Malaysia’s GST dilemma

THE government’s latest suggestion that Malaysia could combine elements of the sales and service tax (SST) and the goods and services tax (GST) may sound like a technical exercise in tax design.

It is anything but.

For Malaysians, the word GST still carries memories of higher prices, complicated refunds and the political backlash that eventually contributed to its demise.

For businesses, however, the GST also represented something else: a broader, more systematic and transparent consumption-tax framework.

Prime Minister Datuk Seri Anwar Ibrahim said recently that the GST is “the most transparent and efficient system” he had advocated since the 1990s.

However, he was equally clear that the government is not proposing to simply reinstate the GST, given the burden that a broad-based consumption tax could impose on poorer households.

Instead, the government appears to be asking a more fundamental question: Can Malaysia capture the efficiency of the GST without repeating the mistakes of the past?

That is arguably the right question.

Malaysia’s tax challenge is no longer merely about collecting more money. It is about building a tax system capable of supporting a growing economy, funding public services and reducing the country’s dependence on volatile sources of revenue, while remaining fair to households and businesses.

The SST, in its current form, has limitations. Its narrower coverage means a significant portion of economic activity remains outside the consumption-tax net.

That can make revenue collection less broad and potentially less predictable.

The GST, in contrast, was designed around a much wider base, with tax collected throughout the supply chain and businesses able to claim input-tax credits. In theory, that makes the system more transparent and reduces the cascading effect of taxes.

But theory is only half the story.

Malaysia’s first experience with the GST exposed the importance of implementation. Businesses, particularly smaller ones, struggled with compliance costs and delayed refunds.

Consumers faced higher headline prices as the tax was introduced. Whatever the economic merits of the GST, the policy failed to secure sufficient public trust.

That is the lesson Putrajaya cannot afford to forget.

A new system must, therefore, be judged not by whether it carries the GST or SST label, but by whether it fixes the weaknesses of both.

If the government wants “everyone to pay, albeit at a low rate of taxation”, as Anwar put it, the definition of “everyone” will be crucial.

A genuinely broad tax base cannot mean simply taxing more everyday necessities. Doing so would disproportionately affect households that spend most of their income on food, transport, housing and other essentials.

Importance of progressivity

Progressivity must, therefore, be designed into the system.

Essential goods and services could receive appropriate protection, while targeted transfers or rebates could compensate lower-income households.

At the same time, discretionary consumption could bear a greater share of the burden. But there is a danger here.

Too many exemptions and special treatments could recreate the complexity that a broad-based tax is supposed to eliminate.

The more exceptions there are, the greater the administrative burden and the greater the opportunity for businesses and consumers to face uncertainty.

The government will have to strike a delicate balance between simplicity and fairness.

There is another issue that deserves far more attention: refunds.

A consumption tax that requires businesses to pay tax upfront and then wait months for refunds is not an efficient tax system.

For large companies, that may be manageable. For an SME operating on tight margins, it can become a serious cash-flow problem.

If Putrajaya is serious about learning from the GST, it should make timely refunds a core feature of any new model rather than an administrative afterthought. Technology should make this possible.

Malaysia today has far more sophisticated digital tax infrastructure than it did when the GST was introduced in 2015.

A redesigned consumption tax could potentially use real-time or near-real-time digital reporting, automated verification and risk-based refund processing to reduce leakage while speeding up legitimate claims.

This is where Malaysia has an opportunity to do something different.

Instead of resurrecting the GST as it existed a decade ago, it could develop a modern consumption-tax framework designed around today’s digital economy.

The government should also be honest about the purpose of reform.

If the ultimate objective is simply to raise more revenue, public resistance will be understandable.

But if the objective is to create a more sustainable fiscal framework – one that allows the government to fund healthcare, education, infrastructure and targeted social protection without constantly searching for new revenue sources – then the case becomes stronger.

There is also a broader fiscal reality that cannot be ignored.

Malaysia cannot indefinitely expect a relatively narrow group of taxpayers and companies to carry an expanding fiscal burden.

As the economy becomes more services-oriented, digitalised and consumption-driven, the tax system must evolve with it.

Addressing inefficiencies

But broadening the tax base should not become an excuse to avoid addressing inefficiencies in government spending.

Tax reform and expenditure reform must go together.

Malaysians will be far more willing to accept a broader tax base if they can see that additional revenue is being used responsibly, subsidies are better targeted, leakages are reduced and public services improve.

That means the government’s credibility will matter as much as the tax architecture.

The GST debate should, therefore, move beyond the familiar ideological divide of the “GST versus SST”.

The real question is whether Malaysia can build a system that is broad without being burdensome, efficient without being regressive, transparent without being overly complex and revenue-enhancing without fuelling unnecessary inflation.

That is a difficult balancing act. But perhaps this is precisely the moment to attempt it.

The government should not be afraid to learn from the GST. Nor should it be afraid to acknowledge where the GST went wrong.

The objective should not be to bring back an old tax. It should be to build a better one.

If Putrajaya can deliver that, the debate over the GST and SST may finally evolve from a political argument about the past into a serious conversation about the kind of fiscal system Malaysia needs for the future.