13/09/2023 (Malaysia) - The government had considered reintroducing the goods and services tax (GST) with some adjustments after giving priority to widening Malaysia's revenue base. However, amid a slowing economy and increasing living costs, economists believed that imposing a capital gains tax (CGT) was not a good idea at that time.
Economy Minister Rafizi Ramli had mentioned that the government was contemplating the reintroduction of GST and the implementation of CGT in the following year. He stated that the government was open to exploring various avenues to achieve fiscal sustainability through a broader revenue base, including different forms of tax schemes, be they direct or indirect.
In order to identify the most suitable tax reform, a comprehensive evaluation of revenue and expenditure became crucial for the 2024 Budget. This evaluation aimed to reduce wastage, leaks, and corruption. It also allowed the government to shift its spending focus towards more efficient allocation and priority mechanisms.
Carmelo Ferlito, the CEO of CME, pointed out that GST was more effective in terms of implementation from the business perspective and in revenue collection for the government. He suggested that the government should consider reintroducing GST with some modifications. However, he advised delaying the introduction of CGT until the economy displayed stronger signals of long-term recovery. Instead of prioritizing CGT, the government was encouraged to introduce a progressive GST alongside a revised income tax system.
Dr. Geoffrey Williams, an economist at Malaysia University of Science and Technology, stated that the fiscal position hadn't changed significantly to necessitate the introduction of GST or CGT in the following year. He proposed exploring non-tax income sources, such as Petronas royalty, to reduce the reliance on higher taxes. According to him, there might be no need to revamp the tax system to broaden the tax base once this was implemented.
Regarding GST, Williams warned that the implementation costs would be transferred to consumers and could lead to higher inflation. This, in turn, would require the government to assist the low-income group, but no such system was in place at that time to address the aftermath. Williams emphasized that GST was a regressive tax affecting both the rich and the poor, disproportionately burdening low-income groups.
Williams cautioned that introducing exemptions or zero-rated products could create market distortions that would harm many businesses. The appropriate GST rate had not been thoroughly assessed, and advocates were merely speculating about acceptable rates, often advocating for lower initial rates. Additionally, the previous refund mechanism was deemed ineffective and imposed a heavy burden on businesses responsible for tax collection.