Households are clear winners in SST trade-off, according to CIMB Research

KUALA LUMPUR: Households are clear winners under the proposed Sales and Service Tax (SST) which will be re-introduced on Sept 1, as they will have RM23bil in disposable income through reduced tax collection.

CIMB Equities Research said in a note that while goods without exemptions are poised for price increases after the tax holiday, SST 2.0 would cover a narrower basket of goods and services. However, cars, selected building materials, processed food and beverage and services are not exempted.

As stated by Finance Minister Lim Guan Eng on Thursday, the basket of goods and services will be 38% of CPI basket versus 60% under the goods and services tax, curtailing the inflationary impact to consumers.

“We retain our inflation forecast of 1.3% in 2018, which already assumes the re-introduction of the SST,” it said.

To recap, the SST has proposed rates of 5% and 10% for the sales tax, and 6% for the service tax, which was similar to the previous SST regime that was retired after 2015.

While a separate tax schedule will be released later for petroleum and petroleum products, specific provisions are not made for tobacco and liquor, which incurred sales tax rates of 25% and 20% respectively under SST 1.0, implying either the tax rate has not been finalised or a standard-rated sales tax of 10% applies.

The new SST bill will be tabled soon and is expected to be passed before the end of the current parliamentary session in mid-August. The SST 2.0, alongside the GST zerorisation on June 1, brings one of the new government’s core election promises closer to realisation.

“We understand that improvements are being considered to the new SST Bill to address criticisms of the old SST like double taxation, incomplete tax relief for exports outside designated/special areas, and efficiency of collection.

“The Royal Malaysia Customs Department (RMCD) is also in consultation with the Finance Ministry and the Domestic Trade and Consumer Affairs Ministry to monitor and prevent unjustified profiteering during the SST 2.0 implementation,” it said.

CIMB Research said the SST 2.0 and the proposed abolition of the GST Act relieved many businesses from the onerous reporting requirements, with the RMCD estimating that less than 100,000 businesses will be affected by SST 2.0 compared with 472,000 under GST.

Lim had also contended that delayed GST refunds had tied up operating cash flows and raised costs for businesses.

The RMCD planned to help reduce administrative burden via automatic registration of eligible businesses (annual turnover of more than RM500,000) and digitising submissions of SST returns.

CIMB Research said the government was expected to collect RM21bil per annum from the SST compared with RM44bil under the GST).

“While higher oil-related revenues provide a fortuitous temporary buffer, maintaining fiscal discipline hinges on the new government’s ability to rapidly rationalise unproductive expenditures and reduce revenue leakages.

“Alongside these fiscal reforms, we believe a comprehensive tax reform over the medium term, which helps simplify tax structures and broaden the tax base, is equally critical to ensuring fiscal and debt sustainability,” it said.

We retain our inflation forecast of 1.3% in 2018.

CIMB Equities Research