FEBRUARY 19 — In a notable shift of policy designed to enhance its revenue foundations and guarantee fiscal durability, the Malaysian government has declared an imminent alteration to its service tax framework, set to commence in March 2024. This modification will witness the service tax rate rise from 6 per cent to 8 per cent across an extensive array of taxable services.

Crucially, this escalation exempts essential services, such as food and beverages, telecommunications, vehicle parking, and logistics, underscoring the government’s dedication to preserving the affordability and accessibility of fundamental necessities for its populace. The Treasury anticipates this policy adjustment will accrue an additional RM3 billion in revenue, a vital move towards rectifying fiscal deficits, elevating the quality of public services, and underpinning significant infrastructure endeavours.

Policymakers might contemplate the following three measures to alleviate any negative impacts and amplify the overall advantages of this policy change.

1. Implementation of a Graduated Tax Relief Program for SMEs

To ease the transition for small and medium enterprises (SMEs) affected by the service tax hike, the government could introduce a graduated tax relief program. This program would offer temporary tax reductions or credits to SMEs, scaled based on their annual revenue or profit margins. For instance, smaller businesses with tighter profit margins could receive more substantial tax relief, helping them adjust to the increased operational costs without significantly raising prices for consumers. This measure would not only alleviate the immediate financial pressure on SMEs but also encourage them to maintain or even expand their workforce, supporting employment and economic activity.

2. Enhanced Incentives for Innovation and Digital Transformation

Recognising the role of innovation and efficiency in mitigating the impact of increased service costs, the government should offer enhanced incentives for businesses that invest in digital transformation and innovative practices. These incentives could take the form of tax deductions, grants, or subsidised training programs for employees in digital skills and innovative service delivery models. By encouraging businesses to adopt modern technologies and innovate in their operations, this policy could help improve productivity and service quality, offsetting the cost increases resulting from the tax hike. Such a move would also align with Malaysia’s broader economic goals of becoming a more digitalised and innovation-driven economy.

3. Strengthening Consumer Protection and Price Monitoring Mechanisms

To protect consumers from potential price exploitation and ensure that the tax increase does not disproportionately affect the cost of living, the government should strengthen consumer protection and price monitoring mechanisms. This could involve setting up a dedicated watchdog to monitor service prices, particularly in sectors not exempt from the tax hike, to prevent unjustified price increases. Additionally, the government could enhance transparency and consumer awareness by requiring businesses to clearly distinguish between price adjustments due to the tax increase and those resulting from other factors. This measure would help maintain consumer trust and confidence, ensuring that the tax hike does not lead to a general increase in the cost of living.

In conclusion, the Malaysian government’s decision to raise the service tax rate from 6 per cent to 8 per cent represents a calculated move to bolster fiscal sustainability and fund essential national projects. While this policy is anticipated to generate an additional RM3 billion in revenue, contributing significantly to the reduction of fiscal deficits and the enhancement of public services and infrastructure, it also poses challenges and opportunities for the economy, businesses, and consumers alike. The potential for increased government revenue and alignment with global tax standards suggests a positive outlook for Malaysia’s economic stability and growth.

However, the anticipated rise in service costs and the possible impact on consumer expenditure and small and medium enterprises (SMEs) necessitate careful consideration and strategic policy interventions. By implementing supportive measures such as a graduated tax relief program for SMEs, enhanced incentives for innovation and digital transformation, and strengthening consumer protection and price monitoring mechanisms, the government can mitigate adverse effects and maximise the benefits of this tax reform. These actions will not only facilitate a smoother transition for all stakeholders but also ensure that Malaysia’s economic landscape remains resilient, competitive, and inclusive in the face of this fiscal adjustment.

*The author is a Senior Lecturer at the Department of Economics, Faculty of Business and Economics, Universiti Malaya, and can be reached at ltgoh@um.edu.my

**This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.