This article first appeared in Forum, The Edge Malaysia Weekly on February 20, 2023 - February 26, 2023

The Goods and Services Tax (GST) is widely seen as the “better” taxation system compared with the single-stage sales and service tax (SST) currently implemented in Malaysia. As the preferred multi-stage consumption tax regime implemented in more than 170 countries worldwide, GST is a more transparent, efficient and effective system. There has been much chatter in the market on whether GST should make a return, even amid statements from the government that it will not be recommending the reintroduction of GST at the moment.

The general perception is that Malaysia had an unsuccessful three-year run with GST when it was introduced in 2015. If GST is deemed a good tax regime elsewhere, perhaps it is important to understand what went wrong for Malaysia and how to better implement it should we decide to go down the GST route again.

One obvious change after switching from SST to GST was that it helped to substantially grow the government’s revenue and broaden the government’s tax base. Was the tax rate itself the issue and the tax burden too much for the economy to handle?

That does not seem to be the case.

When compared with other countries that practise GST (called VAT in some countries), the 6% rate rolled out by Malaysia back in 2015 was not an overly high rate. Numbers show that the median GST rate among Malaysia’s upper-middle income peer economies had stood at around 16%, more than double the rate Malaysia imposed previously. The total amount of tax collected when GST was in force was also comparable if not lower than that of other nations. While Malaysia’s taxes on goods and services did expand to around 29% of total fiscal revenue as a result of GST, this is still lower than the global average of around 33% and what is typically collected by Malaysia’s upper-middle income peers of around 35% of overall revenue.

Even if we consider the overall taxation structure and other forms of non-tax receipts collected by the government, Malaysia is not overtaxed compared to other countries as well. In fact, it is the opposite. As a share of gross domestic product, government revenue has been on a declining trend, hovering around 16% in 2020, from about 21% in 2013. This ratio is lower compared to the global average of around 23% and the average rate among upper-middle income economies of about 20%.

If the overall amount of taxation is “fair” relative to the size of the Malaysian economy, perhaps we can argue that the abruptness in terms of additional tax burden on the economy was one of the issues behind the unsuccessful implementation in 2015. After all, the government did manage to double its consumption tax collection under the GST regime (GST in 2016: RM41.2 billion; SST in 2014: RM17.2 billion). That is a whole lot of money that was extracted out of the economy over a brief period of time.

To soften its impact, perhaps the GST could be introduced at a lower rate as a start. The government can then lay out plans for future GST rate hikes in order to reach the optimal rate that generates sufficient revenue for nation-building. The clear road map and clear communication will help to further reduce the surprise factor to the economy.

Another option is to introduce tiered GST rates for different goods or services. For the commonly consumed goods and services, GST can first be levied at a lower preferential standard rate while a higher GST rate can be imposed on luxury goods. This will help to alleviate the tax burden on low-income households, while the tax receipts from high-valued goods will help to pad government earnings. That said, the downside from having varied GST rates comes down to the complexity of execution and cost of implementation, which may offset the potential gains from this tiered system.

The last and most important aspect to better implementation is to ensure the GST input tax refunds are processed and returned to businesses swiftly. The slow refunds were a key reason why GST triggered soaring inflation and what gave it such a bad name in Malaysia. GST by design should not have caused price increases but the delay in input tax refunds negatively impacted cash flow and businesses had no choice but to pass on the extra cost and GST input tax paid to their clients.

Regardless of whether GST is reimplemented, I believe we will first need to acknowledge that the tax system was not the issue. If we can find ways for it to be better implemented, Malaysia can reap its benefits. All said, due to the regressive nature of the tax, the government will need to be wary of the negative impact it places on the economy, particularly among the lower income households. That can be addressed through additional support programmes dedicated to the vulnerable segments while ramping up anti-profiteering surveillance to prevent unwarranted price hikes.

Woon Khai Jhek, CFA, is a senior economist and head of economic research at RAM Rating Services Bhd

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