Moody's: Replacing GST with SST will impact govt revenue

PETALING JAYA: The abolishment of the Goods and Services Tax (GST) and the reinstatement of the Sales and Services Tax (SST) might translate into a 1% revenue loss of Malaysia's gross domestic product (GDP) assuming that the new tax system comes into effect in July, according to Moody's Investors Service.
"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% of GDP this year. We estimate that if the SST, which yielded revenue of around 1.6% of GDP before the GST replaced it, takes effect in July, the revenue loss would narrow to 1.0% of GDP for this year," the rating agency said in a report yesterday.
Moody's stressed that unless the government is able to cushion the revenue loss with offsetting measures in the next one to two years, the removal of GST may have a negative effect on revenue, despite crude oil revenue serving as a buffer.
On May 18, Brent crude oil prices trended at US$78.50 per barrel which was above Budget 2018 price assumption of US$52 (RM206). If oil prices average US$70 this year, revenue gain is projected to be at about 0.4% of GDP, bringing net revenue loss to 0.6% of GDP.
"However, higher oil prices are not a permanent substitute for GST, and are not a reliable offset to lost revenue given the volatility of prices," Moody's opined.
Beyond 2018, it said the reintroduction of the SST will create a revenue shortfall of 1.7% of GDP if the GST remains at zero.
Moody's reiterated that in the absence of other effective offsetting fiscal measures, the GST removal is credit negative for the sovereign because it increases the government's reliance on oil-related revenue and narrows the tax base, thus straining fiscal strength.
Adding that Malaysia's fiscal strength is already a drag to its credit profile, the rating agency said reforms on expenditure such as the reintroduction of fuel subsidies and savings from wastages and corruption of RM20 billion will play a role in the ultimate fiscal reform.
Malaysia's debt-to-GDP ratio stood at 50.7% as at end-2017.
Separately, Malaysian Rating Corp Bhd (MARC) said the gap between the amount of SST to be collected in the near future and the abolished GST would not be as large as expected due to the larger number of taxpayers.
It added that short-term measures to be undertaken to fill the revenue gap including reducing leakages and reprioritising projects when utilising its operating expenditure, as well as higher commodity prices (particularly from oil and oil-related products), could be the additional revenue streams.
MARC, which maintained its GDP growth forecast at 5.3%, expects the repealing of GST to be neutral on private consumption although there may be a temporary uplift in consumer sentiments, as the actual spending trend would depend on the impact of GST removal on general prices.