Govt's fiscal path remains on track

The Star

13-05-2025

KUALA LUMPUR: Malaysia's fiscal path this year remains on track, but timely execution of targeted fuel-subsidy reforms will be critical to offset short-term revenue shortfalls caused by delays in tax measures, BIMB Research says.
In a report, the research house noted that while the government's fiscal strategy continues to emphasise economic growth, fiscal responsibility and social welfare, delays in the expansion of the sales and service tax (SST) and the rollout of phase three of e-invoicing are expected to result in 'a minor headwind to ongoing fiscal consolidation efforts'.
'Together, these postponements could result in a total revenue shortfall of about RM2.5bil, equivalent to roughly 0.1% to 0.15% of gross domestic product (GDP),' it said.
Although this gap is modest, BIMB warned that 'it may put upward pressure on the fiscal deficit, particularly if not offset by other measures or expenditure controls'.
The SST expansion, which was expected to begin on May 1, has been delayed to June 1, while the third phase of the e-invoicing rollout – initially set for July – is now being pushed to next January.
The research house said the expanded SST was expected to raise RM5bil annually, while the full e-invoicing rollout could generate between RM3bil and RM4bil in additional tax revenue once fully adopted.
It said the revised SST would apply to more non-essential goods, including imported premium goods like salmon and avocados, and extend to more commercial services, with 5% for food and beverages, 8% for logistics, and 10% for other services.
The research firm said the third phase of e-invoicing, which targets medium-sized businesses, is seen as crucial, as it captures a broad swath of small and medium enterprises, where compliance gaps are most prevalent.
It said the SST expansion, which was expected to generate about RM700mil a month in additional revenue, would now contribute a month later than planned, resulting in a RM700mil shortfall.
Meanwhile, the research house estimated the deferment of e-invoicing for medium-sized businesses could cost the government an estimated RM1.8bil in tax revenue in the second half of the year (2H25).
However, BIMB Research highlighted that the government still has fiscal space if it proceeds with rationalising the subsidy for RON95 petrol, which 'remains a high-impact policy lever'.
'If implemented in 2H25, even a partial rationalisation could yield savings in the range of RM4bil to RM6bil for the year, depending on global oil prices and the targeted coverage,' it said.
It added that such savings could more than offset the RM2.5bil shortfall from the delayed SST and e-invoicing, while creating room for development spending or social support.
'Moreover, it would signal strong policy commitment to structural reforms, enhancing Malaysia's fiscal credibility and investor confidence amid heightened global economic uncertainty,' the research house said.
It added that Malaysia's fiscal outlook remains stable, supported by sustained growth in tax collection, new revenue measures such as the capital gains tax and digital tax, and the government's commitment to fiscal discipline.
'The slight delay in implementing the expanded SST and third phase of e-invoicing is not expected to significantly derail Malaysia's economic growth trajectory.
'Momentum continues to be underpinned by a recovery in private consumption and strengthening export performance.'
It also noted that the government's projected fiscal deficit of 3.8% of GDP for this year could widen slightly due to the delays, but could return to 3.85% with subsidy reforms in place.
Meanwhile, the research house expects the country's debt-to-GDP ratio to stabilise around 62% to 63%, below the 65% statutory ceiling.
'Overall, Malaysia's fiscal outlook for this year remains stable. Continued focus on policy execution and the careful sequencing of fiscal initiatives will be key to ensuring both economic resilience and fiscal sustainability in the medium term,' BIMB Research said.