Malaysia's tax system faces mounting pressure to balance revenue generation with affordability, and a prominent economist has now thrown support behind a hybrid approach that could reshape how businesses handle levies across the supply chain. Mohd Sedek Jantan, director of investment strategy at IPPFA Sdn Bhd, believes the government's exploration of a reformed tax structure represents a pragmatic middle ground between two competing philosophies that have dominated Malaysia's recent tax policy debates.
The current SST regime, which Malaysia returned to after abandoning GST in 2018, operates within narrow parameters that constrain its ability to raise revenue while simultaneously allowing taxes to multiply at different stages of production and distribution. Conversely, the goods and services tax that preceded it cast too wide a net across the economy. Jantan's advocacy for a hybrid model acknowledges that neither system in its pure form adequately serves Malaysia's fiscal needs or protects consumers from hidden tax burdens embedded in final prices. This positioning aligns with recent signals from the government, which Prime Minister Datuk Seri Anwar Ibrahim articulated last Tuesday when he indicated an intention to make Malaysia's tax system more progressive while selectively incorporating GST principles into the existing SST framework.
The critical innovation that Jantan emphasizes is the input tax credit mechanism, a feature fundamental to GST systems worldwide but absent from Malaysia's current SST structure. Under this arrangement, businesses are permitted to offset taxes they have paid on inputs against taxes they collect from customers, creating a net remittance obligation rather than a gross payment burden. This technical distinction carries profound implications throughout the supply chain, from manufacturers through wholesalers to retailers.
To illustrate how this mechanism functions in practice, Jantan walks through a realistic transaction scenario. When a manufacturer sells goods to a wholesaler for RM100 and collects RM10 in tax, the wholesaler's immediate cost is RM110. If that wholesaler subsequently marks up the goods to RM130 and collects RM13 in tax, an input tax credit system allows the wholesaler to subtract the RM10 already paid from the RM13 collected, leaving only RM3 as the net tax remittance to government. This structure fundamentally breaks the cycle of tax accumulation that characterizes cascading systems.
Without such a credit mechanism, the taxation applied at earlier supply chain stages becomes embedded in business costs. When wholesalers and retailers calculate their own pricing, they typically factor in all expenses, including the taxes they have already borne. This means that tax itself becomes part of the cost base upon which subsequent taxes are calculated, creating a compounding effect that bears no relationship to the actual value added at each stage. The phenomenon is most acute in sectors involving multiple distribution layers, where a single product might pass through manufacturer, agent, distributor, wholesaler, and retailer before reaching consumers.
The economic consequences of tax cascading extend beyond mere accounting complexity. When taxes are stacked and restacked across the supply chain, the effective rate borne by consumers often bears little relationship to the statutory rate. A 10 per cent tax can effectively become 15 or 20 per cent by the time a product reaches the consumer, depending on the number of supply chain stages. This hidden tax increases creates several problems: it distorts price signals in the economy, it raises costs for export-oriented businesses who must absorb taxes in inputs they will not recover, and it disproportionately harms small and medium enterprises that lack sophisticated tax planning capabilities.
Jantan's cautionary note—that input tax credits reduce cost pressures on businesses but do not automatically translate to lower prices for consumers—reflects economic reality. Businesses may use part of the savings from reduced tax burdens to maintain profit margins rather than passing all benefits through to consumers. Nevertheless, the mechanism still provides substantial benefits by preventing prices from rising more than they otherwise would, particularly in competitive sectors where cost advantages translate more directly into pricing decisions. Over the medium term, the efficiency gains from eliminating tax cascading tend to reduce prices across the economy.
Malaysia's consideration of a hybrid approach reflects lessons learned from both the GST era and the subsequent SST reversion. The GST, implemented from 2015 to 2018, generated stronger revenues and created more efficient tax treatment across economic sectors, but its regressivity and perceived burden on the middle class contributed to public dissatisfaction that became a political liability. The SST, brought back in June 2018, proved more politically palatable due to its narrower scope but has consistently underperformed revenue expectations while failing to eliminate the cascading problem for selected goods and services.
Southeast Asia's tax landscape varies considerably, and Malaysia's potential adoption of such a hybrid mechanism could have regional implications. Singapore's GST operates with similar input credit principles, while Indonesia and Thailand employ versions of value-added taxation that incorporate credit mechanisms. Should Malaysia successfully implement a hybrid system that combines efficiency with political acceptability, it could offer a template for other nations seeking to modernize tax systems while maintaining progressive principles.
The timing of this policy reconsideration coincides with Malaysia's evolving fiscal challenges, including pressures to fund expanded social programmes and infrastructure development. A tax system that more efficiently collects revenue while reducing economic distortions would provide additional resources without necessarily increasing statutory rates. For ordinary Malaysians, the practical benefit would manifest in prices that grow more slowly than they would under a cascading tax regime, while businesses would gain operational efficiency from simplified tax compliance and reduced hidden costs embedded in supply chains.
As the government and economists continue refining these proposals, the specific design of any hybrid system will prove critical. The definition of which goods or services qualify for SST versus GST treatment, the credit mechanism's technical implementation, and threshold levels for business registration will all influence real-world outcomes. Jantan's advocacy suggests that Malaysia's tax policy community increasingly recognizes that efficiency and revenue adequacy need not be sacrificed to political acceptability, provided the system is thoughtfully designed and communicated to the public.
