GST – A way out of debt dilemma

Amro economist Diana del Rosario (pic) said in a briefing that Malaysia “clearly needs to restore fiscal buffers” once the economic recovery is achieved.

PETALING JAYA: Amid Malaysia’s burgeoning debt levels as the government resorts to borrowings to save the economy, the revival of the goods and services tax (GST) is seen as a much-needed lifeline for the country’s debt dilemma.

Asean+3 Macroeconomic Research Office (Amro) said that the government’s aim to bring down the debt ratio to 55% of the gross domestic product (GDP) by 2023 would be challenging to achieve under baseline assumptions.

However, with the reintroduction of GST, the government debt ratio could be lowered substantially as revenue base widens and the pace of fiscal consolidation is accelerated.

“The reinstatement of the GST at a rate of 6% in mid-2022 is estimated to contribute an additional 1.5% of GDP in revenue relative to the sales and service tax (SST), representing a significant boost to the fiscal coffers.

“If the GST were to be re-introduced in mid-2022, the government debt ratio would fall sharply from 63.9% of GDP in 2021 to 56.6% by 2025 as the primary deficit would consolidate at a faster pace.

“Moreover, the domestic debt ratio would be only slightly above the statutory limit in 2023, ” Amro said in its 2020 Annual Consultation Report.

Domestic debt only comprises the Malaysian Government Securities (MGS), Malaysian Government Investment Issues (MGII) and Malaysian Islamic Treasury Bills (MITB), based on the government’s official definition.

Amro said that any introduction of new taxes should only be done once the economy is back on a firm footing and the Covid-19 uncertainties have dissipated.

In the near term, without GST in place, Amro recommends the government to broad the SST to approximate the coverage of the GST.

It said that while the SST coverage was broadened in 2019 to cover amusement parks, cleaning services and imported digital services, it can be broadened further.

Currently, the SST covers 38% of goods in the consumer price index basket and the number of goods exempted via SST is 10 times more than those exempted through GST.

“Broadening the SST coverage to 50% of goods in the CPI basket – close to the level of GST coverage at 52% to 60% – could increase tax collection by 0.9% of GDP.

“Alternatively, the authorities might need to review the scope for reducing the number of goods exempted from the standard SST rate to reduce the administrative burden on businesses and, hence, broaden the tax base, ” according to Amro.

Other possible tax measures that could be undertaken are the introduction of capital gains tax and carbon tax, as well as increasing tobacco excise taxes and raising the income tax for high-income earners.

Amro economist Diana del Rosario said in a briefing that Malaysia “clearly needs to restore fiscal buffers” once the economic recovery is achieved.

She pointed out that given the sizable fiscal stimulus packages announced by the government since early 2020, the country’s debt level has become “considerably larger”.

“There is a need to enable a faster reduction in the fiscal deficit and government debt ratio. One way to do it is to broaden the tax base, ” she said.

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