Kuala Lumpur. Malaysia's new government on Wednesday (16/05) said it would reduce a goods and services tax, or GST, to zero from June 1, effectively abolishing it, a move that is likely to spur spending in the Southeast Asian nation but put pressure on its fiscal position.
Prime Minister Mahathir Mohamad, who won last week's general election, had vowed during the campaign to get rid of the 6 percent GST to address the rising cost of living. Ousted leader Najib Razak had introduced the tax in 2015 amid lower oil prices.
GST would be zero-rated from June 1, the Ministry of Finance said in a statement on Wednesday.
Mahathir had also promised to reintroduce fuel subsidies, which along with the GST removal, could widen Malaysia's fiscal deficit.
Ratings agency Moody's said that the removal of GST without any offsetting measures would be credit negative.
"While revenue losses this year will be offset to some degree by higher oil prices, this is unlikely to be structural or act as a permanent substitute for GST itself," said Anushka Shah, sovereign risk analyst at Moody's.
"The extent to which offsetting measures, if any, will help recover the revenue loss from GST will allow us to determine the exact impact on the fiscal position going forward."
Najib's government had planned to collect 43.8 billion ringgit ($11.05 billion) in 2018 in GST, about 18 percent of total revenue.
Zeti Akhthar Aziz, a senior adviser to the government, said on Tuesday Malaysia would be able to reduce the fiscal deficit by controlling expenditure in the absence of GST.
Zeti, a former long-serving central bank governor, said the government would re-prioritize projects, increase efficiency and reduce wastage in the public sector.