Malaysia's new PM Mahathir scraps GST; Petronas may plug revenue hit to exchequer

Last Updated: Fri, May 18, 2018 12:16 hrs
Malaysia PM Mahathir Mohamad

Malaysia's newly elected Prime Minister Mahathir Mohamad has achieved his election-promise of scrapping off the Goods and Service Tax from southeast Asia's fourth largest economy.

As part of the fresh regulation, a 6% flat GST rate has been abolished and instead a zero rate has been called for. There will be a Sales and Service Tax in place of the GST. The new rule will commence from July 1 onwards.

A media release from the ministry said that the ruling would not include goods and services for previously exempt goods, but businesses "must ensure that prices of goods and services comply with the price-control and anti-profiteering act 2011 at all times."

92 year old Mahathir had won the elections promising to scrap GST if elected. The announcement was a surprise to markets, the public and analysts considering the central bank governor, Zeti Akhtar had herself informed that GST removal may not occur overnight. A parliamentary approval to scrap the 2014 GST Act was required.

But right after the surprise announcement from the Mahathir and later the ministry, Zeti Akhtar Aziz, the first woman Governor was briefing credit agencies such as Moodys, Standard & Poors, and Fitch ratings. She was quoted by Bernama, the state' news agency, as saying that the move was in line with market expectations.

Although GST was implemented amid much criticism, the rising inflation and cost of living in Malaysia led to disgruntlement and negative perception among masses. Former Prime Minister Najib Razak's government had called for implementing the GST in 2013. The parliament approved a draft in 2014 and Malaysia saw GST from 2015.

The implementation of GST, a consumption based tax, was referred to as the government's saviour. There was a strong belief that GST could help generate nearly one-fifth of the revenue.
File photo of PM Narendra Modi with former Malaysian Prime Minister Najib Razak, who had visited India last year to sign 7 trade agreements. More about the story is available here.

The reason for implementation were the burgeoning central government deficits during the oil-supply glut in 2015. During this period, the cost of borrowing escalated and the Malaysian Ringgit weakened. By the end of 2014, the Malaysian economy, a largely petrol exporting nation, had enough worries on its hand both on the international trade front and also internally managing interest rates.

This is when the Razak government aimed at implementing GST. GST, according to the government helped collect revenues worth 43.8 billion ringgits ($11.05 billion) in 2017. This is nearly 18% of the total government revenue (according to a media report).

Post its implementation however, there has been wide-spread criticism. Sudden rise in global crude prices led to an up-swing in crude prices which has hit the consumer markets. A Reuters report in 2015 found inflation for May rising to 2.1%.

But data available on Tradingeconomics, says, Malaysia's inflation rate and consumer prices deaccelerated in March 2018. Consumer prices increased 1.3% year-on-year (1.4% rise in the previous month), the lowest inflation rate since July 2016. This was mainly attributed to a slowdown in cost of food & non-alcoholic beverages and a dip in prices of transport. In February 2018, inflation was at a 16 month low of 1.4%.

To give readers a perspective, Malaysia's inflation recorded for the month of March 2018 stood at 1.30%, while India recorded a monthly inflation rate of 4.58%.

The decision to scrap GST has been cheered by most Malaysian citizens. Public opinion on Twitter and Facebook has largely been in favour of Mahathir's fresh move. Responses were largely in awe of the politician delivering on his poll-promise within weeks of assuming office. The Straits Times carried a report detailing the consumer-centric aspects of scrapping GST. The report found businesses losing customers after the implementation of GST in 2015. Retailers that the report quotes, found that there was a rise in cost of raw ingredients and materials which escalated the final price and thereby had an impact on consumer spending.

People posted their opinions on the rise in food and essential items. Here is one tweet:

Analysts on the other end, have been critical of pulling back the GST. Moodys, the international rating agency was quoted in reports saying that revenue losses this year will be offset to some degree by higher oil prices, but this development was unlikely to be a structural or act as a permanent substitute for GST.

Here are additional responses from Twitter:

Andy Mukherjee was critical of pulling back the GST, a major revenue driver for the government. Writing for Bloomberg, he said PM Mahathir had once called George Soros a 'moron' for the 1997 Asian Financial crisis. Mukherjee argues that slashing GST to an acceptable rate than to abolish it completely was a huge sacrifice. Besides investments already made by businesses, there was also a chance of investors losing their interest in the economy altogether.

In the report that starts with the headline- 'Mahathir must temper his contempt for markets', Mukherhjee finds, "if investors start to lose confidence in Malaysia, Mahathir should know whom to blame. Not Soros, of course."

What will fund the budget?

Malaysia's budget for 2017 stood at 260.8 billion ringgits or $62.3 billion. GST was nearly one-fifth of the total revenue collected by the government. The absence of a GST may impede the government's plans and agenda.

PM Mahathir's Pakatan Harapan alliance's pledge to set up a sovereign wealth fund may plug some gaps. The sovereign fund will fetch profits from Petroliam Nasional Bhd, the state-owned oil company. This sovereign fund may help the government balance budget in its move towards scrapping GST. Petronas (Petroliam Nasional) will be infusing the sovereign fund with a minimum of 10 billion ringgits from its income every year. Other state-linked companies will also be required to channelize their earnings to the fund as long-term savings to the country.

Concerns for India:

A file photo of a protest called by a textile association. Similar Bandhs were observed across various parts of India by many agencies.

No soon had the news of Malaysia's new government scrapping GST gone live, there were comparisons with the Indian GST.

India that went live with its version of GST in July 2017 and has been equally criticised over the timing (implementation after demonetisation). There were challenges with respect to GST compliances for small businesses.

There were also discussions on social media portals on how Indian travellers and tourists to Malaysia may expect some respite in price for services.

The Malaysian example was used by many to remind the ruling government of the upcoming elections and the probable result it may face over the implementation of GST. Others took the opportunity to highlight that India's GST was multi-rated and hence was a far better system than the one used by Malaysia.

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