PRIME MINISTER Datuk Seri Anwar Ibrahim has said the government is currently not considering reintroducing the goods and services tax (GST) as a broad-based tax but may incorporate some of its elements into the existing sales and service tax (SST) system.
This raises an important question – can the two systems really be combined, and what impact would such a move have on government revenue, businesses and the people?
I pointed out several years ago that although the government had not reintroduced the GST, it had already adopted some elements of its mechanism, most notably e-invoicing.
Its basic mechanism is similar to the tax invoice used under the GST, while the additional information captured makes it easier for the government to curb tax evasion and leakage.
But does incorporating some GST elements mean the two systems can be seamlessly combined? Or can we retain the strengths of both systems while avoiding their respective weaknesses?
The Socio-Economic Research Centre of the Associated Chinese Chambers of Commerce and Industry of Malaysia conducted a rapid survey in 2022, in which 75.4% of respondents supported the reinstatement of the GST. This reflected businesses’ firsthand experience with both tax systems.
The government itself knows that the GST is a more effective and transparent tax system.
The World Bank said in its 2023 Malaysia Economic Monitor that Malaysia should explore new sources of revenue, identifying the reintroduction of the GST as one of the better options.
The International Monetary Fund has likewise repeatedly urged Malaysia to reinstate the GST to strengthen long-term fiscal sustainability, broaden the tax base and reduce reliance on oil revenue.
Before the GST was abolished in 2017, it generated RM44.3bil, or 20% of total government revenue.
Had it remained in place, it is estimated that it could generate about RM70bil today, compared with the RM60bil in SST revenue projected under Budget 2026.
The gap, however, is not as significant as it appears. The current SST revenue already reflects measures that incorporate elements of the GST, including higher sales tax on selected products, an expanded service tax and the implementation of e-invoicing.
This suggests that even if the GST were reintroduced, it may not substantially increase government revenue, as e-invoicing has already plugged many loopholes in the SST system.
Many people who oppose the reintroduction of the GST do not fully understand the differences between the two systems, particularly the cascading effect under the SST. Under the SST, tax is imposed at certain points along the supply chain.
Because businesses generally cannot claim back tax paid on their inputs in the same way they can under the GST, that tax can become part of their costs and be reflected in the price ultimately paid by consumers.
In other words, while the SST does not apply to every product or service, taxes can still be imposed at different stages of the supply chain.
The perception that consumers do not bear the tax is, therefore, misleading – the tax has already been built into the cost of the product or service.
Although the current SST system has incorporated some elements of the GST, combining two fundamentally different tax systems is not that simple, and structural problems remain.
One of the main reasons businesses favour the GST is its input tax credit mechanism.
Under the GST, businesses can generally claim credit for the GST paid on eligible business purchases and offset it against the GST collected on their sales. This helps prevent the cascading of tax through the supply chain.
The SST is, after all, a relatively outdated system that no longer fully meets modern economic needs.
If the government genuinely intends to improve it, an input tax credit mechanism should be part of the discussion. Otherwise, expanding the tax base or raising tax rates could add to inflationary pressures and increase the cost of living.
Of course, introducing input tax credits under the existing system is no easy feat.
The government could consider introducing the mechanism gradually in specific industries or at selected points along the supply chain, giving businesses sufficient time to prepare without imposing a sudden increase in compliance costs.
Based on my many years of experience in auditing and tax practice, logistics and transportation costs are common across businesses involved in importation, manufacturing, wholesale and retail.
A gradual introduction of an input tax credit mechanism for selected sectors or activities, particularly those related to logistics, could be a practical step towards reducing tax cascading throughout the supply chain.
This would help contain business costs, improve the efficiency of the tax system, and ultimately ease cost pressures on goods and services for consumers.
If the government considers an input tax credit mechanism too complex, it could impose higher tax rates on selected luxury products.
Alternatively, it could exempt all business-to-business transactions from the SST and impose it only at the final business-to-consumer stage.
This would eliminate the problem of tax continuously cascading through multiple stages of the supply chain and help contain the cost of goods and services.
(Of course, there is an even simpler way – reintroduce the GST, but call it “Value Added Duty” instead.
If people do not see the word “tax”, perhaps they will not react so strongly to it.)
Ultimately, regardless of the tax system, the objective is to increase government revenue, control the fiscal deficit and achieve fiscal sustainability. In other words, it is about broadening the revenue base.
But the government cannot focus on revenue without addressing spending.
Of the RM419.2bil in total expenditure under Budget 2026, civil servants’ salaries and pensions account for 36.3%, while subsidies and social welfare make up 11.7% and debt servicing accounts for 13.9%.
Unless the size of the civil service is reduced and subsidies are further rationalised, higher tax revenue alone will not be enough to keep pace with rising expenditure. There is also a limit to how far the tax base and tax rates can be expanded.
If we continue to rely on higher tax rates indefinitely, businesses and society will eventually push back, potentially affecting economic growth and investor confidence.
We have already seen this in the government’s tax reforms in recent years. Several measures have been repeatedly revised or ultimately U-turned following industry opposition and the knock-on effects they created.
In conclusion, combining two fundamentally different tax systems is no easy feat.
The government should not act impulsively or hastily, as the cost of getting it wrong could be difficult to estimate.
Before introducing any new tax measure or adjusting tax rates, the government must conduct thorough consultations, assess the potential knock-on effects and give businesses and the public sufficient time to prepare.
Implementation should be gradual to minimise disruption to businesses and the people.
Government agencies and their systems must also be ready for such changes. In particular, if input tax credits are introduced, or if overpaid taxes need to be refunded, the relevant authorities must strictly adhere to the timelines they have set.
This is essential to ensure that businesses’ cash flow is not adversely affected, allowing them to maintain healthy operations and helping to preserve investor confidence.
Ultimately, a healthy economy is the best source of sustainable government revenue. As long as the economy continues to grow, government revenue will naturally follow.
Datuk Koong Lin Loong is the managing partner, Reanda LLKG International and treasurer general-cum-chairman of SME Committee, The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM). The views expressed here are the writer’s own.
