Malaysia scraps GST June 2018

The new Prime Minister of Malaysia has committed to withdrawing the 6% Goods and Services Tax, setting it at zero from 1 June 2018. It will be replaced by a more limited Sales and Services Levy – a sales tax.

PM Mahathir Mohamad has promised to withdraw the consumption tax, which was only introduced in April 2015 to replace the Sales Tax and Service Tax. The proposal in based on the view that GST has raised the cost of living. At the time of the introduction of the GST, inflation rose to 4.2%, but has since fallen back.

However, GST has been successful at stabilising the fiscal picture of the country and ensuring a good credit rating, which helps cap borrowing costs. Its introduction was considered vital as oil prices fell from over $100 per barrel for crude oil in 2015 to below $50 – although it has since recovered. Malaysia is a large exporter of oil. It is highly dependent on foreign borrowing, with 55% debt to GDP.

Replacing GST with a sales tax would likely to half indirect tax revenues, which account for 3.8% of GDP today.

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