Why Malaysia has scrapped the GST that accounted for 18% of govt's revenue

In just a week after his unexpected win in the general election, Malaysia's new Prime Minister Mahathir Mohamad has fulfilled his poll promise by scrapping the goods-and-services (GST) tax in the country. He has now promised to replace the 6 per cent GST with a moderate sales-and-service tax. There will be zero per cent GST in the country from June 1 even though the tax regime contributed to over 18 per cent of the government's revenue in 2017. Mahathir had promised to get rid of the GST as several people in the country were unhappy over rising living costs. His poll promises include fuel subsidies to common people and raising minimum wages.

The government is hoping to ease the rising inflation with the GST cut, which would lead to a rise in consumer spending, and hence boost the economy. Malaysia is the fourth largest oil and natural energy producer in the Asia-Pacific region. Since the crude prices are trading at a new high of $79 a barrel, the Malaysian economy is set to benefit from the move. Zeti Akhthar Aziz, a senior adviser to the Malaysian government, said on Tuesday that Malaysia would be able to reduce the fiscal deficit by controlling expenditure in the absence of GST, reported Reuters.

However, the credit rating agencies, including Moody's and Fitch, have also warned of serious economic consequences, including the widening of the budget deficit and overall reduction in the government income. But the new dispensation in Malaysia is confident that with crude oil prices likely to remain high for quite some time, the government would be able to recover its economic jolts.

The GST was introduced by former prime minister Najib Razak in 2015 after crude oil prices touched an all-time low of $37 a barrel, contributing over $11 billion to the economy; it also helped to reduce the fiscal deficit to just 3 per cent. With 18 per cent of the revenue inflow, GST was the second largest contributor to the Southeast Asian nation's economy after corporate income tax, which stood at 32 per cent.