Removing GST is 'credit negative' for Malaysia: Moody's

Removing GST is 'credit negative' for Malaysia: Moody's

Malaysia stocks
Investors watch trading boards at a private stock market gallery in Kuala Lumpur, Malaysia on May 14, 2018. (Photo: AP/Vincent Thian

KUALA LUMPUR: Malaysia's planned removal of a goods and services tax (GST) will be "credit negative" unless its new government takes steps to offset the loss in revenue, Moody's Investors Service said on Tuesday (May 22).

Unless there are offsetting measures over the next one to two years, "the GST's removal will have a net negative effect on government revenue, even accounting for some budgetary cushion from higher oil prices," the agency said in a report analysing the new government's plan to eliminate the tax.

In April, Moody's reiterated its A3 rating with a stable outlook for the country, giving it good scores for the country's economic and institutional strength, but moderate scores for its fiscal strength and susceptibility to event risk.

Elections on May 9 produced a new government led by Mahathir Mohamad. In its first week, it announced that the broad-based GST, which is 6 per cent, would be "zero-rated" from Jun 1.

On May 17, the Finance Ministry said the shortfall in revenue stemming for the ending of GST would be supported by measures to be announced soon, including reinstating the sales and services tax (SST) that was replaced by GST in 2015. The ministry did not give a timeline.

Moody's said on Tuesday that proposing a new SST Act will wait for the next parliament sitting, expected at the end of June or early July.

In 2017, GST revenue was RM44.3 billion, or 3.3 per cent of gross domestic product (GDP).

"Assuming a stable share relative to GDP, and taking into account seasonal patterns, we estimate that the revenue loss from the voiding of the GST at around 1.9 per cent of GDP this year," Moody's said.

The agency said if the SST takes effect in July, revenue loss would narrow to 1 per cent of GDP for this year, which will be mitigated by higher oil prices.

"However, higher oil prices are not a permanent substitute for the GST, and are not a reliable offset to lost revenue given the volatility of prices," the agency said, adding that the GST had reduced Malaysia's reliance on oil-related revenue.

Brent crude oil, which was at US$78.50 per barrel on May 18, was well above the price assumption of US$52 per barrel in the government’s 2018 budget.

Assuming oil prices average US$70 this year, oil revenue gains will be about 0.4 per cent of GDP, bringing net revenue losses to 0.6 per cent of GDP.

"Beyond 2018, the reintroduction of the SST will create a revenue shortfall of 1.7 per cent of GDP if the GST remains at zero," Moody's said.

According to the government, the rationale for eliminating the GST is that it will ultimately boost private consumption and economic growth, adding to the tax coffers through improvements in corporate and motor vehicle taxes and excise and import duties.

"We do not include these effects in our assumptions because we do not expect a sizeable multiplier effect," said Moody’s.

Source: Reuters/Bernama/ec(aj)