KUALA LUMPUR (May 22): Malaysia’s plan to remove the goods and services tax (GST) would be credit negative as it would increase the government’s reliance on oil-related revenue, as well as narrow the tax base which would strain fiscal strength, said Moody’s Investors Service today.

Last Wednesday, the Ministry of Finance announced that the 6% GST would be void from June 1, and indicated it would reintroduce the sales and services tax (SST) that was in place before the introduction of GST in 2015.

“Most likely, legal formalities including the repeal of the GST Act and proposing a new SST Act will wait for the next Parliament sitting, which we expect at the end of June or early July,” Moody’s said in a note to clients today.

According to the credit rating agency, unless the government introduces other offsetting measures at least over the next one to two years, the GST’s removal will have a net negative effect on government revenue, even accounting for some budgetary cushion from higher oil prices.

“Assuming a stable share relative to gross domestic product (GDP), and taking into account seasonal patterns, we estimate that the revenue loss from the voiding of the GST at around 1.9% of GDP this year,” said Anushka Shah, a Moody's vice president and senior analyst.

In 2017, GST revenue was MYR44.3 billion ($11.2 billion), or 3.3% of GDP.

Similarly, Shah said if the SST, which yielded revenue of around 1.6% of GDP before the GST replaced it, takes effect in July, the revenue loss would narrow to 1.0% of GDP for this year.

While these losses can be mitigated by higher oil prices, they are however not a permanent substitute for the GST, and are not a reliable offset to lost revenue given the volatility of prices.

“Indeed, the introduction of the GST in 2015 sought to reduce Malaysia’s reliance on oil-related revenue, which it successfully achieved,” she said.

Furthermore, beyond 2018, the reintroduction of the SST will create a revenue shortfall of 1.7% of GDP if the GST remains at zero.

“According to the government, the rationale for eliminating the GST is that it will ultimately boost private consumption and economic growth, adding to the tax coffers through improvements in corporate and motor vehicle taxes and excise and import duties. We do not include these effects in our assumptions because we do not expect a sizable multiplier effect,” said Shah.