More Details on Reintroduction of SST Soon

According to Ministry of Finance (MoF), the country’s goods and services tax (GST) rate will be reduced from 6% to 0% from 1 June 2018 throughout the country, for goods and services within Malaysia and those imported from abroad. Malaysia’s GST tax system was introduced in Malaysia since April 2015.

MOF highlighted that “all registered business entities have to comply with the GST rate adjustment to 0%. In the meantime, all registered businesses are still subject to all existing rules including those related to tax invoice, submission of tax return within predetermined taxable period, and claims of input tax credit." From our perspectives, the GST tax system remains in place, but by reducing the GST tax rate to 0%, there will be zero GST incurred on inputs, therefore zero tax credit to the registrant (there will be zero offset against output tax). In another word, the GST paid on goods and services used as intermediate inputs by GST registered businesses to make taxable supplies will be 0%, where businesses are not required to claim input tax credits (ITC) as the GST tax they paid on their business inputs are also at 0%. We believe the rationale for keeping the GST system active at 0% is to ensure effective enforcement involving different tax collection agencies, namely Customs Department and the Inland Revenue Board (LHDN), to ensure registered businesses paid income tax, and to avoid taxpayer from non-compliance, like evasion and avoidance. Furthermore, businesses had invested and spent on changes in business processes, development of software and training of personnel for GST previously.

Based on the Budget 2018 report, the collection from GST will increase from the RM41.5bn estimated for 2017 (actual collection is RM44.3bn) and remain high at RM43.8bn projected for 2018. Based on our rough estimates, even with the reintroduction of a sales and services tax (SST), the revenue collection from SST will likely amount to about RM21.7bn, reflecting a possible shortfall of revenue of approximately RM22.1bn from GST collection. Apart from higher oil revenue expected for 2018, Tan Sri Dr. Zeti Akhtar Aziz also noted that Malaysia could meet its revenue requirements by increasing the efficiency of the public sector and cutting operating expenditure (i.e. reducing wastage), as well as exploring new sources of revenue. She guided that the new Government will be unveiling a comprehensive fiscal reform package within one hundred days timeframe, assuring investors that fiscal consolidation can be achieved.

With Malaysia’s economic fundamentals remain sound, as reflected in the steady economic outlook, sustainable current account surpluses, and increase in foreign exchange reserves, it is unlikely that international rating agencies will caution on Malaysia's sovereign rating outlook in the near term. With a 0% GST and a reinvigorated middle-income segment, we believe the propensity to spend on big-ticket items, particularly on passenger vehicles, will likely give a boost to consumer spending. The banking sector could be a beneficiary as automotive loans accounted for 10.6% of outstanding loans (March 2018 vs 2014: 12.4%). MREITs’ retail mall operators could also benefit from an improvement in retail sales. While the property sector should see buyers and developers benefitting from lower costs for upcoming projects in the long-run, however, the high debt to GDP ratio and stringent housing loan approvals (may tighten further) will continue to pose challenges to the weak property market, despite the improvement in Malaysians’ purchasing power.

Source: Affin Hwang Research - 17 May 2018