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Malaysia to impose 6 percent sales tax by 2015

October 25, 2013

KUALA LUMPUR, Malaysia (AP) — Malaysian Prime Minister Najib Razak announced plans Friday to impose a 6 percent goods and services tax by 2015 to boost revenue and stem rising government debt.

Najib said fuel and other subsidies will also be slashed as part of fiscal reforms, while personal and corporate tax will be lowered to make the economy more competitive.

Tabling the 2014 budget in Parliament, he said the broad goods and services tax will replace the current sales and services tax from April 1, 2015. He said the rate is among the lowest in the region and that essential food items, education, housing, public transportation and healthcare will be excluded.

“The GST is not a new additional tax. Our inflation rate is low at 2 percent. We are convinced that this is the best time to implement the GST because inflation is low and under control,” said Najib, who is also finance minister.

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

Standard and Poor’s has also warned of a credit ratings downgrade for Malaysia if it fails to tighten its public finances.

Analysts hailed the government’s move to implement aggressive fiscal reforms.

“This will translate into a positive message to investors, which is a major policy change that they have been waiting for,” said Wan Suhaimi Saidie, economist with Kenanga Investment Bank.

Opposition lawmakers, however, said the government has consistently overspent its budget for the past 15 years and the move to cut subsidies and raise tax revenue wasn’t match by tightening its purse strings.

“The subsidy cuts aren’t going toward reducing our debt or deficit, instead it is just providing more funds for the government to go shopping,” said lawmaker Tony Pua. “The 2014 Budget paints an obvious picture of a government failing to reform despite a brave goods and services tax proposal.”

Najib said the government plans to spend 264.2 billion ringgit ($84 billion) next year, of which 82 percent is for operating expenditure and the rest for development.

He said the economy is expected to strengthen to between 5 and 5.5 percent growth in 2014, up from 4.5-5 percent this year. With rising revenue, he said the fiscal deficit is expected to narrow to 3.5 percent of GDP in 2014, from 4 percent this year, with hopes of achieving a balanced budget by 2020.

“This budget ensures that the economy expands at a strong pace, the fiscal deficit is reduced and the nation and the people continue to prosper,” he said.

To sweeten the deal, Najib said cash handouts will be increased next year to 4.6 billion ringgit ($1.5 billion) to benefit 7.9 million poor people.

Under plans to raise progressive income tax scales for individual taxpayers, he said some 300,000 people will no longer have to pay taxes. At the same time, he said corporate tax will be cut by 1 percentage point to 24 percent from 2016.

The government, in an economic report released with the budget, said fuel and other subsidies will be cut by nearly 16 percent to 39.4 billion ringgit ($12.5 billion) next year.

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