PETALING JAYA: A day before Budget 2020, the World Bank has recommended that the government broaden the coverage of items under the sales and service tax (SST) and expand personal income taxes, among potential measures to diversify Malaysia’s sources of revenue.
The suggested measures are expected to rebuild the country’s fiscal buffers, which the World Bank’s lead economist for Malaysia, Richard Record, described as “limited” at the moment.
Sufficient fiscal buffers would ensure that Malaysia is well-positioned to weather the impact of any potential economic growth deterioration, moving forward.
Commenting on the SST, Record said the indirect tax regime’s coverage could be broadened by reducing the number of items that are currently zero-rated or not taxed under the SST.
“Perhaps, this is the right time to widen the SST coverage to raise revenue when inflation is still low in order to mitigate a severe increase in prices.
“Another factor that the government should consider is the products that the low-income population mostly uses. These items can remain as zero-rated, ” he told reporters after the launch of the World Bank’s October 2019 edition of the Economic Update for East Asia and the Pacific.
The SST, which replaced the goods and services tax (GST), was re-introduced in September 2018 as part of the Pakatan Harapan’s electoral pledge.
Former Customs Department director-general Datuk Seri Subromaniam Tholasy had previously said that a total of 5,443 consumer items have been exempted from the SST indirect tax regime.
In comparison, only 545 consumer items were exempted from the GST when it was introduced in 2015.
Record pointed out that Malaysia’s public-sector revenue as a share of the gross domestic product (GDP) was below the levels seen in other upper-middle income countries.
He added that Malaysia collected less revenue in terms of consumption tax in comparison to many other comparable economies.
“Since Malaysia aspires to become a high-income nation, the government would need to collect more revenue over time and that reflects the increasing demand of Malaysian citizens for higher quality public services, education, health and others, ” he said.
In its Economic Update for East Asia and the Pacific, the World Bank has maintained its GDP growth forecast for Malaysia for the 2019-2021 period. The Malaysian economy is expected to expand by 4.6% annually in 2019,2020 and 2021.
As for the fiscal deficit, the World Bank predicts that the government may likely miss its initial target of 3% in 2020. However, based on the bank’s forecast figures, the government’s fiscal deficit as a share of GDP next year will be 3.1%, lower than the 3.4% estimated to be achieved in 2019.
Commenting on the country’s economic prospects, the World Bank believes that risks to Malaysia’s growth continue to tilt towards the downside.
“On the external front, sharper than expected slowdowns in major economies, unresolved trade tensions and a maturing global technology cycle could weigh on Malaysia’s export demand in the near term.
“Increased uncertainty could also lead to more subdued business sentiment and a moderation in private sector activity. Meanwhile, Malaysia’s comparatively high level of government liabilities will continue to exert constraints on fiscal space available in the event of macroeconomic shocks, ” stated the bank.
As for the region, growth in developing East Asian and Pacific economies is expected to slow from 6.3% in 2018 to 5.8% in 2019. Meanwhile, the economic expansion is forecast to moderate further to 5.7% and 5.6% in 2020 and 2021, respectively.
According to World Bank lead economist for East Asia and the Pacific, Andrew Mason, the slowdown reflects a broad-based decline in export growth and manufacturing activity.
The heightened trade tensions between the United States and China are expected to pose a long-term threat to regional growth.
While some countries have hoped to benefit from a reconfiguration of the global trade landscape, the inflexibility of global value chains limits the upside for countries in the region in the near term.
“While companies are searching for ways to avoid tariffs, it will be difficult for countries in developing East Asia and the Pacific to replace China’s role in global value chains in the short term due to inadequate infrastructure and small scales of production, ” said Mason.
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