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New service tax increase is rational, says analyst
Published on: Friday, March 15, 2024
By: Bernama
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New service tax increase is rational, says analyst
Records show that the country’s debt exceeded US$255.4 billion (RM1.22 trillion) at the end of December last year.
PETALING JAYA: On March 1, Malaysia’s service tax rose from 6% to 8%, sparking concerns about price increases during the 2024/2025 school term and Ramadan.

The Madani government, led by Prime Minister Anwar Ibrahim, assured that essential items like food, beverages, and telecommunications services would not be affected.

Universiti Utara Malaysia school of economics, finance and banking senior lecturer Nur Hafizah Ismail said, the rise in prices of some goods can be attributed to the higher service tax on logistics services, the lifeline of supply chains.

“However, the increase in prices of goods and services largely depends on traders and how they choose to pass on the logistics costs to consumers.

“In other words, it is up to the traders to decide the extent of the price increase or how much profit margin they want to achieve. This perception holds true in some cases as we observed,” she told Bernama.

Service tax to boost the government’s cash flow

To recap, the service tax is a tax charged and levied on taxable services provided by any taxable person in Malaysia in the course and furtherance of business.

The service tax, and the sales tax, were reintroduced by the government in 2018 after the 6% Goods and Services Tax (GST), which had been in effect since April 2015, was abolished.

The prime minister announced the increase in the service tax from 6% to 8% during the presentation of Budget 2024 last October, with the finance ministry projecting an additional revenue of RM3 billion to the country as a result of this 2% increase.

Nur Hafizah said the higher service tax can help boost the government’s cash flow and reduce reliance on other potentially unstable sources of income.

“This strategy can also help the government to cover its operational and development expenses without increasing its loans or debt,” she said.

She added development expenditure is crucial for the implementation of the country’s socio-economic agenda including improving the quality of services such as healthcare, transportation and communication, telecommunications, and education as well as social welfare programmes that directly benefit the people.

“The higher revenue will enable the government to provide more targeted financial assistance and subsidies to the people to address economic inequality,” she said.

Agreeing the government is making an effort to mitigate the impact of the service tax hike, Nur Hafizah said that the consumers must also play a role by controlling their spending.

“It cannot be denied the increase in the tax rate will impact consumers including reducing their purchasing power due to inflation. So, this is where consumers must spend their money wisely,” she said.

She also said the government should continuously monitor the service tax collection process to curb irregularities and leakages that can result in losses to the country.

“Enforcement of laws and tax-related audits need to be strengthened to avoid financial implications for the country.

“This is because the level of compliance and enforcement mechanisms are crucial factors that will help achieve the government’s goal of increasing tax revenue by RM3 billion through the new service tax rate,” she added.

Meanwhile, Universiti Kuala Lumpur Business School economic analyst Aimi Zulhazmi Rashid said he sees the service tax increase as rational.

“The increase is necessary to reduce (the federal) government debt. In the process of reducing the government deficit (due to debt burden), tax increases must be made with minimal impact on the people.

“Records show the country’s debt exceeded US$255.4 billion (RM1.22 trillion) at the end of last December,” he told Bernama.

He added the government is aware the service tax increase will affect the people but it is working to minimise that impact by implementing various initiatives including continuing the provision of cash assistance to the rakyat.

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