Unlike the GST, which burdens the poor proportionately more, the new SST will also be tweaked and designed to ensure that the impact on the lower income groups will be proportionately less.
KUALA LUMPUR: Moody's Investors Service forecasts the introduction of the Sales and Services Tax (SST) and higher crude oil price to offset the zeroising of the 6% Goods and Services Tax (GST) which takes effect on June 1.
It said on Tuesday that assuming a stable share relative to gross domestic product (GDP) and taking into account seasonal patterns, it estimates the revenue loss from the voiding of the GST at around 1.9% of GDP this year.
“We estimate that if the SST, which yielded revenue of around 1.6% of GDP before the GST replaced it, takes effect in July, the revenue loss would narrow to 1.0% of GDP for this year,” it said.
However, Moody's estimates these losses will be mitigated by higher oil prices: Brent crude oil at US$78.50 per barrel as of May 18 is well above the price assumption of US$52 per barrel in the government’s 2018 budget.
Assuming oil prices average US$70 this year, oil revenue gains will be about 0.4% of GDP, bringing net revenue losses to 0.6% of GDP.
“However, higher oil prices are not a permanent substitute for the GST, and are not a reliable offset to lost revenue given the volatility of prices.
“Indeed, the introduction of the GST in 2015 sought to reduce Malaysia’s reliance on oil-related revenue, which it successfully achieved.
“Beyond 2018, the reintroduction of the SST will create a revenue shortfall of 1.7% of GDP if the GST remains at zero,” it said.
Last Wednesday, Malaysia’s (A3 stable) Ministry of Finance announced that its 6% GST rate would be voided on June 1 and indicated that it would reintroduce the SST that was in place before the introduction of the GST in 2015.
To recap, Moody's said in the absence of other effective offsetting fiscal measures, this development is credit negative for the sovereign because it increases the government’s reliance on oil-related revenue and narrows the tax base, straining fiscal strength.
Malaysia’s fiscal strength is already a drag on its credit profile, but the abolition of the GST was a key electoral pledge for the Pakatan Harapan, the new coalition government that won parliamentary elections on May 9.
Most likely, legal formalities including the repeal of the GST Act and proposing a new SST Act will wait for the next Parliament sitting, which we expect at the end of June or early July.
In 2017, GST revenue was RM44.3bil (US$11.2bil), or 3.3% of GDP. Unless the government introduces other offsetting measures at least over the next one to two years, the GST’s removal will have a net negative effect on government revenue, even accounting for some budgetary cushion from higher oil prices.
Assuming a stable share relative to GDP, and taking into account seasonal patterns, we estimate that the revenue loss from the voiding of the GST at around 1.9% of GDP this year.
Moody's said the Ministry of Finance said that it will announce specific measures that will cushion the shortfall.
According to the government, the rationale for eliminating the GST is that it will ultimately boost private consumption and economic growth, adding to the tax coffers through improvements in corporate and motor vehicle taxes and excise and import duties. We do not include these effects in our assumptions because we do not expect a sizable multiplier effect.
Reforms on the expenditure side will also play an important role in determining ultimate fiscal outcomes. These reforms include a reintroduction of fuel subsidies removed in 2014, but potentially reinstated to benefit lower-income groups.
Another key expenditure priority in the Pakatan Harapan’s alternate budget released during its campaign year and reiterated since its election victory is savings from a so-called reduction in wastage and corruption of RM20bil or 1.4% of GDP.
“Broader fiscal policy measures will allow us to gauge the eventual effect on the government’s debt burden and assess overall credit implications.
“However, measures on the revenue side are particularly important to address Malaysia’s relatively high debt burden of around 50.7% of GDP at year-end 2017, since structurally weaker revenue also weighs on debt affordability (i.e., interest payments/ revenue).
“Revenue has gradually fallen as a share of GDP over the past five years to 16.7% at year-end 2017, significantly below the median of 33.8% for A-rated sovereigns.
“In 2017, Malaysia’s interest payments accounted for 12.4% of revenue, higher than the median of 5.4%. Structural reductions in the revenue base, which would result from the move to remove GST,
will strain this ratio,” Moody's said.
Limited time offer:
Just RM5 per month.
