Expanded SST could threaten food security

Filepic/The Star

AS Malaysia prepares to roll out a sweeping expansion of the sales and services tax (SST) on July 1, policymakers must confront an uncomfortable question: Are we compromising national food security in pursuit of short-term revenue gains?

The Finance Ministry argues that the expanded SST, which broadens the tax base and updates taxable goods and services, is necessary to strengthen the government’s fiscal position.

But in doing so, it risks overlooking deeper vulnerabilities in our economic structure, especially in the realm of food imports and household food access.

For a country that imported over RM75.6bil in food in 2022, according to the Statistics Depart-ment (DOSM), this new tax regime could be a costly misstep.

Malaysia’s dependency on food imports stems not just from market preference but also agricultural constraints. We simply cannot produce certain items commercially, in sufficient volume or at all.

According to the DOSM’s Supply and Utilisation of Agricultural Commodities report, Malaysia continues to rely heavily on imports for key foods such as apples (236,877 tonnes imported), oranges (176,210 tonnes), grapes (85,267 tonnes), wheat (1.74 million tonnes) and potatoes (242,489 tonnes) in 2023. These are not exotic indulgences but everyday staples.

Yet, under the expanded SST, many of these very items, particularly temperate fruits and imported cereals, will be subject to a 5% sales tax.

Despite government clarification that local produce remains exempt, the expansion of the 5% tax to imported fruits and processed foods, including canned goods, sauces, spices, and dried ingredients will have a cascading effect on the food supply chain.

Restaurants, caterers, food manufacturers, and consumers will all feel the pinch. This reliance is not just economic, it is a food security issue.

When prices of imported foods go up, the affordability and accessibility of basic nutrition for millions of households are compromised.

While the SST is not technically a tariff, its effects resemble one. Imported goods, especially food, will now be subject to additional tax burdens that domestic items avoid.

For our free trade agreement (FTA) partners, this raises red flags. Under agreements such as the Comprehensive and Prog­ressive Agreement for Trans-Pacific Partnership and the Regional Comprehensive Econ­omic Partnership, Malaysia is bound by commitments not to introduce trade-distorting measures.

Yet, by applying a sales tax selectively on imported goods while exempting local ones, Malaysia risks violating the national treatment principle embedded in its FTAs.

These actions could prompt our partners to impose their own barriers in retaliation. As a trading economy, this is a risk Malaysia can ill afford, particularly in current times in view of ongoing negotiations over US tariffs.

According to analyst briefings, the SST expansion could generate as much as RM10bil in additional government revenue annually. However, no amount of revenue justifies policies that make food less affordable and undermine food sovereignty.

This concern is echoed by the Associated Chinese Chambers of Commerce and Industry of Malaysia, which has called for a deferment of the SST expansion due to its inflationary impact and poor timing amid global economic uncertainty.

PwC Malaysia, too, highlights the cascading cost effect on small and medium enterprises, consumers and trade supply chains.

If the objective is long-term economic resilience, should we not prioritise investments in domestic agriculture, improve logistics for food distribution and reduce dependency on imports rather than tax what we fail to produce?

We urge the government to reassess the long-term impact of the SST expansion, particularly its implications for food security, trade credibility and household affordability.

We recommend that the government reinstates full exemptions for imported food items essential to daily consumption, including canned fruits, sauces, cereals and dried spices, especially where there are no viable domestic substitutes.

A thorough trade impact assessment should be conducted to ensure the expanded SST does not breach Malaysia’s obligations under FTAs or trigger retaliatory measures.

We also call for a delay in implementing SST on the food and agriculture sectors until a comprehensive national Food Security Strategy is in place.

Food security is not just about domestic production. It is about ensuring that people can access nutritious, affordable food, regardless of where it comes from. Taxing that access without addressing the root causes of import dependency is not reform. It is a policy reversal at odds with Malaysia’s long-term interests.

See full letter at TheStar.com.my.

WOON KING CHAI

Director

Institute of Strategic Analysis and Policy Research (Insap)

Insap is a Malaysian think tank focused on public policy solutions