As the Malaysian government struggles to keep the economy afloat by injecting a series of stimulus packages to keep consumer spending alive and revitalize the economy, its public coffers come under serious pressure as its fiscal deficit deepens, threatening the government to plunge into further debt in the midst of the Covid-19 pandemic. 

In difficult times like these, one cannot help but look back retrospectively on how we could have done better. As we struggle with a weak fiscal balance, we ask ourselves whether we could have had better public revenue against public expenditure, which could have provided us with better financial firepower to fight against the devastating effects of the Covid-19 pandemic on the economy.   

This takes us back to the time when Malaysia started implementing the Goods and Services Tax (GST) back in 2015. Today, 160 countries out of 195 countries implement GST in some form or another.

The reasons for their implementation of the GST is rather straight forward. One of the biggest reasons has to do with a problem in tax collection called attrition, which is a bane for every tax collector. In some tax regimes, the tax coverage is limited, giving rise to the incidence of indirect taxes, which in turn gives rise to ambiguity and loopholes. This is one of the reasons why tax collection before 2015 gave rise to a lot of tax evasion.

When the broad-based tax regime GST came into effect in Malaysia on 1 April 2015, it came with a specific objective in mind. GST was to ensure that the coverage is encompassing of all economic sectors, but with the flexibility of 0-6%, depending on affordability of the sector in question. This means that, though GST covers all economic sectors, it can be zero-rated for essential sectors especially for essential services and those consumed by the lowest-income group.

This is crucial for a country that needs to ensure that their tax collection is efficient, and that their tax revenue is enough to weather crises such as what we are experiencing now.

A cursory glance at our tax situation since 2015 has shown that Malaysia has a much lower tax rate compared to its ASEAN neighbours. An Ernst & Young Economic Outlook 2020 report shows that Malaysia’s 6% tax rate under GST is low compared to all other ASEAN countries whose tax rate ranges from 7% – 12%. According to a LHDN study, Malaysia’s tax to GDP ratio is at 13.6% in 2016, 13.7% in 2017 and 12.8% in 2018, compared to the OECD average of 34.2%. This sits very well in the middle of ASEAN countries in 2017, with the highest being Philippines and Thailand at 17.5% and 17.6% respectively. This corresponds to the initial years when the country has to change the whole tax system of the country from SST to GST, which requires more time and education for the people. Unfortunately, we did not have the opportunity to settle down with the GST regime when SST was brought back in 2018 with the change of the Pakatan Harapan government. But from 2016 to 2019, total government revenue increased from RM212.4 billion to RM263.3 billion, which is a steady increase throughout the years.

This goes to show that the implementation of GST has progressively brought more revenue to the government’s coffers throughout the years, even though our tax to GDP ratio is still quite low compared to its ASEAN neighbors. This means that tax revenue from GST has been more efficient for Malaysia, as it covers a wider ground, leaving very little room for loopholes and tax evasion.

The decision to implement GST should not in any way be seen from a political perspective which will always end up in a never-ending debate. Rather, it should strictly be seen from an economic perspective, and implemented as a form of necessity in a country that is struggling fiscally to save the economy from a recession. But perhaps the introduction of the Malaysian GST regime could have been done at a lower rate than 6%, which was at that time a sensitive topic in the country. A 3% GST rate would have been more acceptable in Malaysia’s struggling context, and we could increase it over the years as the economy improves.

But as we now struggle financially to keep the economy afloat, in retrospect a solid GST regime would have given us more fiscal space to save our economy from a free fall. I hope that once the dust settles in Malaysia, politically and with the discovery of a vaccine or treatment for Covid-19, we could once again explore the reimplementation of GST for a better future of the country. If 160 countries can do it, so can we.

This article was published by The Malay Mail, Nanyang, New Straits Time and The Sun.