In a landmark election on May 9, Dr. Mahathir Mohamad’s coalition Pakatan Harapan (PH) claimed a surprise victory after defeating Barisan Nasional, the coalition that has maintained power since Malaysia’s independence in 1957.
During his campaigns, Mahathir proposed and promised several measures and initiatives that would impact the business, economic, and political landscape in Malaysia. One such measure was the elimination of the controversial Goods and Services Tax (GST) that was introduced by the previous administration in 2015 and is considered a key cause for Malaysia’s higher cost of living.
Mahathir officially announced the reduction of the GST rate from 6% to 0% from June 1 within a week of being sworn in as Malaysia’s seventh Prime Minister. This is likely to have a significant impact on the exchange rate, government spending, and companies’ pricing strategies.
To partly offset the loss in fiscal revenue from the reduction in the GST rate, the government plans on re-introducing the sales and services tax (SST), which was abolished in 2015. Under the previous SST regime, a services tax of 6% was levied on all services and a single-stage sales tax of 5%–25% was charged at the manufacturing or importing stage for all goods. While this provides an indication of what the new taxes are likely to look like, uncertainty regarding the SST will remain in the short-term till further details are released.
Companies are likely to face increased price competition from other players in the market as many local and foreign firms have already cut prices following Mahathir’s GST announcement. Executives should evaluate the impact of a reduction in the GST rate on their competitive positioning. Companies should also assess the impact of the new SST on their operating costs as more details of the tax scheme are released.
The removal of the GST is also sure to negatively impact government revenues, particularly in the period before the SST is implemented. Higher oil prices will provide some short-term fiscal space; however, any significant delay in the introduction of the SST will likely impact government revenues. Companies selling to the government would be wise to prepare for a fall in demand caused by reduced fiscal spending.
More broadly for companies across industries, lower government revenues, if not accompanied by an equal reduction in fiscal spending, will increase the budget deficit. This will result in capital flows out of Malaysia and downward pressure on the ringgit. Companies importing goods into Malaysia should evaluate the impact of a weakening ringgit on their import costs. Exporting companies would benefit from assessing if a weaker ringgit improves the price competitiveness of their product in the global market.
The new Mahathir government has been quick to move on key campaign promises, but details of many policy initiatives remain unclear. This makes it necessary to stay up-to-date on proposed policy initiatives such as the introduction of the SST, fiscal spending cuts, and reviews of large-scale foreign investment. Companies should evaluate the impact of upcoming policies on demand, costs, and pricing and be prepared to modify their strategies to take advantage of new opportunities and mitigate potential risks.