Malaysia Needs Tax Reform Including Reintroducing GST or VAT

Malaysia needs to implement tax reforms, including reintroducing the Goods and Services Tax (GST) or Value-Added Tax (VAT), according to the World Bank.

In its report titled Reducing Inequality and Strengthening Mobility in Malaysia, the World Bank stated that such measures would ensure a more efficient tax system and help reduce economic inequality among the population.

It added that these steps are expected to significantly increase long-term revenue through both direct and indirect taxation.

According to the World Bank, Malaysia’s indirect tax revenue is currently low, at just three percent of Gross Domestic Product (GDP), which is below the average for low-income countries (LIC).

Therefore, it emphasized that revenue collection could be increased in the short term through indirect taxation.

“Consideration should be given to reintroducing the Goods and Services Tax (GST) or Value-Added Tax (VAT), which is widely regarded as one of the most efficient tax systems in any country and can be implemented broadly and quickly.

“A simulation indicates that replacing the current Sales and Services Tax (SST) with GST at a base rate of 10 percent (the benchmark rate for the region), with minimal exemptions or preferential rates, could generate approximately one percent of GDP in additional revenue, with relatively small effects on inequality,” the World Bank report stated.

The report also noted that consumption taxes might be more progressive since untaxed informal spending is higher among low-income households.

Additionally, according to the World Bank, at least another one percent of GDP could be collected through increased personal income tax (PIT) revenue as a result of proposed tax reforms.

This would not only create additional fiscal space but also directly reduce inequality, as this tax is primarily paid by high-income earners while keeping the overall income tax burden at a reasonable level.

The World Bank report further stated that the tax burden on low-income households could be reduced through better-targeted financial assistance and the introduction of GST rebates.

This is because, while GST is neutral in terms of distribution, any increase in indirect taxes would still place a burden on poorer households.

“Better-targeted social assistance for households in the bottom 40 percent income group, along with the provision of tax rebates, could offset the impact of higher GST on poverty, have no adverse effect on inequality, and still generate additional fiscal savings equivalent to two percent of GDP,” the report stated.

The World Bank report also explained that tax reforms would help reduce inequality, as Malaysia’s current tax, transfer, and subsidy systems reduce cash-based inequality at the average rate of upper-middle-income countries.

However, it noted that when non-cash benefits such as healthcare and education are included, the impact is relatively small compared to other upper-middle-income nations.

The report concluded that removing fuel subsidies, reintroducing GST without exemptions, providing tax rebates to poor households, increasing social assistance spending to 1.5 percent of GDP with better targeting for the poorest groups, reforming PIT, and using additional revenues to enhance healthcare investments would improve Malaysia’s fiscal system in reducing inequality.

“This would elevate Malaysia’s fiscal system from the bottom half to the top half of countries in terms of inequality reduction,” it stated.