OECD recommends Malaysia to re-introduce the Goods and Services Tax at a low rate

• The Goods and Services Tax (GST), a value-added tax, was launched in 2015 but abolished in 2018.
• OECD recommends to re-introduce the Goods and Services Tax at a low rate while compensating low-income households with targeted transfers.

Increasing taxes on goods and services could be accomplished by re-introducing the GST, which was removed in 2018 (Box 1.3). The rate should initially be kept low to avoid the problems that marred its initial introduction in 2015. The potential regressive distributional effects of higher value-added taxes could be offset through well-targeted social transfers to vulnerable households, whose real purchasing power could be affected by the tax. Such a policy would be much more effective than exemptions and reduced rates, including those for food and other basic necessities, as the bulk of the monetary benefits from these exemptions tend to accrue to high-income households, reflecting their higher spending levels (OECD/KIPF, 2014[21]). In addition, exemptions and reduced rates raise administrative and compliance costs, especially for SMEs, provide opportunities for fraud through the misclassification of items and reduce tax neutrality.

Source OECD

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