In an attempt to fulfill his campaign promise, Malaysia Prime Minister Mahathir Mohamad on Thursday scrapped a 6% rate on Goods and Services tax (GST). Confirming the development, the Ministry of Finance said the tax rate will be set at zero percent from June 1 and businesses must comply with the ruling. Reportedly, the voters have urged the newly elected coalition government to scrap the draconian tax regime as it has increased the cost of living since it was imposed in 2015.

Notably, the world’s renowned company Moody’s Investors Service has warned the coalition for such move stating that it would cut the government income and will widen the budget deficit if not offset by other revenue-raising measures. Speaking to media, Sanjay Mathur an economist at Australia & New Zealand Banking Group Ltd in Singapore said, “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”.

According to Bloomberg data, the Malaysian government earned 43.8 billion ringgit ($11 billion) in revenue from GST in2017, 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% of gross domestic product last year.

A senior economist at Natixis Asia Ltd. Trinh Nguyen was of the view that this tax regime helped the country to grow when the oil prices were as low as $37 a barrel, “The GST was key to Malaysia during the worst period for the budget when oil had bottomed at $37 a barrel. But this sudden decision to remove the tax regime will be very positive for the consumer sector”.

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.

If one looks closely, India too imposed GST and borrowed the anti-profiteering clause from Malaysia to ensure that GST benefits are passed on to the end-consumer by the industry. Nevertheless, experts believe that India’s GST will not meet the same fate as Malaysia’s due to its unique structure and implementation. “Malaysia had an absurd situation of a single GST rate of 6% for all goods and services. That is not sustainable. A cycle and a BMW cannot be taxed at the same rate. That is why for India the different rates will work,” said Sumit Dutt Mazumder, former chairman of the Central Board of Excise and Customs. He added India has not borrowed anything from Malaysia, except the anti-profiteering clause.

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