Examine the economic implications of Malaysia's SST increase on the wallets of both consumers and businesses. Is it a boon or a burden?
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29 Mar 2024
6 Min Read
Afrina Arfa (Alumni Columnist)
Examine the economic implications of Malaysia's SST increase on the wallets of both consumers and businesses. Is it a boon or a burden?
Following its initial announcement in October 2023, the Malaysian government's decision to increase the Sales and Service Tax (SST) came into effect on March 1, 2024. With the intent of expanding the country's revenue base and stabilising its fiscal policy, the SST was raised from 6% to 8% across several industries, including logistics, finance, and leisure. While the government assured that affordability would be maintained amid the SST hike by sparing industries deemed necessary for the public, the move has been met with growing resistance and scepticism.
In the months preceding its implementation, widespread concern and advocacy for alternative taxation strategies emerged, fueled by fears of economic strain and negative consumer sentiment. Despite the hike being targeted solely at applicable industries deemed unlikely to burden the majority of its population, debates regarding its ripple effects persist. Many experts have highlighted the potential harm of the increase for consumers, particularly those in the lower and middle-income brackets, which could lead to adverse outcomes.
Conversely, supporters of the hike remain confident in its effectiveness, foreseeing long-term economic stability. With the increase having been in effect for only a few weeks, it is undoubtedly too early to assess its success. Nevertheless, this has not deterred experts from analysing, nor the public from questioning: Will the SST hike deliver the economic improvements pledged by the government, or will its adverse effects spread through our wallets like a contagion?
On September 1, 2018, Malaysia officially introduced the Sales and Services Tax (SST) to replace the former Goods and Services Tax (GST) with the aim of boosting the nation's purchasing power. The SST regime encompasses different tax rates based on the nature of goods and services, distinguishing between sales and service tax. Basic foodstuffs, building materials, petroleum oil, and other essentials incur a 5% rate, while luxury items or non-essentials incur a 10% rate. On the other hand, a 6% rate is applied to services such as car rentals, hotel services, domestic flights, and business consulting.
With the newly modified rate of 8% impacting several industries, the Treasury anticipates an additional RM3 billion in revenue. This influx of funds could help close the fiscal deficit and finance investments in better infrastructure and public services. Moreover, the elevated tax rates could incentivise businesses to pursue enhanced operational efficiency and innovation. This alignment with the increased cost of services could yield benefits for the economy at large.
While some industries are adapting to the changes, services such as food and beverages, telecommunications, parking, and logistics were exempted to mitigate the impact on middle and lower-income brackets. On the surface, the effects of the increase may seem like a mere drop in the ocean. However, in a nation where businesses and consumers are closely intertwined, even a small disturbance can create significant waves of impact.
In line with public expectations, services subjected to the 2% increase have experienced higher production costs, prompting some to pass these costs on to consumers through higher prices. Notably, consumers using services such as hotels, private clubs, golfing, maintenance or repair services, and other car rental services would witness price hikes. Although these increases are not predicted to be drastic, hotel prices are expected to rise by 10% to 30%, and the automotive industry may experience a decline in new car sales due to the increase in car prices. However, in exempted industries, some effects may be less noticeable.
In an era of globalisation that amplifies interconnectedness among economies and facilitates the flow of goods and services, the impact of the SST increase may extend even to exempted markets. A business's trade and production processes are intricately linked to various stages within its supply chain, including operational systems, financials, and inventory management. As the newly adjusted SST rate infiltrates different stages that may have initially been exempt, it triggers a cascading effect. This effect was observed in a random survey of supermarkets and Ramadan bazaars, revealing a rise in prices of some goods attributed to the higher SST on logistics services, which act as the lifeline of supply chains.
While the increase in SST may not be explicitly listed on receipts, the heightened prices are indeed concealed within the rise in utilities, rent, logistics, and other contributing costs. This could result in an outcome contradictory to the government's goal of achieving economic stability, as consumers face a decrease in purchasing power, paying more for goods that previously cost less. However, the escalation in prices of goods and services largely depends on traders and their discretion in passing costs on to consumers, leaving the fate of exempted industries uncertain.
While consumers may experience varying effects in exempted industries, businesses bearing the brunt of the burden are forced to navigate through turbulent waters. The cascading effect of the new and revised SST can increase the cost of operations at multiple stages, leading to a 'double counting' effect. A typical business engages multiple external service providers, each of which relies on others, all now facing increased tax burdens.
Throughout the value chain, businesses contend with higher production costs stemming from the SST increase, resulting in multiple layers of taxation. The deeper a business is positioned within the chain, the more pronounced the cumulative tax burden becomes. This scenario presents significant challenges for businesses as shrinking profit margins compel them to make difficult choices: either passing on costs to customers or risking competitiveness.
While larger companies with ample profit margins may scarcely feel the effects of the hike, small and medium-sized enterprises (SMEs), which constitute 97% of the Malaysian economy, are exceptionally vulnerable to the impact of the SST increase. Operating on narrower profit margins, they face the dilemma of absorbing the tax burden, thereby straining their financial viability, or transferring the burden to consumers.
In the short term, uncertainty surrounding future tax policies and their impact may foster cautious investment behaviour. However, experts argue that clear guidelines delineating taxable industries could pave the way for long-term reinvestment in the nation's economy.
With the new SST rate implemented less than a month ago, understanding its full impact and implications on the economy and its stakeholders remains challenging. While it may generate significant revenue for the government, providing an opportunity for reinvestment in infrastructure and public services, there is also a risk of triggering ripple effects that could erode the nation's purchasing power. Both exempt and non-exempt industries will undoubtedly experience price increases, with members of the public perceiving the invisible costs of SST as the primary drawback.
Nonetheless, the SST hike holds potential for success over time as the government continues to establish clear criteria for taxable industries and provides guidance to affected businesses. While the raising of taxes has always been a bitter pill to swallow, it is a necessary discomfort to initiate the healing process that could steer the nation toward fiscal stability and economic prosperity.
Afrina Arfa is a Bachelor of Finance and Economics (Honours) alumna of Taylor's University. She spends her time indulging in economic news, hoping to inspire others to think beyond the constraints of society.
