By Danial Dzulkifly
SHAH ALAM, June 17 — Malaysia’s fiscal deficit has narrowed to 4.5 per cent of the national gross domestic product in the first quarter of 2025, down from 5.7 per cent in the same period last year. This is said to reflect improved revenue collection from the revised Sales and Services Tax (SST) and recent subsidy rationalisation efforts.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said this came after the government’s decision to expand SST coverage and raise the tax rate from 6 to 8 per cent in March 2024, which has helped boost tax revenue by 30.3 per cent.
He said the diesel subsidy rationalisation, activated in June, reduced social aid spending by 19.4 per cent, adding to further fiscal consolidation. These approaches, he said, are a “gradual but effective balancing act” that manages public finances and economic growth.
However, expanding the SST base has also sparked debate on whether the government should reintroduce the Goods and Services Tax (GST), with many arguing that SST is more transparent and comprehensive.
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Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid seen in this file photo. — Picture by BERNAMA[/caption]
Economist Prof Emeritus Barjoyai Bardai from Universiti Tun Abdul Razak said there is room for the SST to be improved instead, adding that Malaysians have had a traumatising experience with the prior implementation of the GST.
“SST can be modified to eliminate the cascading effect… it will work better than GST, especially in eliminating the burdensome tax, psychological and perception by consumers,” he said.
Barjoyai said the SST is more flexible in its implementation by targeting high consumption brackets.
Economist Prof Geoffrey Williams echoed the sentiment, saying that while SST expansion will result in a price hike, especially in the newly taxed luxury category, it remains the least disruptive approach, particularly for the M40 group.
“Since the new products and services added are luxury and non-essential goods, middle- and low-income groups should not be affected too much, and existing exemptions that benefit low-income groups have been retained in a balanced way.
“There is no risk of the M40 falling into the B40 category and consumers can switch spending to cheaper, local options to avoid any impact on cost of living issues,’’ he said.
However, Barjoyai warned that real-world business behaviour could blunt the policy’s intent, pointing to local SMEs that may jack up their prices to stay afloat.
“Knowing the Malaysian economy and how it operates... the business community will surely raise prices, anticipating the rise in suppliers’ prices and the overall costs of doing business.
“In the end, we can expect prices to go up, especially food items, including takeaway and restaurant food prices,” he said.
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A married couple checks to see if a baju Melayu fits their son ahead of Aidilfitri, at the PKNS Complex in Section 14, Shah Alam, on April 2, 2023. — Picture by AHMAD ZAKKI JILAN/SELANGORKINI[/caption]
Tax the rich?
With public concern over the rising living costs, which is eroding their already stagnant income, the SST hike has reignited the debate over whether the rich are contributing their fair share of taxes, especially with the government projecting an additional RM5 billion in revenue from the new SST structure.
Former Klang MP Charles Santiago also weighed in, calling for a 2 per cent wealth tax on Malaysia’s 50 richest people, which he claimed could generate RM8.3 billion, or over 60 per cent more than the new SST’s projected yield.
Barjoyai also proposed other measures to tax the wealthy without impacting lower-income groups, such as taxing high dividend earnings, property transfers and capital gains on share trading.
However, the idea of taxing the ultra-rich remains a politically contentious idea.
It even drew comments from Domestic Trade and Cost of Living Deputy Minister Fuziah Salleh, who admitted that the government will become “very unpopular” and risk losing support if it taxes the rich.
During a BBC World Questions debate on June 10, she cited the 2 per cent dividend tax on annual dividend income exceeding RM100,000, introduced in Budget 2025, as an example that drew criticism.
Williams, however, agreed that a wealth tax is “feasible in principle” but easily circumvented through offshore transfers and accounting loopholes.
“A 2 per cent wealth tax is feasible in principle, but it is avoidable with clever accounting. While there is a risk that wealthy people will simply relocate their wealth to zero-tax accounts overseas, there will be some who will pay the tax, but not as much as is predicted.
“Taxing the rich does not raise a huge amount of money. The key to raising large amounts of revenue is to have tiny taxes on everything,” he said.
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Image for illustration purposes only. — Picture by PEXELS[/caption]
Williams also said the government should instead evaluate other taxes, such as the electronic payments (EPT) tax, which is a small duty on e-payments.
“A 1 per cent EPT can raise RM28.8 billion, and this significant revenue reduces the need for further SST increases in the future,” he said.
He also warned against reviving the GST, arguing that it disproportionately burdens lower-income families.
“Some former politicians have been calling for broadening the tax base, and many call for the reintroduction of the GST. A broader tax base means more people, especially the poor, pay more.
“One reason many companies prefer the GST is that they can reclaim it; essentially, they do not pay it, and mostly, consumers are hit. This is one reason the GST is considered regressive,” Williams concluded.
