Coherent SST reform requires zero exemptions for policymakers

Focus Malaysia

2 days ago

THE Malaysian government's recent changes to the Sales and Service Tax (SST) are true to an at least decade-old tradition of self-defeating consumption tax policies.
Raising taxes is a thankless but necessary task that requires astute policy design and nuanced messaging to manage both economic and political narratives.
Both the 1 July changes and the case for them have left policymakers open to justifiable but needless criticism.
Malaysian policymakers have long recognised the need to significantly increase revenue collections but have struggled to convince Malaysians.
Tax reforms repeatedly adopt a narrow, small-target strategy that—by lacking both vision and tangible economic sustainability and equity objectives—instead become lightning rods for critics.
Malaysians worried about their household budgets naturally fear higher taxes and do not count fiscal sustainability among their chief concerns.
Making the case for consumption tax reform needs and deserves better than pointing to unsustainable budget deficits and delivering patronising rebukes of SST critics.
It requires a consistent, coherent and non-condescending narrative that garners public support for changes that will improve not threaten their livelihoods.
Policymakers should be explaining the importance of taxing consumption, how it supports a tax strategy that balances fairness, competitiveness and sustainably, and how the money raised will be used to benefit Malaysians.
Consumption taxes have advantages that are especially relevant to Malaysia's circumstances. Malaysia has a large visiting and undocumented population whose income cannot be taxed but whose consumption can be.
It has a sizeable informal sector contributing around a quarter of gross domestic product, whose income likewise escapes direct taxes but whose inputs may be partially captured by consumption levies.
Shaping consumption choices through price signals will be essential to making Malaysia's future economic development less carbon intensive and more sustainable.
Consumption taxes progressed alone cannot address Malaysia's revenue needs or be implemented equitably. Consumption taxes are regressive as low-income households consume more of their disposable incomes and therefore experience a greater relative impact.
Attempts to neutralise these impacts by exempting or setting to zero the rate for basic goods introduces complexity for businesses and consumers, exempts rich and non-Malaysian consumers at the same time, and opens policymakers to arguments of inconsistency or bias.
Accompanying changes to income taxes, transfers or welfare for low-income households would be a superior approach.
Malaysians would be more receptive to tax hikes if their purpose were more tangibly linked to spending for their benefit.
Public wariness remains high in the shadow of 1MDB and other newsworthy examples of funds being misused, with the government's fiscal challenges explicitly associated with corruption.
At the same time Malaysians want better schools and hospitals, greater access to safe and efficient transport and technology, more generous social welfare and more. Transparent and well communicated spending intentions are an essential enabler of tax reform.
The SST reforms have thus far been mapped poorly in these regards. Far from presenting a coherent vision for equitably, efficiently and sustainably raising revenue to spend in the interests of Malaysians, the reforms adopt a piecemeal and discriminatory approach to taxation.
Two particularly concerning elements that have attracted fair criticism are the inclusion of basic goods and differential rates for local and imported goods.
Malaysia is a net importer of food including many staple products, with openness to trade a critical contributor to food security both at the household and national levels.
SST increases that represent an implicit import tariff, especially on basic and healthy goods like fruit, send precisely the wrong signal at a time when Malaysia is trying to counter global economic policy uncertainty.
Malaysia must reinforce its openness to trade and investment by avoiding discriminatory taxes on overseas goods.
Bowing to public backlash to provide post-announcement tax exemptions for imported apples and oranges (among other changes) further illustrates the policy development and communication shortcomings.
Policymakers were either unaware of or misread public sensitivity on the price and availability of basic food imports, and in the absence of a compelling defence for the proposed SST increase were forced to make concessions.
Evident is both a need for wider consultation and that complex and subjective tax design leaves policymakers exposed.
Making the case for tax reform in Malaysia should also stick to message not mechanism. Long-running arguments comparing the SST with a restored GST are of greater distraction than consequence to the current debate.
Either mechanism can be tailored to achieve comparable coverage and revenue outcomes, and tax incidence (who ultimately pays: consumers or producers) is determined by markets not tax design.
Differences in administrative efficiency and effectiveness are important considerations that are adaptable to a consumption tax with either (or any) name.
What Malaysia needs from policymakers is greater tax policy reform coherence, communication and ambition. And the leadership to design and deliver tax strategies and mechanisms that benefit Malaysia and Malaysians. ‒ July 2, 2025
Dr Stewart Nixon is the deputy director of research at the Institute for Democracy and Economic Affairs (IDEAS).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
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