Malaysia scraps GST, would it really impact Indian GST regime?
- Blog|GST & Customs|
- 3 Min Read
- By Taxmann
- |
- Last Updated on 6 January, 2021
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Malaysia implemented the Goods and Services Tax (GST) regime from April 1, 2015 which replaced the existing Sales and Service Tax (SST) regime. This GST law was enacted after 6 years of its first presentment in the Malaysian Parliament. Malaysia was the last country before India that implemented the GST. The standard rate of GST in Malaysia was at 6%. On May 10, 2018 Mr. Mahathir Mohamad was sworn in as 7th Prime Minister and on May 16, 2018 he scrapped the GST, fulfilling a campaign promise that gave him an unexpected win in elections.
This move would definitely increase the Budget deficit of Malaysia. It is not yet clear whether the repealed Sales and Service Tax would be brought in force again to compensate the country for revenue loss it would incur after scrapping the 6% Consumption Tax.
This unprecedented decision might sound alarm bells in India to tread with caution over next couple of years as 17th general election in India is due in year 2019. Malaysia is the fourth largest oil and natural gas producer in the Asia-Pacific region. Despite 18% of Government’s revenue accruing from GST, Malaysia scraped the consumption tax to curb the rising inflation. As the crude prices are trading at a new high since last 5 years, it would compensate the Malaysian economy from the losses it incurred after scrapping the GST.
It is not likely that India may perceive such an extreme step because of the difference in structure of GST law of these two countries and the contribution of Indirect-tax collection in overall revenue of the Govt. in India.
Except Anti-profiteering provisions, laws of both the Countries are quite different. India follows the dual GST model where two types of GST levies, Central GST and State GST, are levied. In stark contrast, Malaysia had followed the single GST levy. In Malaysian GST, there was only one standard rate of 6% on all goods and services. In sharp contrast, Indian GST has 5 different rates, i.e., 0%, 5%, 12%, 18% and 28% along with compensation cess on some items.
India’s budgeted revenue from GST for FY 2018-19 is 33% of total revenue. Share of actual Indirect-tax revenue in Financial Year 2016-17 constituted 37% and the budgeted revenue from Indirect-tax collection in FY 2018-19 is 44%. Indian Govt. derives almost half of its revenue from Indirect-taxes and more than 1/3rd revenue from the GST.
India may not take such an extreme step as Malaysia has done, fearing serious economic repercussions and impact on its credit rating in the International market. The leading credit rating agencies, including Moody’s and Fitch, have warned of widening of the budget deficit and overall reduction in the Malaysian Government’s income.
Malaysia had to take this extreme step because of single rate (6%) of GST for all goods and services. The essential items and luxurious items cannot be taxed at the same rate. It is unlikely that this change in economic circumstances in the neighboring country would impact the Indian GST. After implementation of GST, India has jumped to 100th rank in the index of Ease of Doing Business. However, it is highly advisable for India to take prompt actions to stabilize the GST and remove all technical glitches and hurdles which business entities are facing relating to compliances or refunds.
Recently the World Bank said that India’s economy has recovered from the impact of demonetization and by the introduction of GST regime, and would grow at 7.3% in 2018 and 7.5% in 2019. It added that Demonetization and GST created short-term disruptions in economic activities of India. As the inflation rate rebounded pushing real interest rates down, a recapitalization plan for banks was announced, and the effects of the two temporary shocks vanished, and growth too bounced back.
Indian GST and Malaysian GST both are separate laws having been implemented according to economic conditions in these countries. In our opinion, there would not be any perceivable impact of such unpleasant news on Indian GST.
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