M cash transfer payments in 2012 as a GE13 campaign strategy but also to pave the way for the introduction of GST in 2015. The Madani government can consider doing something similar to show that a consumption tax is needed to fund new progressive government policies. One example of such a policy is to expand the Bantuan Warge Emas (BWE), which currently pays a social pension of RM600 a month to about 140,000 senior citizens aged 60 and above (4% coverage rate).

A recently released report by the World Bank entitled “Should Malaysia Expand its Social Pension?” recommends that the coverage of social pensions for those aged 60 and above should be expanded as a way to reduce income inequality, especially as Malaysia transitions into an aged and, soon, a super-aged society. This policy, which can be both popular and progressive, can be introduced with other policy reforms such as a gradual increase in the retirement age, the introduction of an optional annuity for the Employees Provident Fund that aligns with social pension payments and the reintroduction of a consumption tax.

Finally, the tax rate can be set at 5%, which is lower than the 6% rate for the 2015 GST under Najib. If GE16 is held in 2026, the groundwork can be done in 2027 and these policies can be introduced in 2028, giving the government ample time to prove itself before GE17, due by 2031.

Ong Kian Ming is an adjunct professor at Taylor’s University and a former deputy minister at the Ministry of Investment, Trade and Industry

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