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Malaysia plans to impose sales tax by 2015

August 29, 2013

KUALA LUMPUR, Malaysia (AP) — Malaysia hopes to impose a goods and services tax by 2015 to boost revenue and curb its fiscal deficit, a senior government official said Thursday.

The announcement comes as Malaysia’s economy and financial markets come under pressure amid rising domestic debt, a swollen fiscal deficit and a shrinking current account surplus. The central bank recently cut the country’s growth forecast this year to 4.5-5 percent, while Fitch Ratings downgraded Malaysia’s credit rating outlook to negative from stable, citing a lack of fiscal reforms.

The government deferred plans to introduce a broad goods and services tax amid fears of a backlash in May’s general elections. With polls over, it is now moving to tackle the fiscal deficit, which hit 4.5 percent of gross domestic product last year.

“The GST is a must, it’s not an option,” said Treasury Secretary-General Mohamad Irwan Serigar Abdullah.

Irwan said the new tax could be announced by Prime Minister Najib Razak when he unveils the 2014 federal budget in October, but it will take 14 months before it can be implemented. He said the tax plan will encompass a “total package” that includes reforms in corporate and income tax but declined to give details.

“If they announce it now, it will come online in 2015,” he told an economic forum.

Irwan said the sales tax rate, previously mooted at 4 percent, hasn’t been decided yet. Staple foods such as rice and milk powder will be exempted to ease the burden on the poor, he said.

The government previously said a 4 percent GST could boost its revenue by 1 billion ringgit ($302 million) annually and help cut reliance on income from state oil company Petronas.

The confidence boost from plans for a new tax regime could also help dampen capital outflows. Malaysia and other Asian nations have come under stress as China slows and investors anticipate a scaling back of monetary stimulus in the U.S. The Malaysian stock market has slid while the local ringgit has lost nearly 7 percent since April.

The GST is expected to replace the current narrowly applied 10 percent sales tax and five percent services tax. The GST will be levied on transactions at all stages of production of goods and services. Malaysia’s current sales and services taxes are single-stage taxes applicable to selected goods and services

Irwan said the government will also announce plans to rationalize subsidies for fuel, food and other items next month so they benefit the poorest rather than being broadly applied.

With the new tax regime, he said the government is confident of trimming its fiscal deficit to 3 percent of gross domestic product by 2015 and hit a surplus by 2020.

“Hopefully if there is no major recession ... we will be on target to achieve a surplus in 2020,” he said.

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