“TO tax or not to tax?” Prime Minister Datuk Seri Anwar Ibrahim borrowed this phrase, inspired by Shakespeare’s Hamlet, to describe the difficult decision his government is now facing.
The question is simple but serious: How should Malaysia reform its tax system without hurting the people or its political standing?
Experts agree that reform is needed. But the challenge lies in finding a way that is fair, sustainable and acceptable to the public.
What is our current tax system?
Malaysia’s tax system relies mainly on two streams: income tax and the Sales and Services Tax (SST).
Income tax is collected from individuals and companies based on their earnings. Companies pay a standard 24 per cent rate. Individuals pay a tiered rate that increases up to 30 per cent for those with an annual income above RM2 million.
SST is a consumption tax. Sales tax, usually 5 to 10 per cent, is applied at the manufacturing or import level. Service tax, at 6 per cent, is applied to selected services such as restaurants, hotels and professional services.
There are some weaknesses in this system. Only about 15 to 18 per cent of working Malaysians pay income tax, mainly because many earn below the taxable threshold.
This means the government depends heavily on a smaller group of high-income earners and businesses.
SST, on the other hand, does not generate as much revenue as the GST did. It is also easier to avoid because it only applies to one level of the supply chain. In contrast, GST taxed value added at every stage, which reduced leakage.
The result is a tax system that is not broad enough. Malaysia collects less tax relative to the size of its economy compared to other countries. We also still rely too much on oil and gas revenue, which is unstable and influenced by global prices.
GST: What happened?
GST was introduced in 2015 during Najib Razak’s administration. It was a multi-stage tax of 6 per cent applied at every level of production and distribution.
Businesses could claim tax credits, which helped improve transparency and accountability.
It collected more revenue than SST. In some years, GST brought in over RM40 billion, compared to around RM28 billion from SST.
But GST was politically unpopular. Many Malaysians believed it caused prices to rise and worsened the cost of living.
Despite efforts to zero-rate basic items, the perception remained that GST was hurting the average person while benefiting the government.
At the same time, trust in public institutions was low due to political scandals. The rakyat did not believe that the money collected was being used wisely.
This combination made GST a major election issue in 2018 and contributed to Barisan Nasional’s defeat.
The return of SST
After Pakatan Harapan won GE14, they fulfilled their campaign promise by abolishing GST and bringing back SST. The move was initially welcomed by many Malaysians who were struggling with rising costs.
However, over time it became clear that SST had its flaws. It collected less money and was less efficient. It also did not help much in lowering prices.
Government revenue dropped, which limited spending on development and public services.
Now, the government is considering expanding SST to cover more goods and services. This is being done to improve tax collection, but the move has triggered strong reactions.
A political risk?
Recently, civil society groups and business associations raised concerns that expanding SST could lead to political trouble. They argue that taxing more essential goods, like imported fruits and daily-use items, could hurt the middle and lower-income groups.
Some even warned that this could become the government’s “undoing”, just like how GST contributed to the fall of Barisan Nasional.
Six business groups jointly urged Putrajaya to delay the SST expansion, saying the timing is bad given the current economic challenges.
They worry that more taxes on goods and services could raise inflation, reduce consumer spending and create uncertainty for small businesses.
Consumer groups have also spoken out. They are concerned that expanding SST may increase the cost of living without giving people any extra support.
If the people begin to feel that the MADANI government is going back on its promises or adding to their burdens, public trust could erode. This is a serious risk, especially since Anwar’s coalition campaigned against GST in 2018.
Which system is better?
Most economists still believe that GST is more effective. It has fewer loopholes, a broader base, and more transparency. It also brings in more revenue, which the government badly needs.
However, GST is not politically easy to implement. Its failure in the past shows that even a good tax system can fall apart if not introduced with care and fairness.
The SST expansion now being considered is also risky. It may not raise enough money to close the revenue gap, but it could still make life harder for ordinary Malaysians. That would be the worst of both worlds.
What can be done?
If Malaysia is to move forward with tax reform, a few key steps must be taken.
First, protect the rakyat. Any tax changes must come with safeguards. Essential goods should be zero-rated. Targeted cash aid should be increased for B40 and M40 households. The aim must be to reduce inequality, not worsen it.
Second, build trust. The government must show clearly how tax revenue will be used. People are more willing to pay if they see better schools, hospitals, roads and safety nets in return.
Third, communicate clearly. One of the main problems with GST in the past was poor communication. People did not understand how it worked, which created confusion and anger. This mistake should not be repeated.
Fourth, implement gradually. Big changes should not happen overnight. If GST is to return, it should be phased in slowly with proper consultation and education.
The way forward
For Prime Minister Anwar, the decision is not just economic but also political. Bringing back GST or expanding SST carries real risks. But avoiding reform is not a solution either.
Malaysia needs more stable revenue to invest in its future, reduce debt and support the rakyat. Whatever form the tax system takes, it must be fair, efficient and trusted by the people.
“To tax or not to tax” is no longer just a question of policy. It is a test of leadership, credibility and political courage.
The views expressed here are those of the writer and do not necessarily represent the views of Sarawak Tribune. The writer can be reached at nazmixsuhaimi@gmail.com.
