Further subsidy rationalisation hinted

Monday, 21 October 2013 10:00 

Tanu Pandey 

Malaysian Rating Corp Bhd (MARC) has suggested a further rationalisation of subsidies and bringing in Goods and Services Tax (GST) in the upcoming Budget 2014 this month to ease the burden on government coffers.

“The recent upward revision of petrol prices (RON95 and diesel) is the beginning of the long term effort to wean Malaysians off their addiction to subsidies,” the local rating agency said in a pre-budget report yesterday.

The agency said that due to the increasing amount and the general upward trend in oil prices, the price of RON95 will likely be gradually adjusted according to the average monthly market prices.

“As such, the government may introduce a more systematic adjustment mechanism for RON95 to reflect changes in market prices,” it said.

Apart from fuel, other subsidies that are currently provided for items like sugar and liquefied petroleum gas (LPG) may be looked into and revised, the report pointed out.

The subsidy bill is expected to amount to RM38 billion in 2013 which is about 19% of the federal government’s total operating expenditure. Of this, about two-thirds or RM25 billion is from fuel and LPG subsidies.

Setting the finances right will also require plugging leakages in the revenue stream of the government. To plug these leakages, the agency suggested implementation of GST, something which is highly anticipated in the budget.

“The implementation of GST is expected to be generally positive for the economy by boosting exports and gross domestic product (GDP) growth. The positive impact on GDP growth will likely be driven by lower business costs as businesses will be refunded on taxes they paid for their inputs,” it said.

"The impact on government revenue stream is also expected to be positive even if the initial GST rates are 5% or 6%, MARC added. Further, the report suggested that to control the upward pressure on property prices, the real property gains tax (RPGT)should be raised along with the price limit for foreign purchases.

"We think that it will to some extent bring down the enthusiasm among speculators, although it may not totally alleviate the upward pressure on prices. We think that the previous tax structure of a sliding scale in the RPGT (from 30% to 0%, depending on the number of years held) is preferable to the present scale to deter speculation in the property market,” it said.

MARC further suggested the speeding up of construction of homes under various government programmes to provide affordable housing for people. Meanwhile, to ease the burden of the middle-income group, the government should consider widening the income tax band and also a higher eligibility for 1Malaysia People’s Aid.