Malaysian Prime Minister Najib Razak announced plans today to impose a 6 per cent goods and services tax by 2015 to boost revenue and stem rising government debt.
Najib said fuel and other subsidies will also be slashed as part of fiscal reforms, while personal and corporate tax will be lowered to make the economy more competitive.
Tabling the 2014 budget in Parliament, he said the broad goods and services tax will replace the current sales and services tax from April 1, 2015. He said the rate is among the lowest in the region and that essential food items, education, housing, public transportation and healthcare will be excluded.
"The GST is not a new additional tax. Our inflation rate is low at 2 per cent. We are convinced that this is the best time to implement the GST because inflation is low and under control," said Najib, who is also finance minister.
Malaysia's economy has come under pressure amid rising domestic debt, a swollen fiscal deficit and a shrinking current account surplus. The central bank cut the country's growth forecast this year to 4.5-5 per cent, while Fitch Ratings lowered Malaysia's credit rating outlook to negative from stable, citing a lack of fiscal reforms.
Standard and Poor's has also warned of a credit ratings downgrade for Malaysia if it fails to tighten its public finances.
Analysts hailed the government's move to implement aggressive fiscal reforms.
"This will translate into a positive message to investors, which is a major policy change that they have been waiting for," said Wan Suhaimi Saidie, economist with Kenanga Investment Bank.
Opposition lawmakers, however, said the government has consistently overspent its budget for the past 15 years and the move to cut subsidies and raise tax revenue wasn't match by tightening its purse strings.
"The subsidy cuts aren't going toward reducing our debt or deficit, instead it is just providing more funds for the government to go shopping," said lawmaker Tony Pua.
