KUALA LUMPUR (April 30): Malaysian households may end up paying more tax over the medium term if a consumption tax as mulled by the government is implemented, said Fitch Solutions.

In the Fitch Solutions Country Risk and Industry Research outlook for Malaysia released yesterday, the firm cited that in March 2021, it was reported that the Ministry of Finance (MoF) was studying the possibility of a consumption tax to be introduced once the economy has recovered as a way to widen the revenue base.

“This suggestion would ultimately see Malaysian households pay more tax over the medium term.

“These are the first announcements by the government to reduce the tax deficit and we highlight them, and any future plans, as a clear risk to disposable incomes of households over the medium term,” it said.

The firm said real household spending in Malaysia will begin its recovery over 2021, growing by a projected 3% year-on-year (y-o-y) from its previous forecast of 11% y-o-y.

"We estimate that household spending contracted by 4.3% over 2020," it said.

Fitch Solutions said Malaysian households had been supported by the government, partially shielding them from the worst of the economic impact.

However, it said fiscal constraints will mean that not as much support can be provided over 2021 and this is a risk should infections increase again and restrictions are required.

“While we still hold a positive outlook for Malaysian consumers in 2021, we have revised down our consumer spending forecasts for the year as a result of surging [Covid-19] cases and the reimplementation of stricter restrictions on movement and non-essential retail,” said the Fitch group unit.

According to the note, total household spending in nominal terms will be worth RM922 billion in 2021, slightly lower than the RM932.9 billion estimated for the pre-Covid-19 environment in 2019.

Fitch Solutions noted the recovery in consumer spending will rely on the ability of the government to vaccinate enough of the population, so as to allow gradual easing of movement restrictions.

“However, Malaysian authorities have so far been slow to administer doses. As of April 25, 2021, Malaysia had only administered four vaccine doses per 100 people,” it said.

Meanwhile, it said retail sales in Malaysia continued to post a y-o-y contraction as there was no significant relaxation of restrictions, impacting both consumers and retailers.

"We also note that continued restrictions on inter-district and interstate travel within the Klang Valley (centred on Kuala Lumpur and includes adjoining cities and towns in Selangor), which accounts for approximately 60% of retail sales in the country, will delay this recovery.

"However, these restrictions continue to speed up the development of the country's e-commerce sector. The online retail sales index, which portrays e-commerce activity, surged to a record 23.1% growth y-o-y," it said.

Fitch Solutions said its forecasts take into account risks that are highly likely to play out in 2021, such as the easing of government support, a reduction in restrictions and the vaccine roll-out.

"However, there are risks to the outlook that if they do start to play out will lead to forecast revisions," it said.