Prime Minister Datuk Seri Anwar Ibrahim has indicated that the Malaysian government is not currently considering the full reinstatement of the goods and services tax (GST) as a broad-based tax, but may instead incorporate certain elements of the GST mechanism into the existing sales and service tax (SST) system.

This announcement has sparked a discussion on the feasibility of combining the two tax systems and the potential effects on government revenue, businesses, and consumers. Although GST was abolished in 2017, its core features, such as e-invoicing, have already been adopted to some extent under the current SST framework. E-invoicing functions similarly to the tax invoice system under the GST, and is intended to curb tax evasion and revenue leakage.

A survey conducted in 2022 by the Socio-Economic Research Centre of the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) found that over 75% of respondents supported the reinstatement of the GST, reflecting businesses’ experiences with both tax models. Economic institutions like the World Bank and the International Monetary Fund have also recommended the reintroduction of the GST to broaden the tax base, reduce reliance on oil revenue, and improve fiscal sustainability in Malaysia.

Prior to its repeal, GST generated RM44.3 billion or about 20% of government revenue. If it had been maintained, this figure is estimated to have grown to approximately RM70 billion today, compared with the projected RM60 billion from SST revenue in Budget 2026. However, recent adjustments to the SST, including increased sales tax rates on select goods and expanded service taxes, alongside e-invoicing, have helped to narrow this gap by enhancing tax collection efficiency.

Despite these measures, there are fundamental differences between GST and SST systems. The SST’s structure allows tax to be imposed at multiple points along the supply chain without allowing businesses to claim back tax paid on inputs. This cascading effect can increase costs, which are often passed on to consumers. In contrast, the GST includes an input tax credit mechanism that prevents such taxation layering by enabling businesses to offset taxes paid on purchases against GST collected on sales.

Experts caution that merging elements of both tax systems is complex and will not automatically preserve their respective advantages while eliminating weaknesses. Introducing an input tax credit system under the SST framework would be challenging but could be considered gradually, with an initial focus on specific industries such as logistics, which are common across many sectors. This approach could reduce the cascading effect and help contain costs.

Should the input tax credit mechanism prove too complicated, alternatives could include applying higher tax rates to luxury items or limiting SST application to only final business-to-consumer transactions while exempting business-to-business sales. Another option put forward is rebranding GST as a “Value Added Duty” to lessen public resistance.

Ultimately, the government’s goal is to strengthen fiscal sustainability by broadening the tax base and increasing revenue. However, analysts emphasize that revenue enhancements must be balanced with measures to control public spending. Budget 2026 allocates over a third of total expenditure to civil servants’ salaries and pensions, with significant portions also dedicated to subsidies, welfare, and debt servicing. Without addressing expenditure growth, raising revenue alone may not suffice.

The government also faces constraints regarding how much tax rates and the tax base can be expanded without provoking backlash from businesses and society, which could hinder economic growth and investor confidence. Recent tax policy reversals following industry opposition illustrate this challenge.

Experts recommend that any tax reform be carefully planned and implemented gradually with extensive stakeholder consultation to minimize disruption. Sufficient preparation time for businesses and readiness within government agencies are crucial, particularly if mechanisms such as input tax credits or tax refunds are introduced.

Maintaining a stable and growing economy is seen as the foundation for sustainable government revenue. As long as economic growth continues, tax collections are expected to improve in tandem.