KUALA LUMPUR: It is Budget 2025 or never for the reintroduction of Goods and Services Tax (GST), analysts said, citing time needed for legislative approvals and for businesses to adapt before the election year begins.
The next general election is expected to be called by November 2027 at the latest.
"We still think GST is a solution to many of the government's fiscal problems. We estimate government debt to remain elevated at 62 per cent of gross domestic product (GDP) this year, close to the 65 per cent debt limit.
"With the Fiscal Responsibility Act passed last year explicitly stating that the debt-to-GDP ratio should not exceed 60 per cent in the medium term (three to five years), a strategy to ensure reliable and permanent revenue enhancement is needed," CGS International said in a note.
"As such, we think the main element for this budget is how the government addresses its fiscal constraints but also formulates a mitigating measure to minimise the impact on the lower-income group, regardless of what is announced," it said.
The firm put forward three scenarios for the Budget.
It is either the government reintroduce the GST, cut RON95 fuel subsidy; or enhance other taxes (such as Sales and Service Tax).
It said the first and second choice will allow for improved fiscal sustainability but unlikely both will come at the same time.
" Also, we believe the second option is less palatable politically. Meanwhile, we see the third option as akin to "kicking the can down the road", allowing the government to survive another year but not necessarily solving its problems.
"As such, we believe chances are high for a GST reintroduction helped by the drive for e-invoicing while there is still sufficient time to prepare for the tax before the general election needs to be called by Nov 2027," it added.
Meanwhile, CIMB Securities believes Budget 2025 presents a timely opportunity for a clear announcement about the future implementation of a GST regime, if the government plans to bring it back.
CIMB Securities Sdn Bhd (CIMB Securities) said should it happen, it could be reintroduced as early as the second half of 2025 (2H25).
The firm said reintroducing GST would allow the government to retain the option for rationalising RON95 subsidies, when logistic challenges and the Central Database Hub (PADU) database for targeted cash transfers are addressed
"Government officials have emphasised a preference for well-designed reforms with minimal risks of reversals," CIMB Securities said in its note.
The bank-backed research firm also noted that reintroducing GST 2.0 at a 4 per cent rate would align with the recommendations of the National Chamber of Commerce and Industry of Malaysia (NCCIM) and the Federation of Malaysian Manufacturers (FMM).
"However, if the GST 2.0 were introduced in place of RON95 subsidy cuts, the additional fiscal revenue above current levels would have to be collected to compensate for the continued provision of RON95 subsidies," it said.
"We estimate that a 50 sen increase in the RON95 retail price would reduce government spending by 0.4 per cent of gross domestic product (GDP), equivalent fiscally to a reintroduction of GST at 5 per cent and C-efficiency ratio of 70 per cent," it added.
CGS International said the 2025 Budget could be the toughest budget for the Madani government.
This is because there is a need to reduce debt towards a more sustainable level but the government has limited low-hanging choices for revenue enhancements while at the same time it is pressured by increased spending commitments.
"In our view, the options are clear but not necessarily easy - either raise revenue or find ways to cut spending. Either option could negatively affect the consumer base," it said.
CGS International expects a fiscal deficit of 3.8 per cent of GDP, missing the 3.5~3.0 per cent target set during the 12th Malaysia Plan Midterm Review.
It said this reflects the struggle faced by the government to keep its finances in check amid the likelihood of lower revenue collections next year as well as a jump in spending on emoluments following civil servant pay hikes.
"We see the operating expenditure rising on the back of the government's commitment to raise the civil servant salary (estimated at RM10 billion for both 2025 and 2026).
"Some savings from the adjustments to diesel and electricity prices helped to reduce the subsidy commitment, although we do not price in savings from the RON95 fuel adjustment (which poses upside)," CGS International said.
On the other hand, the firm projected development expenditure (DE) at RM78 billion, lower than the RM90 billion budgeted in 2024 as it is of the view that the government is limited in its ability to maintain its high levels of borrowing.