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Malaysian election prompts tax policy rethink

Malaysian election prompts tax policy rethink

KPMG’s Merriden Varrall discusses Malaysia’s approach to tax policies following the election of former Prime Minister Mahathir Mohamed in May and the abolition of the unpopular goods and services tax (GST).

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Director, Geopolitics & Tax

KPMG Australia

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The unexpected result of the May election in Malaysia was at least partly to do with the Mahathir-led coalition promise to scrap the hugely unpopular goods and services tax (GST). Now the new government is going to have to do some creative thinking to make up the gap in government revenue.

The elections in May this year could be described as a ‘perfect storm’. The Barisan Nasional coalition had been in power in Malaysia since the country’s independence in 1957. However, despite this background, many Malaysian voters were becoming very dissatisfied with where their country was heading. The Party’s leader, Najib Razak was implicated in the massive IMDB corruption scandal. The Malaysian ringgit had depreciated nearly 20 percent against the US dollar since 2014. Living costs had risen, and wages were sticky. Added to this was the 6 percent GST implemented in 2015, which all together made for real anxiety and unhappiness among the Malaysian people.

Against this backdrop emerged former Prime Minister Mahathir Mohamed, coming out of retirement to head up a coalition opposition which promised real change. It was his symbolic appeal that provided the ‘x factor’ that pushed the loose coalition opposing Barisan Nasional over the line and into power.

One of the main platforms of Mahathir’s election campaign was to scrap the GST and reinstate the sales and services tax (SST) that it replaced. Since gaining office, he has made good on that promise, despite widespread views among the business community that it is not a policy that is in the best interests of the country.

The scrapping of the GST helped solve the problem of getting into power for Mahathir, but it has opened up a range of new challenges. According to Malaysian government figures, the projected revenue from the GST this year would have been around 40 billion Malaysian ringgit (around AUD 13.5 billion, or USD 9.6 billion). In 2014, before the GST replaced it, the SST brought in just under 20 billion Malaysian ringgit. Even allowing for changes over the past few years, it is unlikely the SST will be able to provide the government with more than 20 billion ringgit.

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This article was written in consultation with Mr Tai Laikok, Partner, Corporate Tax, KPMG Malaysia.

 

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