KUALA LUMPUR: The hike in the service tax, and the surprise inclusion of maintenance and repair jobs in an expanded scope, will force manufacturers to increase the prices of their products, particularly fast-moving consumer goods, said a top industry official.
Federation of Malaysian Manufacturers (FMM) president Tan Sri Soh Thian Lai said this would make the country's exports less competitive.
FMM believes the revival of the Goods and Services Tax (GST) is a better option.
Effective March 1, the service tax will increase to eight per cent from six per cent. Food and beverage, telecommunication and parking services are excluded.
The government recently announced the expansion of the service tax to include logistics services as well as maintenance and repair jobs.
The maintenance and repair segment covers a wide area such as maintenance management, corrective and preventive maintenance, calibration, adjustment, recondition, reconfigure and overhaul.
Soh said as big users of maintenance and repair services, the eight per cent tax would increase the overall manufacturing costs for businesses.
FMM believes the tax on logistics is equally burdensome as it will affect all services along the logistics supply chain. These include forwarding agent, warehouse operators, shipping lines (domestic), shipping agents, port and airport services, freight forwarding and haulage services.
"The Finance Ministry expects to collect an estimated RM3 billion more from the higher service tax. We understand that taxes are essential for the governments to provide funds for vital public services and infrastructure.
"FMM firmly believes the revival of the GST is a timely lifeline for the country's debt dilemma as well as to shore up adequate fiscal buffers in order to weather the next economic downturn," said Soh.
Meanwhile, economists said the higher SST was expected to affect consumer spending but not at a significant level.
Malaysian University of Science and Technology's professor of economics Dr Geoffrey Williams said consumers would feel the effects of higher cost despite the "limited" scope of the tax.
"There are now many exclusions, for example traditional and complementary medicine, so it is limited in that sense.
"However, there is a cascading effect, so the tax on one item passes on to other items. So, prices will rise and will hit consumers. They may buy less. As a result, it will hit businesses."
Malaysian Institute of Economic Research economist Dr Shankaran Nambiar said the higher tax would not lead to a significant slowdown in consumer spending that would negatively impact growth.
He said the additional two per cent tax would not be spread across the bundle of goods bought uniformly.
"We are likely to find the increased tax adds more to tax revenue. I don't think there'll be a significant impact on the gross domestic product due to decreased consumption.
"The decrease in consumption is more likely to come from a decrease in exports and export-oriented manufacturing," he added.