The service sector is characterised by creations of services rather than final finished products, which are enjoyed with the inclusion of a myriad of human emotions with satisfaction of a need often being in the lead.
In Malaysia, the service sector accounts for over half of its GDP, making the sector a major contributor towards economic growth, productivity and national income. The Department of Statistics Malaysia (DOSM) reported the total revenue of the service sector for 2023 to be RM2.3 trillion, up 8.4 per cent from RM2.1 trillion in 2022.
To recap, Chief Statistician Datuk Seri Dr Mohd Uzir Mahidin said the performance was contributed by the wholesale and retail trade sub-sector; transportation and storage; and information and communication each increased by 7.7 percent (+RM119.1 billion); 15.8 percent (+RM20.4 billion); and 5.3 percent (+RM8.6 billion) compared to the figure in 2022.
Prime Minister Datuk Seri Anwar Ibrahim, during the presentation of Budget 2024, announced an increase in the Sales and Service Tax (SST) rate from 6% to 8% which came into effect on 1 March 2024. This excluded services such related to telecommunications, food and beverages but the rate expands its scope on taxable services to include logistics, brokerage, underwriting and karaoke services.
Will SST be socio-economic blunder?
Undoubtedly, the increase in service tax will have either a positive and negative impact on the country’s socio-economics, traces of the latter have already been found.
A significant negative effect is the increase in the price of services. According to Deloitte Malaysia’s Head of Taxation Sim Kwang Gek the immediate impact on businesses is the increase in the cost of doing business as the service tax will be passed on to consumers and other businesses in the end. The impact of ‘tax on tax’ will cause prices to rise higher.
This price increase, if not contained and allowed to continue, will have a greater impact, which is an increase in the country’s inflation rate. The effect of this inflation will reduce the value of the real income of the population and purchasing power. It is not impossible for the crime rate; divorce rate and abuse will also rise correspondingly because people have to bear the increasing cost of living. In addition, the increase in the level of poverty also occurs, especially urban poverty.
In respect of the nation, the increase in the SST rate can raise national income, and maintain the country’s fiscal stability. According to reports, the government is expected to generate additional service tax revenue of RM900 million this year. Malaysia, at this juncture, = cannot depend too much on foreign loans to cover the costs of national development and the provision of subsidies because it may worsen the country’s fiscal deficit.
According to the Minister of Communications Fahmi Fadzil the government will strive to reduce the national fiscal deficit rate to 4.3 per cent this year. Indirect taxes such as sales and service taxes are among the solutions to shrinking the fiscal deficit as the services sector accounts for more than half of the country’s GDP. The higher the activity of this sector, the higher the tax collection.
Next, the government’s success in dealing with the deficit problem will increase the government’s credibility and increase the confidence among local and foreign investors.
In addition, the increase in SST can prevent consumers from using services that are deemed less important such as nightclubs, dance halls, public houses, private clubs, golf courses, and traits like betting and gambling.
The increase presently does not involve services for food, beverages, telecommunications, parking, and logistics which are considered a necessity for residents in Malaysia. This means that service tax for food, beverages, telecommunications, parking, and logistics remains at 6%.
Apart from that, electricity service users can also still enjoy a service tax rate of 6% at consumption levels above 600 kilowatts, if consumption is less than 600 kilowatts, no service tax is charged, to reiterate.
There is an urgent call that the government be able to properly monitor the implementation of this increase to ensure its implementation is in line with what was presented on paper, especially involving issues of information transparency, distortions, lack of compliance, “tax on tax”, among others.
More importantly, safeguards must be present to stop irresponsible business owners from raising prices indiscriminately which will further add on a burden to the people.
As a good measure, second finance minister Amir Hamzah Azizan said on Monday (Mac 4) the government intends to use part of the revenue obtained from the hike in the sales and service tax (SST) to help society in areas like school repairs, housing for the armed forces.
Amir, too, called upon Malaysians to be vigilant against traders exploiting the recent SST rate hike and to report unjustified price hikes.
Amir applauded the domestic trade and cost of living ministry for fining traders who increased prices during its Ops Kesan operation — again stressing the need to have a keen watchful eye on the hike in the rate.
