Reintroduce Gst As Part Of Tax Reforms World Bank Suggests

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Malaysia should reinstate the goods and services tax (GST) as part of tax reforms to raise additional revenues and reduce inequality, according to the World Bank.
Its latest report “A Fresh Take on Reducing Inequality and Enhancing Mobility in Malaysia” stated that the country needs to raise more revenues through both direct and indirect taxes.
“Consideration should be given to the reintroduction of the GST, since it is widely regarded as one of the most efficient taxes in a country’s toolkit and can be implemented widely and swiftly,” said the global lender.
“Malaysia’s (public) revenues lag (behind) not only the revenues of upper middle-income countries and high-income country peers but also the low middle-income country average.
“The biggest consequence of low revenues is to limit what the country can spend,” read the report, which was developed in collaboration with the Economy Ministry and Statistics Department.
The World Bank said international data suggest that there is a relatively fixed cost of running a government, with total spending apart from that on health, education and social protection relatively fixed as a percentage of gross domestic product (GDP) across all income levels.
“This means that as new revenues are raised, fiscal space is created for greater social spending,” it added.
According to the World Bank, income inequality in Malaysia trended down between 1970 and 2022, but the decline has stalled in recent years.
Inequality, as measured by the Gini index, fell from 45 in 2004 to 40 by 2014. It remained at that level through 2019 - before the Covid-19 pandemic - and declined slightly to 39, according to the most recent data from 2022.
“While this is not insignificant, Malaysia’s Gini remains higher than that seen for the advanced economies that it wishes to emulate,” the World Bank said.
Progressive income tax
The Bretton Woods institution said the personal income tax (PIT) could be made more progressive and tackle inequality at the top of the income distribution.
It said that Malaysia’s heavy reliance on direct taxation is progressive, but capital incomes are not taxed, and direct taxation through the PIT is low at less than 3percent of GDP.
Estimates from Malaysia’s PIT Policy Microsimulation Model suggest that lowering the taxable income thresholds and applying higher rates at the upper income brackets could increase PIT revenue by up to RM2.5 billion-RM2.8 billion in 2024, while imposing a cap on relief could add up to at least another RM1.1 billion.
In addition, at least an extra 1 percent of GDP could be raised from increased PIT collection from the specific reforms outlined, which would not only create additional fiscal space but would also reduce inequality directly by richer households mostly paying it, while keeping the overall income tax burden reasonable, it said.
Increase public spending
The World Bank said as new revenues are raised, fiscal space is created for greater social spending.
It also noted that Malaysia needs to increase its public spending beyond the current level to achieve the high-income country goals by investing in capital and productivity, allowing wages to be improved.
“Malaysia is expected to become a high-income country by 2028-2030. However, less than half of its people are projected to have incomes above the high-income country cut-off because incomes are unevenly distributed
“In 2022, almost two-thirds of the population earned less than the high-income cut-off,” according to the report.
The World Bank report also showed that even after achieving high-income status, Malaysia would still have a long way to catch up with more advanced economies.
“Like other economies in East Asia and Pacific, Malaysia faces the challenges of deglobalisation and changing regional trade patterns, rapid population ageing, and climate change,” it noted.
- Bernama

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