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(File pix) The Sales and Services Tax (SST) may turn out to be a more effective mechanism than the Goods and Services Tax (GST), against the backdrop of a debate over which tax system allows for higher economic growth. Archive image for illustration purposes only. Pix by Salhani Ibrahim

KUALA LUMPUR: THE Sales and Services Tax (SST) may turn out to be a more effective mechanism than the Goods and Services Tax (GST), against the backdrop of a debate over which tax system allows for higher economic growth.

This is because analysts expected the implementation of SST to offer more room for the economy to expand through higher consumer spending, which was dampened in 2015 when GST was introduced.

When GST was first implemented in April 2015, the private consumption growth rate decelerated in the second and the third quarters of 2015, 6.4 per cent year-on-year and 4.1 per cent year-on-year respectively, analysts said.

It was also the lowest yearly private consumption growth rate, too, according to Bloomberg data for 2011 to 2017.

Previously, Malaysia’s economic growth had been mainly driven by domestic consumer spending, followed by exports and government expenditure.

With the old tax system demolished and SST Bill passed, the analysts projected private consumption would expand firmly by around seven per cent this year.

However, it was not an apple-to-apple comparison in observing both taxes’ impact on yearly economic growth as SST has only four months until the end of the year in its implementation, whereas GST had nine months when it was first introduced, analysts said.

MIDF Research said SST would have minimal impact on domestic consumption.

“We see SST’s reintroduction as a strong structural factor to lift consumer sentiment and spending power. This may drive spending on consumer discretionary items beyond the temporary demand volatility during the transition from GST to SST,” it said.

Compared with GST, SST did not affect consumers directly, but rather manufacturers and service providers, said the research firm.

Prices of consumer staples in general would not be significantly different under SST as prices were more subjected to market forces, MIDF Research said, adding that spending on these goods was expected to be stable.

MIDF Research expected private consumption to expand by 6.5 per cent this year.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid expected consumer spending to grow at 6.9 per cent.

“Improved consumer sentiment amid stability in income growth and labour market would allow households to be more than willing to spend their hard-earned money,” he told NST Business.

He said enforcement of the existing law to curb malpractice by businesses is crucial to ensure stability in prices.

Malaysian Rating Corp Bhd expects a higher private consumption growth rate of 7.2 per cent.

“This is underpinned by consumer-friendly measures introduced by the new government such as the zero-rating of the GST and a stable price for RON95, going forward,” the rating agency said.

Bloomberg Economist Intelligence Unit said economic growth would continue to be mainly driven by private consumption until 2022.

However, the research unit expected economic growth to be weaker than last year mainly due to the impact of comparatively subdued demand for the country’s largest export category, electronic and electrical goods, the bulk of which goes to China and the United States.

“Weaknesses in the external sector notwithstanding, growth will continue to be driven by private consumption throughout the forecast period.

“This component will, on average, contribute around 3.8 percentage points to headline expansion per year in 2018-2022,” it said.

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