Combining GST and SST is not the answer

The Malaysian government's suggestion to combine the sales and service tax (SST) with the goods and services tax (GST) into one system has been dismissed as a poor solution. While the idea may appeal to policymakers who want flexibility, tax experts argue that the two taxes have fundamentally different structures and rarely combine to create a better tax system than either on its own.

GST is considered a more robust model, covering approximately 60% of goods and services and allowing businesses to claim input tax credits at each stage. This helps avoid the cascading effect that plagued the previous SST model. Malaysia's own records show that GST generated RM184.8 billion between 2015 and 2018, significantly outpacing SST's paltry RM44.7 billion in 2024, RM49.7 billion in 2025, and the projected RM54.7 billion in 2026.

Proponents of GST also argue that it can stimulate economic growth. Studies of previous GST implementations in Malaysia found average real GDP growth of 2% higher than before the tax was introduced, largely due to reduced input costs for businesses and stronger competitiveness in domestic manufacturing and exports. While the initial inflationary impact was significant, it proved short-lived and eventually settled at a low 0.11% in the years following GST implementation.

However, reintroducing GST at its original 6% rate would likely generate additional inflationary pressure. A lower rate of 2% to 4% is recommended to ease the initial shock while still providing significant benefits. At a 4% rate, government revenue would drop by roughly a third, but this could be offset by a RM15 billion increase in household spending, which would boost consumption, manufacturing, retail, and tax receipts.

The transition would take one to three years to fully materialize, but acting now is crucial to avoid delays and cumbersome management later on.