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Malaysia in transition

Malaysia to stop collecting goods and services tax on June 1

Mahathir had promised to abolish the levy before electoral victory

A Malaysian flag can be seen in Kuala Lumpur. (Photo by Takaki Kashiwabara)

KUALA LUMPUR -- Malaysia's Ministry of Finance on Wednesday said the goods and services tax will be reduced to zero percent on June 1.

New Prime Minister Mahathir Mohamad and the then opposition parties had promised to abolish the 6% tax while campaigning ahead of last week's big electoral upset.

The GST was introduced in April 2015 to offset a fall in oil revenue. It covers a wide range of goods and services. It became an election issue because some Malaysians blame it for raising the the cost of living.

The previous government, which introduced the tax, also recognized its negative impact and promised to increase annual cash handouts to low-income earners.

Since the election, the new government has said it might return to the previous sales and services tax, or SST, which affects a smaller range of purchases. The GST contributed 44.3 billion ringgit ($11 billion), or 18%, to government coffers in 2017.

In 2014, the SST accounted for 8% of total government revenue. 

Zeti Aziz, the former central bank governor who is now a government adviser, said the GST cutback could be mitigated by prioritizing spending measures and trimming waste. Mahathir also campaigned on reducing government expenses.

On Wednesday, the 92-year-old said Malaysia has about 17,000 civil servants who were appointed due to their political connections and that his government is looking for ways to reduce their numbers.

Malaysia is a net oil- and gas-exporting nation. As such, the rising price of oil could help to mitigate lost GST revenue. 

In an FX Research and Strategy report released on Tuesday, Maybank said the increase in oil prices could partially buffer GST revenue losses. 

Investment bank Natixis said repealing the GST and re-introducing fuel subsidies would cause the deficit to widen to 3.7% in 2018 from 3.1% last year. The then opposition also mentioned the possibility of bringing back fuel subsidies during the campaign.

While the ministry can reduce the GST, only parliament can abolish it, and the new government has yet to convene a parliamentary session.

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