SST Expansion To Have Limited Direct Impact On GDP, Inflation -- RHB IB

KUALA LUMPUR, June 20 (Bernama) -- The Sales and Service Tax (SST) expansion is expected to have a limited direct impact on gross domestic product (GDP) and inflation, as it primarily targets discretionary items and selected service sectors, according to RHB Investment Bank Bhd (RHB IB).

It said this targeted approach helps minimise any significant negative effects on overall consumer expenditure and keeps inflationary pressures in check.

In a research note today, RHB IB stated that strategically, the sales tax expansion primarily targets discretionary or non-essential items, such as luxury goods, entertainment, and certain lifestyle services, rather than essentials like food, healthcare, or basic utilities.

“By doing so, the policy aims to reduce the burden on the average consumer, thereby limiting the potential for broader inflationary pressures and avoiding a significant dampening of household spending on necessities.

“To recap, the impact on consumer prices remains muted following the revision of service tax rates and the expansion of the Service Tax scope in March 2024,” it said.

RHB IB maintained its 2025 GDP growth forecast at 4.5 per cent, assuming continued resiliency in the domestic economy.

Meanwhile, the investment bank noted that the scope of the existing service tax will be broadened to encompass six categories of services: rental or leasing, construction work, financial services, private healthcare, education, and beauty services.

It said the direct impact of this service tax expansion on GDP is expected to be limited, as it targets a relatively narrow range of sub-sectors, such as select fee-based services and certain discretionary activities, which collectively represent only a modest share of overall economic output.

“Moreover, by excluding critical sectors like food, healthcare, utilities, and public transport, the expansion avoids placing undue burden on the broader economy, thereby minimising any potential drag on growth,” it said

On the inflation front, RHB IB estimated the direct impact of the SST expansion on the Consumer Price Index to be negligible at around 0.1–0.2 per cent year-on-year (y-o-y) on a full-year basis.

“We may expect a passthrough impact from SST broadening to higher food prices and increased business costs to consumers, albeit in a limited fashion,” it said.

For the second half of 2025, RHB IB estimated the upside inflation impact at 0.3 per cent y-o-y, with the average inflation rate projected at 2.0 per cent.

It added that for the entire year of 2025, inflation is expected to average 1.7 per cent with the SST expansion, compared to 1.6 per cent without any fiscal adjustments.

“Hence, we maintain our 2025 inflation forecast at 2.2 per cent, reflecting a gradual and orderly implementation of fiscal retargeting measures alongside moderate demand-side pressures,” it stated.

Meanwhile, RHB IB opined that the fiscal deficit target of 3.8 per cent of GDP is attainable for 2025, following the expansion of the SST scope, introduction of new revenue drivers, and implementation of subsidy reforms, which will help narrow Malaysia’s fiscal deficit.

It said that all else being equal, the additional revenue of RM5 billion from SST expansion would reduce the projected budget deficit from RM80 billion to RM75 billion, with the fiscal deficit-to-GDP ratio improving to 3.6 per cent (versus the budgeted 3.8 per cent).

“Similarly, the SST broadening will also help Malaysia achieve its fiscal deficit percentage of GDP goal of 3.0 per cent in 2026.

“Overall, the measured approach to SST expansion reflects a balanced effort to enhance public finances sustainably without significantly disrupting economic activity or consumer welfare,” it added.

-- BERNAMA