Expanded SST offers nation buffer in tough times, say economists

Economists say the expanded SST, which will take effect on July 1, will come in handy in times of global uncertainty.

PETALING JAYA: The expansion of the sales and service tax (SST), set to take effect next month, will strengthen the government’s fiscal buffer amid rising global uncertainty fuelled by wars, trade tensions, and shifting US policies.

Economists say the move could help reduce national debt, raise tax revenue, and create more fiscal space for spending on critical areas such as healthcare, education, and targeted assistance for lower-income households.

They also claim it is a safer and less costly option compared to reinstating the goods and services tax (GST), which would take time and effort to restart.

Malaysia University of Science and Technology’s Barjoyai Bardai said the SST expansion is not aimed at cost savings, but at boosting revenue to help narrow the country’s budget deficit.

Barjoyai Bardai.

“The government wants to collect more tax so that it can achieve the objective of reducing the deficit in the budget,” he said.

Barjoyai said the government expects SST collection to hit RM52 billion this year, a big jump from the RM29 billion collected in its first year, and even higher than GST’s peak of RM42 billion.

“If they can collect RM52 billion, then they can prove that SST is even better than GST. I believe SST can be developed into a better tax system than GST,” he said.

Barjoyai said the SST is generally more acceptable to the public as it does not affect consumers directly, with its primary targets being imports and manufacturing.

“So, people don’t feel they are being taxed—at least psychologically,” he said.

Yeah Kim Leng.

Sunway University’s Yeah Kim Leng pointed out that the country’s tax-to-GDP ratio presently hovers just above 12%, one of the lowest levels in decades.

He said the country can no longer depend on petroleum revenue or shrinking income taxes.

“We need to look for sustainable and stable revenue sources. Expanding the SST is a step in the right direction to gradually raise the revenue level so that we do not incur a higher deficit,” he said.

Yeah said the additional revenue is needed to cover the rising costs associated with an ageing population, low retirement savings, and the need to improve essential services, particularly healthcare and education.

“It involves some sacrifices, some short-term pain in exchange for future gains. The expanded SST is not overly burdensome. They are targeting only luxury items and goods and services that are not essential,” he said.

Afzanizam Abdul Rashid.

Bank Muamalat chief economist Afzanizam Abdul Rashid said the SST expansion fits into the broader goal of fiscal reform.

He said the service tax hike from 6% to 8% in March 2024 successfully raised SST revenue by 30.3% in the first quarter of 2025.

That, together with the rationalisation of diesel subsidies, allowed the government to trim its fiscal deficit from RM26.4 billion (5.7% of the GDP) in the first quarter of 2024 to RM21.9 billion (4.5%) in the same period this year, said Afzanizam.

“This has allowed the government to allocate more for Sumbangan Tunai Rahmah and Sumbangan Asas Rahmah, totalling RM13 billion for 2025, from RM10 billion in 2024.

“This is the evidence of how fiscal consolidation exercises can help the government create a fiscal space so that it can spend on improving the livelihood of the rakyat in the short term,” he said.

Afzanizam said that beyond cash handouts, the extra revenue could be channelled to improve productivity through better investment in education, health, infrastructure, and security.

The SST expansion, effective July 1, will broaden the tax base to cover more imported goods and services, while keeping essentials tax-free to minimise inflationary pressure.

Treasury secretary-general Johan Mahmood Merican said the expanded SST is expected to increase revenue by RM5 billion in 2025 and RM10 billion in 2026.