Malaysia Budget 2014: 6% New Tax Effective April 2015, Sugar Subsidy Abolished

Prime Minister Najib Razak unveiled a Malaysian Budget for 2014 on Friday that includes decisive changes like the new Goods and Services Tax (GST) and the elimination of the sugar subsidy.

The budget aims broadly to address Malaysia’s large fiscal deficit, shrinking current-account surplus and growing debt pile. The Southeast Asian nation's debt load at 54 percent of gross domestic product at the end of the second quarter prompted ratings agency Fitch to downgrade the nation’s sovereign credit-rating outlook to negative in July.

As analysts expected, the 6 percent GST tariff will replace a current sales and service tax now in place on April 15, 2015. The new tax will exempt piped water and the first 200 units of electricity per month for domestic consumers in order to protect low-income households. Transportation services, education and health services are among the other sectors exempt from the tax.

“Najib surprisingly introduced a GST at 6 percent, higher than the anticipated 4-5 percent, to be absolutely sure that he could restore Malaysia's investment ratings,” Christian Lewis, a Southeast Asia researcher for the Eurasia Group, told the International Business Times, in an email.

“To offset the possible negative political backlash from the low-income households that form the political base of his party, Najib exempted key staple items such as certain foods and public transportation from the GST,” Lewis added. “These exemptions combined with a modest program of handouts to the civil service and low-income workers will protect his political flank while he implements some unpopular measures to rein in public debt.”

While the GST is expected to raise more revenue with its broader taxpayer base, corporate income tax, income tax for small, medium-size enterprises, cooperative income tax and individual income tax rates have all been reduced in some measures.

The new budget will also see a reduction in the government’s costs with the elimination of the sugar subsidy. The current price of sugar is 2.50 Malaysian ringgit per kilogram (36 cents per pound), but will rise to 2.84 ringgit per kilogram on Saturday.

The increase in sugar prices will have a series of effects on other products, and those already struggling with the high cost of living may need to further tighten their belts, the Star, a Malaysian news outlet, reported.

"Shops are going to increase the price of drinks by at least 10 sen [0.1 ringgit] per glass. Other prices will go up as well and we will feel the pinch," Jason Tan, a 24-year-old insurance agent, said.

Citizens are also skeptical toward the GST and the positive impact the government believes it will have, since nations with a GST in general have higher per capita incomes than Malaysia, and the tax could make life harder for the poor.

"They have reliable transportation systems and affordable goods (relative) to its income per capita. We do not have that," said engineer S. Kulendran, according to the Star.

With these measures, the government is hopeful that economic growth in 2014 will be bumped up to between 5.0 to 5.5 percent, following a gain of 4.3 percent in the second quarter of 2013.