Malaysia to introduce GST at 6% from April 2015

Proposal signals Najib's willingness to cut spending and raise revenue

By Yong Yen Nie, The Straits Times, 26 Oct 2013

MALAYSIA will introduce a 6 per cent consumption tax in April 2015, after raising taxes on property gains and abolishing sugar subsidies next year, as it moves to reduce its long-time Budget deficit.

The 2014 Budget proposal confirmed what had been widely anticipated, analysts said, signalling Prime Minister Najib Razak's willingness to cut spending and raise revenue, or face downgrades by credit rating companies.

The goods and services tax (GST) will replace the current sales and services tax of up to 16 per cent. Essential food items like flour, as well as bus and train fares, will be exempt from GST.

Datuk Seri Najib proposed raising the real property gains tax next year to 30 per cent for properties resold within three years. Currently, property gains are taxed at 15 per cent for properties disposed within two years.

Foreigners will be barred from purchasing homes below RM1 million (S$391,000), up from RM500,000 currently, in a move likely to affect home sales in regions such as Iskandar in Johor.

After the GST kicks in, corporate and personal income taxes will be cut. The government will increase its cash handout to the poor, from RM500 to RM650 for households earning below RM3,000 a month.

"The government believes that this is the best time to implement GST as the inflation rate is low and contained," Mr Najib said, adding that it is still the lowest among South-east Asian countries. Indonesia's GST is 10 per cent and Singapore's 7 per cent.

Also in 2015, the top rate for personal income tax will be cut from 26 per cent to between 24 per cent and 25 per cent. Households earning below RM4,000 will be exempt from paying tax. Meanwhile, the corporate income tax rate will go down from 25 per cent to 24 per cent.

Analysts said the GST - bandied around for years but delayed as it is unpopular with the masses - could bring in revenue of about RM20 billion, which could help reduce the government's dependency on oil revenue.

The GST also has long-term political benefits for citizens, said Mr Wan Saiful Wan Jan, chief executive of Institute for Democracy and Economic Affairs. "With the GST, everyone will realise that the government takes money from our pockets to spend... People will demand more accountability when the government spends," he said yesterday.

The Consumers' Association of Penang said the tax will hurt the poor, as they spend a larger portion of their pay on purchases.

"GST is regressive and exacerbates inequality," its president SM Mohamed Idris said in a statement yesterday.

Starting next year, the government is scrapping its subsidy for sugar of 34 sen per kg, as part of a move to cut its subsidy bill from RM46.7 billion this year to RM39.41 billion next year.

Mr Najib said the economy is expected to grow between 4.5 per cent and 5 per cent this year, and between 5 per cent and 5.5 per cent next year.

The Budget deficit is expected to fall to 3.5 per cent next year, from 4 per cent currently.

Public debt is expected to rise to 54.8 per cent of gross domestic product this year, from 53 per cent last year. Mr Najib said the government will ensure that public debt does not hit its self- imposed ceiling of 55 per cent.

Budget highlight

- Goods and Services Tax to start from April 1, 2015, at 6 per cent.

- GDP projected to grow by between 5 and 5.5 per cent next year, from 4.5 to 5 per cent this year.

- Budget deficit to be reduced to 3.5 per cent of GDP next year, from 4 per cent this year.

- Personal income taxes to be cut by 1 to 3 percentage points after GST is introduced. The top rate now is 26 per cent.

- Corporate income taxes to be cut by 1 to 2 points. The top rate now is 25 per cent.

- RM2,000 (S$783) special tax relief for middle-income group earning up to RM8,000.

- Minimum price of properties that foreigners can buy raised from RM500,000 to RM1 million.