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This article first appeared in The Edge Malaysia Weekly on July 23, 2018 - July 29, 2018

SINCE the Pakatan Harapan (PH) government took over Putrajaya in May, all eyes have been on how the new administration will facilitate the transition from the Goods and Services Tax (GST) to the Sales and Services Tax (SST).

More importantly, how will the SST, which was replaced by the GST previously, help to lower the cost of living of the rakyat?

Last week, Finance Minister Lim Guan Eng announced that the rates will be set at between 5% and 10% for sales, and 6% for services, when the SST is reintroduced on Sept 1 following a three-month tax holiday.

It is worth noting that the upcoming SST will only be imposed on 38% of the Consumer Price Index’s (CPI) basket of goods, compared with 60% under the GST.

Thanks to the zero-rated GST, Malaysia’s CPI, a gauge of inflation, decelerated to 0.8% year on year in June — the lowest level in 40 months.

Last year, CPI growth was higher at between 3% and 5% before it eased to below 3% in the first half this year.

So, will the reintroduction of SST, dubbed SST 2.0, in September fuel inflationary pressures like GST?

“No, at least not in the next 12 months,” say economists The Edge spoke to.

Dr Yeah Kim Leng, professor of economics at Sunway University Business School, opines that given the SST’s relatively smaller coverage of the CPI basket compared to the GST regime, it is likely to result in lower inflation.

He expects the CPI to hover around 1% or even lower from now until May next year, mainly due to the tax holiday between June and August this year, as well as the lower impact of SST on inflation compared with the GST.

But from June to September next year, prices are expected to normalise. For that reason, Yeah expects the CPI to accelerate to between 2% and 2.5% in 2019.

“All in all, the implementation of SST2.0 will not bring back high inflation. The impact of SST will be much smaller than GST’s” he says.

Technically, the cost of living should come down following the reintroduction of SST. Yeah, however, warns that some people from the higher-income group may not feel the impact because the cost of living varies according to lifestyle and location, as well as the demand for individual items.

Under SST2.0, the sales tax — applicable to selected manufactured and imported products — will have two different rates of 5% and 10%.

While a separate tax schedule will be released later for petroleum and petroleum products, specific provisions were not made for tobacco and liquo, on which sales tax rates of 25% and 20% had been imposed respectively under SST1.0.

This implies that the tax rate has not been finalised or that a standard-rated sales tax of 10% applies.

Yeah points out that the government now has the opportunity to transfer the tax burden from the lower-income to the higher-income group.

“The government could increase the tax rate on goods and services that are mainly consumed by the higher-income group, and reduce or even exempt tax on items mostly consumed by the lower-income group.”

He admits that SST is not an effective tool to transfer the tax burden, unlike GST, which has an automatic mechanism built into it as “the more you consume, the higher tax you have to pay”.

RHB Research Institute chief Asean economist Peck Boon Soon also highlights that SST’s coverage of the CPI basket is rather narrow compared with GST. Thus, its impact on the CPI is not likely to be significant.

“If we look at the impact of GST on the CPI, it was an additional 1%. But if my estimation is correct, the impact of SST to the CPI now should be lower than 1%.”

Following the zero-rating of GST this year, which resulted in a three-month tax holiday, Peck says the CPI is anticipated to decelerate to about 1% in the second half of 2018, compared with 1.7% in the first half of the year. For the full year, CPI growth is forecast to be between 1.4% and 1.5%.

As for 2019, excluding the impact of SST, CPI growth was initially estimated to accelerate to between 1.6% and 1.7%, says Peck.

“Including the impact of SST, I think we need to add another 0.6%. So, we are talking about (CPI growth of) 2.3% next year,” he says.

In a July 20 report, CIMB Research economists Michelle Chia and Lim Yee Ping retain their inflation forecast of 1.3% in 2018, which assumes the reintroduction of SST.

“Households are the clear winners in this trade-off, receiving additional disposable income through reduced tax collection,” they write.

The government is expected to collect RM21 billion per annum from the SST, lower than the RM44 billion per annum under the GST regime, leaving a shortfall of RM23 billion a year.

“Based on the tax revenue shortfall of over RM20 billion, suffice to say that SST is less burdensome than the GST, simply because households have RM20 billion more to spend. But like it or not, prices will go up in the long run,” says Peck.

CPI is not expected to head up. Does this mean the cost of living will come down, especially when the benchmark CPI, to many, does not reflect people’s expenditure?

For example, cigarettes were charged a tax rate of 6% under GST but now, a 10% sales tax is likely to be imposed. Likewise for car prices.

 

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