The Malaysian government should consider reimplementing the Goods and Services Tax (GST), abolished in 2018 by the first Pakatan Harapan government, said Johor Menteri Besar (chief minister) Onn Hafiz Ghazi, as reported by The Star.

Onn Hafiz suggested the proposal on Sunday (May 19) during the seventh day of the state assembly meeting.

Impending subsidy rationalisation

In his speech, the chief minister said that many officials raised concerns about the cost of living, particularly about the impending effect of the planned subsidy rationalisation exercises, especially fuel prices, as it impacted their constituents.

Subsidy rationalisation is an exercise to make subsidies more targeted to benefit the needy, instead of a blanket subsidy that benefits everyone, rich and poor.

Onn Hafiz appealed for the government to consider implementing the GST as an additional source of income to support the people, which is "also in line with the views given by economic experts who stated that GST is the best taxation system for a country".

M'sia introduced GST in 2015

Malaysia first introduced the GST in 2015, under the government of then-Prime Minister Najib Razak, but later removed it entirely on Jun. 1, 2018, under then-Prime Minister Mahathir Mohamad.

The GST imposed a six per cent standard rate on about 60 per cent of all consumer goods and services.

It was first introduced to diversify the government's revenue base and reduce Malaysia's dependency on oil revenues and a small income tax base.

The revenue earned from GST would then be directed to reduce the government debt commitments.

The GST reportedly generated RM41.2 billion (S$11.8 billion) in revenue for Malaysia within a year after its implementation, according to a 2024 research written by Suresh Narayanan and Abdul Rais Abdul Latiff and published by the Asian Economic Papers.

GST unpopular among the public & business sector

However, the GST was unpopular among the Malaysian public and the business sector.

A column published by the New Straits Times in August 2018 offered reasons for the GST's failure in Malaysia.

These reasons include that the burden of GST, as a broad-based tax, was felt by every member of the public as "no one escapes its effect".

For businesses, escaping the burden of GST meant they had to pass the tax forward to customers, which meant raising their prices.

However, raising prices could mean a decrease in demand which would, in turn, reduce sales and overall revenue.

GST abolished in 2018

The general dissatisfaction with GST arguably played a role in the defeat of the ruling government, Barisan Nasional, in the 2018 General Election.

During the 2018 election campaign, the opposition coalition Pakatan Harapan, led by former prime minister Mahathir Mohamad promised to remove the GST entirely should they win the election.

PH won the election in May 2018. It later announced it would scrap GST on Jun. 1, 2018.

However, the government on Sep. 2018 implemented a new Sales and Service Tax (SST) instead.

The SST imposed a five to ten per cent tax on the sale of goods, and a six per cent levy on services.

This was later amended on Mar. 1, 2024, to eight per cent on all taxable services including consultancy and training services.

M'sia continues to grapple with rising cost of living

Despite the abolishment of GST, Malaysians continue to grapple with the rising cost of living.

In his speech on Sunday (May 19), Onn Hafiz observed that many officials raised concerns about the cost of living during the state assembly meeting.

A research published in February 2024 by UCSI, a private university in Malaysia, found that nine out of 10 Malaysians are concerned about the cost of living.

On Thursday (May 16), Department of Statistics Chief Statistician Mohd Uzir Mahidin said the price of commodities remains higher compared to pre-pandemic prices, Bernama reported.

On Mar. 1, 2024, the Malaysian government increased the SST rate from six per cent to eight per cent amid inflation fears.

Hopes for a reimplementation of GST

"The state government hopes that the Federal Government will consider reimplementing the GST as an additional source of income to support the people," Onn Hafiz said on Sunday (May 19).

Onn Hafiz added that Johor government is also concerned about "the domino effect and increase in inflation when this subsidy rationalisation is enforced".

However, Onn Hafiz, who is a member of Umno and therefore in the Barisan Nasional coalition allied with Prime Minister Anwar Ibrahim, added that his government is confident in Anwar's promise that the rationalisation would not burden the people.

Subsidy rationalisation to reduce pressure on government fund

The Malaysian government under the subsidy rationalisation plans for a gradual subsidy removal for subsidised commodities, as defined by a 2022 research published by the Asian Development Review.

It explained that the subsidies for these commodities account for a significant portion of the operating expenditure in Malaysia's national budget.

Malaysia is projected to spend RM52.8 billion on subsidies and social assistance in 2024.

The figure is a decrease from the RM81 billion it spent on subsidies in 2023.

The subsidy rationalisation will primarily remove subsidies on food such as cooking oil, sugar, and rice.

The rationalisation aims to reduce pressure on government funds and direct these resources to other areas.

Attempts to bring back GST must focus on acceptance rather than revenue

Questions remain if the reimplementation of GST will help Malaysia achieve its intended goal, especially if the aim is to introduce an additional source of income for the government to support the people.

When it was first introduced in 2015, the burden of GST was felt by every member of the public.

In their research, Suresh and Abdul maintained that any attempts to bring back GST "must focus on gaining acceptance rather than the revenue it generates".

"This is best achieved by timing its reintroduction correctly, keeping the rate low, the base broad, and implementing parallel measures to supplement the incomes of households seriously undermined by the tax on the consumption side...

The advantage of a properly designed GST as a stable, efficient, transparent, and effective revenue source cannot be ignored.

Malaysia may have to return to the GST at some point in the future, but it is important to avoid viewing it as an immediate and permanent solution to rising government deficits and debt."

Subsidy rationalisation must take precedence over GST: Anwar

Speaking at the Milken Institute's Asia Summit on Sep. 13, 2023, Anwar said that his main goal was subsidy rationalisation, adding that it had to take precedence over measures to broaden the tax base, such as GST.

The view was later re-iterated by Deputy Finance Minister Ahmad Maslan in November.

When asked about GST, he reiterated his previous comments, saying that GST is both transparent and efficient as a tax system, but it cannot be implemented while many Malaysians are still living in abject poverty.

Top image via Onn Hafiz Ghazi/Facebook and Khairi Harry/Pexels.