GST will enhance competitiveness

Reimplementation of the consumption-based tax will enable the federal govt to lessen its dependence on direct tax collection

By S BIRRUNTHA / Pic by TMR FILEPIX

THE reimplementation of the Goods and Services Tax (GST) regime has the potential to make Malaysia an attractive investment destination, according to Affin Hwang Capital chief economist Alan Tan.

He said the reimplementation of the consumption-based tax would enable the federal government to lessen its dependence on direct tax collection, thus giving the flexibility to reduce corporate tax and personal income tax.

Tan added that Putrajaya may reintroduce the GST at a rate of lower than 6% in Budget 2022, and possibly roll out the tax regime in 2023.

He, however, stressed the reimplementation should be studied carefully to ensure it is not burdensome on the public.

“We do not expect GST to be reimposed at an immediate rate. It may take two to three years for the government to reimplement, as many aspects need to be looked at first.

“A reduction of the corporate tax rate will make Malaysia more competitive in the region and help attract investment to the country,” he said in a virtual media briefing of 2021 Malaysia Economic Outlook and Construction Sector by Affin Hwang Capital yesterday.

Tan opined that it is better for the government to reimpose GST at a lower rate as it will be accepted by many and improve the previous implementation in terms of setting the suitable ceiling level for businesses to register and return GST payments.

“What I want to say is that, once GST is implemented again, the government will be less dependent on direct taxes.

“By shifting the focus from direct taxes to indirect taxes, this enables the government to have the flexibility to reduce corporate taxes,” he noted.

Tan said the country remains an attractive investment destination for foreign investors supported by good infrastructure and human capital.

He added that despite a challenging backdrop in 2020, Malaysia continued to attract foreign direct investments (FDIs) as data showed in the first nine months of 2020 (9M20), approved FDI’s amounted to RM43 billion compared to RM65.4 billion in 9M19.

“We believe that as soon as the economic development stabilises, the upward trend in private investment growth will recover, especially when business sentiment improves in a relatively low interest-rate environment,” he noted.

Tan expects Bank Negara Malaysia (BNM) to hold its Overnight Policy Rate (OPR) at the current level of 1.75% in 2021 and the current rate is supportive of economic growth.

“The decision on OPR direction will depend on the duration of enforcement of the Movement Control Order (MCO) 2.0 due to uncertainties surrounding the domestic Covid-19 situation, and the impact on the economy from containment measures.

“We believe BNM will likely adopt a wait-and-see approach before deciding on its next course of action. At the moment, we maintain our view that BNM will likely keep its OPR at 1.75% throughout 2021,” he said.

Tan believes that there is a possibility of further fiscal stimulus measures from the government, especially if the MCO gets extended beyond two weeks.

He said the country’s GDP growth is expected to hover around 5% in 2021 due to the second round of MCO, which began on Jan 13 and is scheduled to end on Feb 18.

Tan added that Affin Hwang Capital is looking at a base case assumption of 6% GDP growth in 2021, following the low base effect of a 5% GDP contraction in 2020.

He added that exports would also pick up due to the global recovery, especially from China.

Tan, however, said there are potential downside risks to growth, in the form of an unexpected delay in vaccine roll-out, ineffective containment, elevated number of vulnerable households and domestic political uncertainty.