Revenue drawback with SST delay

The Star

30-04-2025

PETALING JAYA: The postponement of the expanded scope of the sales and service tax (SST) is expected to help safeguard economic stability at a time of heightened global uncertainty, say economists.
Nevertheless, they cautioned that the move is not without costs, as the delay in implementation could result in a short-term decline in government revenue.
UCSI University Malaysia finance associate professor and CME research fellow Dr Liew Chee Yoong pointed out the delay in rolling out a wider scope of SST will 'almost certainly' cause the country to miss at least 'a portion' of the additional RM5bil revenue target initially set for 2025.
Liew added that given the deferment will likely push the implementation to September or later, the government will lose roughly one-third of its potential taxable period.
'Assuming a steady rate of revenue collection, this would amount to a loss of about RM1.6bil to RM1.8bil,' he told StarBiz.
He said when positioned against the government's total projected revenue of RM339.71bil for 2025, the RM5bil expected from the expansion of the SST scope would have contributed about 1.47% of the total.
Consequently, the estimated shortfall of RM1.6bil to RM1.8bil corresponds to about 0.47% to 0.53% of total projected revenue.
'Though numerically small, this shortfall is significant in a context where Malaysia is aiming to reduce its fiscal deficit to 3.8% of gross domestic product (GDP) this year. Even minor setbacks in revenue can have disproportionate impacts on fiscal consolidation targets, making the delay fiscally meaningful,' Liew said.
The expansion of the SST scope was announced during the tabling of Budget 2025 last year by Prime Minister Datuk Seri Anwar Ibrahim.
Back then, Anwar said the sales tax will be imposed on non-essential items, including imported premium items like salmon and avocado.
Further, the service tax will be expanded to include business-to-business commercial transactions, particularly fee-based services, that were previously exempted.
On Monday, the Finance Ministry announced that the enforcement of the SST scope expansion, which was slated to take place on May 1, will be implemented at a later date.
The gazettement of the new tax changes, which was originally supposed to take place in the first quarter of this year, is now scheduled for June 1.
It was noted that nationwide engagements with industries to finalise the scope of the expansion and applicable tax rates have been completed.
Last November, the government said it expects to raise an extra RM5bil in revenue by enlarging the scope of the SST. Revenue was projected to hit RM51.7bil from the initiative, up from the forecast of RM46.7bil for 2025.
While Liew said the decision to delay the expansion of SST scope is 'justified and strategically sound', he also noted the move is not without costs, though the pros outweigh the cons at least in the short term.
'The delay protects domestic consumption, which is pivotal to economic recovery. It supports overall growth momentum and shields households from the rising cost of living.
'Furthermore, it aligns Malaysia's policy approach with other global economies that are favouring fiscal caution over aggressive revenue measures amidst a fragile recovery,' he said.
However, beyond the expected revenue loss, Liew also cautioned that there may be a reputational risk regarding the country's fiscal discipline, as delays may send mixed signals to investors and international credit rating agencies.
'Despite these drawbacks, safeguarding economic stability at a time of heightened global uncertainty is a more critical priority. Thus, the decision reflects a pragmatic balancing of risks where protecting the economy outweighs immediate revenue considerations,' he said.
Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Dr Mohd Afzanizam Abdul Rashid said the postponement of the SST scope expansion should be seen in the context of broader global developments.
Specifically, he stated the tariff shocks imposed by US President Donald Trump on April 2 present a challenging prospect, especially for the local manufacturing sector, where more than two-thirds operate in export-oriented industries.
'Already, we have seen major organisations such as the International Monetary Fund and World Bank revise down their global growth forecast including Malaysia's GDP growth this year,' Mohd Afzanizam said.
Hence, he is of the view that the deferment of the SST scope expansion reflects the government's pragmatic approach in enacting policy measures by constantly looking at the current economic trajectory in order to arrive at a realistic outcome.
Since the expansion of SST scope has been deferred, Mohd Afzanizam said the RON95 subsidy rationalisation plan is expected to go ahead as planned.
'If that is the case, then perhaps the government's fiscal deficit-to-GDP target of 3.8% for 2025 would not deviate much,' he said.
Meanwhile, Universiti Tunku Abdul Rahman economics professor Wong Chin Yoong said the brief delay in the enforcement of the SST scope expansion is unlikely to cause the government to miss its target of obtaining the additional RM5bil in revenue.
Wong opined the reason for the deferment is probably because the authorities and relevant ministries needed more time to fine tune the details of the SST scope expansion, rather than the uncertainties arising from the US' tariffs.
'If the delay was due to the latter, it would likely extend beyond a month, possibly until after the ongoing 90-day pause, allowing businesses to better assess the impact of the tariffs,' he said.
Wong said what is more important at this juncture is the implementation of e-invoicing to ensure the proper and effective rollout of the expanded SST scope.
The government has announced a six-month delay for the implementation of Phase 3 of e-invoicing earlier this year, pushing it to Jan 1, 2026, from the initially scheduled date of July 1, 2025.
'The SST scope expansion is not the only aspect that matters when it comes to revenue collection, but it is the e-invoicing system that matters the most,' said Wong.
He added that the enlarged scope includes fee-based commercial service provisions, which more often than not are not properly recorded as income revenue by the providers. This will end up becoming part of the informal economy.
'With e-invoicing, every such transaction will be invoiced and submitted to the Inland Revenue Board, enabling the government to better capture the corresponding tax revenues,' he said.
To this end, Liew said the country has several viable fiscal strategies to strengthen its financial position, in response to the revenue shortfall created by the delay in the SST scope expansion. One major approach is in enhancing tax compliance.
'The informal and shadow economy accounts for roughly 18% to 20% of Malaysia's GDP. Strengthened enforcement and digitisation initiatives like e-invoicing, could yield between RM3bil and RM5bil annually,' he said.
Other recommendations include the introduction of new taxes, public asset monetisation for one-off revenues and the potential reintroduction of a more targeted and progressive form of the Goods and Services Tax (GST-lite).
'Strategic divestments of non-essential government land or government-linked companies could result in one-off revenues of between RM5bil and RM10bil.
'Broader structural tax reforms like GST-lite could be deferred until the nation's economic recovery is firmly anchored, likely post-2026, to minimise shocks to household consumption and business investment,' Liew said.