MoF announced that GST will be cut from 6% to 0% effective 1 June. This move may cause a loss of RM26bn in government revenue, potentially increasing the 2018 budget deficit from 2.8% of GDP to 4.6%, ceteris paribus . Actual impact could be less drastic as there are several avenues to fill the GST gap - sales tax, reducing wastage and leakages and higher oil price. Winners from GST zerorisation are consumer, telco (Digi has highest prepaid market share) and NFOs which have been absorbing the said tax.

NEWSBREAK

GST cut from 6% to 0%. The Ministry of Finance (MoF) announced that effective 1 June 2018, GST will be reduced from 6% to 0% for all goods and services that are currently subjected to the said tax. This will not impact items that are already exempted from GST. It also stated that all registered traders are also subjected to current regulations, among which involve the issuance of tax invoices, submission of tax returns within the specified period and input tax credit claims.

HLIB’s VIEW

“Zerorising” GST. In its election manifesto, Pakatan Harapan (PH) pledged to abolish GST within 100 days of it coming to power. We believe the move to “zerorise” GST (i.e. cutting its rate from 6% to 0%) is an immediate way to remove the tax without having to table it in Parliament as opposed to an actual abolishment.

Economic implications. To recap, GST collection for 2018 was initially targeted at RM43.8bn. Assuming this amount is linearly spread throughout the year, zerorising GST would imply a loss of RM25.6bn in revenue to the government for 2018. This could bring the 2018 budget deficit target from RM39.8bn to RM65.3bn or 2.8% of GDP to 4.6%, ceteris paribus being the key word. However, we reckon that the actual impact could be less drastic as there are several avenues to fill this GST gap. Firstly, PH did mention about reintroducing sales tax which contributed RM17.2bn in 2014 (RM19.4bn in today’s monetary terms if we assume a 3% p.a. inflation since then). Secondly, there was mention about reducing wastage and leakages amounting to RM15-20bn annually. Lastly, with oil now averaging USD69/bbl, we estimate this could add RM5bn to revenue for 2018. On GDP prospects, zerorising GST should boost private consumption (we estimate 7% growth for 2018) but this may be somewhat offset by a possible cut in government spending. In its recent briefing to the investment community, Tan Sri Dr Zeti Aziz (former BNM governor and now member of the Council of Eminent Persons) said that GST cancellation will not be evaluated on piecemeal but rather as a holistic tax reform which we reckon, could present new avenues of government revenue. Pending further clarity, we maintain our 2018 GDP growth forecast at 5.3%.

A boon for consumer. We view this GST zerorising move as positive for the consumer sector. As it is, several consumer indicators are already showing positive signs, e.g. private consumption growth is trending higher, retails sales growth has recovered to pre-GST levels and the Consumer Sentiment Index is inching higher. Within our consumer sector coverage, we have BUY calls on BAT (TP: RM37.00), Hup Seng (TP: RM1.38) and BFood (TP: RM2.12). We also see AEON (TP: RM2.30) as a potential beneficiary but our Buy call is under review as share price has surpassed our target. Zerorising GST could also boost demand for prepaid telco given the higher price elasticity vs postpaid. For the former, Digi (TP: RM5.10) has the largest market share. Lastly, it would be positive for number forecast operators (NFOs) as they have been absorbing GST.

Source: Hong Leong Investment Bank Research - 17 May 2018