KUALA LUMPUR, Oct 14 — The Malaysian government will be able to increase its revenue for the country’s spending without bringing back the Goods and Services Tax (GST), by opting to instead hike the service tax to 8 per cent under Budget 2024, tax advisory firms have said.

But the tax consultancy firms also cautioned that the increased service tax rate may result in higher costs for both consumers and businesses.

Yesterday, Prime Minister Datuk Seri Anwar Ibrahim in his Budget 2024 speech said the government will expand service tax to cover logistics, brokerage, underwriting and karaoke, and will increase the service tax rate to 8 per cent, but will maintain the 6 per cent rate for services such as food and beverages and telecommunications. Service tax rate at 6 per cent would also be imposed for parking and logistics, the Finance Ministry had said.

Deloitte Malaysia’s country tax leader Sim Kwang Gek said the service tax rate hike to 8 per cent and widened coverage of taxable services under this tax would broaden Malaysia’s tax base.

"This is expected to generate an additional service tax revenue of RM900 million in 2024,” she said in a statement last night.

"The immediate impact on businesses would be rising costs of doing business as the service tax increase will be passed on to consumers and businesses at the end of the day.

"As we all know, the sales and service tax regime has a ‘tax on tax’ effect and will result in higher prices. To cushion this, it is hoped that the government will expand the Business-to-Business Exemptions that is currently applicable to certain prescribed taxable services,” she added.

One of the Malaysian government’s sources of funding or revenue for its RM393.8 billion overall Budget 2024 is indirect tax (comprising 19.1 per cent of RM307.6 billion revenue).

Indirect tax includes taxes such as sales tax and service tax, with Deloitte also including the planned luxury goods tax, planned higher excise duty on sugary drinks, reductions in entertainment tax and tightened control on alcohol and cigarettes’ smuggling under this section.

Tan Eng Yew, Deloitte Malaysia’s indirect tax leader, commented on Budget 2024’s indirect tax measures by saying: "We continue to see adjustments made to plug leakages and enhance indirect tax collection.

"However, we are concerned that increasing the service tax rate and expanding the scope may increase the cost to businesses and impact prices down the supply chain. Thus, we anticipate the government would adopt further indirect tax reforms to increase compliance and widen the tax base,” he also said in Deloitte Malaysia’s Budget 2024 analysis released today.

At the same time, Deloitte Malaysia’s global employer services leader Ang Weina commented on Budget 2024’s proposed extension for income tax reliefs for Malaysians and extensions of tax exemptions and incentives that they may enjoy.

"Working taxpayers will be relieved that there was no increase in personal income tax rates this time around. Instead, the period applicable for some of the existing personal income tax reliefs were proposed to be extended; and others had a further increase in the amount claimable.

"It is also gratifying to see the Budget proposing tax reliefs to promote healthy living and continuous learning through upskilling and self enhancement,” she said in the same analysis booklet.

PwC Malaysia’s tax leader Jagdev Singh said the service tax rate hike seems to be a temporary measure in the absence of a GST-like broad-based consumption tax.

"The announcement to increase the Service Tax rate from 6 per cent to 8 per cent appears to be a stopgap measure until the government is ready to implement a broad-based consumption tax in the form of the Goods and Services Tax or GST,” he said in a statement last night on Budget 2024.

"Although the strategy to maintain the rate of Service Tax for Food & Beverage and Telecommunications services is prudent as these are consumed by the masses, some of the other services consumed by businesses will result in an increase in the cost of doing business.

"Also, expanding the Service Tax to cover logistics services will have a cascading effect on costs, and businesses will seek to pass these on to consumers in the form of increase in prices of goods and services,” he said.

At the same time, Jagdev said the proposed Budget 2024 contains measures that would help ensure Malaysians’ welfare.

"For the rakyat, it is no surprise that there are no further personal tax rate reductions, given the tax cuts already announced in the Re-tabled Budget 2023.

"However, Budget 2024 continues the emphasis of its predecessors in ensuring that the Rakyat are taken care of, and there are targeted measures in Budget 2024, particularly in increasing and expanding the scope of relief for medical and lifestyle expenses to drive certain behaviours,” he said.

Farah Rosley, Malaysia Tax Leader at Ernst & Young Tax Consultants Sdn Bhd, last night said it was expected that the Malaysian government would not revive GST in the Budget for next year.

"As widely expected, Goods and Service Tax was not reintroduced in Budget 2024. Instead, various measures will be introduced to expand the nation’s tax revenue base,” she said, citing these measures as including the service tax hike to 8 per cent, the implementation of capital gains tax (CGT) on unlisted shares from March next year, and plans to roll out a luxury goods tax at 5 to 10 per cent.

As a whole, she said the government’s Budget 2024 with its largest-ever allocation of RM393.8 billion aims at striking a delicate balance between stimulating economic growth and fostering an inclusive and equitable society, and also shows commitment to boosting investment and improving the public’s welfare.

Among other things, she noted the government’s plans to replace blanket subsidies with targeted cash aid for the lower-income group.

"Overall, the second Madani Budget introduces tough and bold fiscal reform measures while enhancing Malaysia’s appeal to investors through targeted incentives. The Budget also prioritises the welfare of the rakyat, especially lower-income groups and vulnerable segments of society, by providing necessary support to counter the escalating cost of living,” she said.

Deputy Minister of Investment, Trade and Industry Liew Chin Tong last night applauded Prime Minister Datuk Seri Anwar Ibrahim for resisting the call to reimpose the GST, saying that this was a "wise decision” as GST would result in consumers spending less and more cautiously and as Malaysia’s economy significantly depends on domestic consumption.

Liew cited the Fiscal Outlook and Federal Government Revenue Estimates 2024 which stated that a consumption tax is generally regressive and may burden low-income households as they spend a bigger proportion of their income on consumption as compared to higher income households.

Saying that the government needs to collect taxes and with the government acknowledging that there is a need to expand the tax base, Liew said the government has decided to take five measures, namely hiking the services tax rate, introducing a reiteration of the previously-announced CGT, implementing e-invoicing and introducing a tax identification number (TIN).