Mahathir Mohamad, Malaysia’s prime minister, is displayed on a screen while speaking via a video link to the participants at the Wall Street Journal CEO Council in Tokyo. (Photographer: Akio Kon/Bloomberg)  

Malaysia Scraps 6% Consumption Tax to Meet Election Pledge

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(Bloomberg) -- Malaysia scrapped a 6 percent rate on the goods-and-services tax, fulfilling a campaign promise by Prime Minister Mahathir Mohamad that gave him an unexpected win in last week’s election.

The tax rate will be set at zero percent from June 1, the Ministry of Finance said in an emailed statement. All businesses must comply with the ruling, it said.

Mahathir’s coalition pledged to replace the tax -- which disgruntled voters blamed for their rising living costs since it was imposed in 2015 -- with a more modest sales-and-services levy. Economists and credit-ratings companies like Moody’s Investors Service have warned the move would cut government income and widen the budget deficit if not offset by other revenue-raising measures.

“It’s good and bad,” said Sanjay Mathur, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “If it’s just the GST, of course, the budget deficit will widen. But I’m hopeful that they will take compensating measures that will ease the pain.”

The government earned 43.8 billion ringgit ($11 billion) in revenue from GST last year, or 18.3 percent of tax income, making it the largest contributor after corporate tax receipts. That helped the ousted government of Najib Razak to steadily narrow the fiscal deficit over time to 3 percent of gross domestic product last year.

Moody’s said this week that Malaysia’s government debt of 50.8 percent of GDP is higher than the median for A-rated peers and without inflows from GST, would remain elevated and be negative for the credit rating. Fitch Ratings has raised similar risks.

“As the situation is still fluid, Fitch will continue to monitor and review the developments to ascertain the implications for Malaysia’s sovereign ratings,” Sagarika Chandra, Fitch’s sovereign analyst for Malaysia, said in an email after the GST announcement.

On the plus side, the move may help spur consumer spending and ease inflation in an economy that’s already booming. Oxford Economics said on Tuesday that the new government’s policies, which include scrapping GST, re-introducing fuel subsidies and raising minimum wages, will boost GDP by 0.2 to 0.4 percentage points.

Read More: Here’s How Scrapping Malaysian Consumption Tax Will Play Out

As a net energy exporter, Malaysia is also benefiting from rising oil prices, which may help to offset a drop in tax income. Oil is trading near $71 a barrel and with geopolitical tensions high, prices are set to remain elevated.

“The GST was key to Malaysia during the worst period” for the budget when oil had bottomed at $37 a barrel, said Trinh Nguyen, a senior economist at Natixis Asia Ltd. in Hong Kong. With the tax being repealed, Nguyen said she’s “not particularly concerned,” and it “will be very positive for the consumer sector.”

©2018 Bloomberg L.P.

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