GST could fund Malaysia’s social protection floor, says economist

Calvin Cheng of the Institute of Strategic and International Studies says alternatives like relying on oil revenue or incremental tax changes are insufficient.

(FMT) – An economist today suggested that the goods and services tax (GST) could be a viable method for financing Malaysia’s social protection floor.

Calvin Cheng of the Institute of Strategic and International Studies described the GST as a “transparent, efficient and stable long-term revenue stream”.

He said alternatives to the tax, such as relying on oil revenue or implementing smaller piecemeal tax changes, would be insufficient for financing the country’s social protection system.

“Corporate taxes also cannot go up that much as Malaysia already has among the highest rates in a low-tax region,” he said at a roundtable discussion on creating fiscal space for the country’s social protection system.

Introduced in 2015 at a rate of 6% to replace the sales and service tax (SST), the GST faced significant backlash due to the perceived heavier tax burden on lower-income groups.

It was suspended on June 1, 2018, and abolished on Sept 1, 2018, with the SST reinstated instead.

Acknowledging that the GST is a regressive tax that affects lower-income groups more, Cheng nevertheless said all consumption taxes, including the current SST, share this characteristic.

He also said the regressive impact of the GST could be counterbalanced by using the increased revenue to fund more progressive benefits, such as the social protection floor itself.

“The solution is to use higher revenues (from the GST) to fund more progressive spending and to show the general public that this is being done transparently,” he said.

However, Cheng said Malaysia should still improve its tax and transfer system, as the GST alone will not solve inequality and meet the growing demands for public spending on essential services.

“GST will form the base of a broad-based and long-term revenue stream, but will not truly achieve the equality promoting impacts of progressive taxes on income and wealth,” he said.

Earlier in the discussion, Cheng said Malaysia urgently needs to invest in its social protection floor due to rising income and wealth disparities, as well as the lingering effects of the Covid-19 pandemic.

According to the International Labour Organization, a social protection system should ensure basic income security for everyone, including children, and provide access to necessities like nutrition, education and healthcare.

It should also guarantee a basic level of income security through various forms of support, such as pensions for the elderly and disabled, child benefits, and income support for the unemployed and working poor.