Nungsari Ahmad Radhi, chairman of Khazanah Research Institute, told FMT the proposed VAT should be set lower than the SST – at about 4%.

“After the e-invoicing starts for big businesses this year, a VAT will formalise the whole economy which in itself will broaden the government tax base,” he said.

Nungsari said the government needs to capture the sizeable informal economy as part of the tax base, generate data and enhance monitoring to improve the country’s fiscal performance.

According to worldeconomics.com, Malaysia’s informal economy is estimated to be 25.3%, which represents approximately RM1,193.8 billion at gross domestic product-purchasing power parity (GDP-PPP) levels at the end of last year.

In Budget 2024, the government announced an increase in the service tax rate from 6% to 8%, from March 1, for all services except food and beverage, telecommunications, parking and logistics.

However, a high-value goods tax, initially planned to be enforced from May 1, was put on hold, with the finance ministry telling the Dewan Rakyat in July that it was fine-tuning the related policies and framework for transparent and orderly implementation.

In January, the government implemented the 10% low-value tax on all goods with a sales value of RM500 or less brought into the country via land, sea or air.

Nungsari also said he would like to see more subsidy rationalisation in the 2025 budget to create a better social safety net as the economy transitions upwards from a low-cost, low-wage economy.

“Subsidy rationalisation is not just about government finances. More important than that is the removal of price distortions that have resulted in misallocation of resources – hence the inefficiencies and non-competitiveness of parts of the economy.

“It is a painful transition but a necessary one. That’s why we need to develop a strong safety net at the same time,” he said.

Nungsari called for the government to take advantage of the strengthening ringgit by rationalising the RON95 petrol subsidy.

“Since the ringgit is strong and crude oil prices are low. It’s an opportune time to rationalise petrol subsidies,” he said.

Earlier this month, FMT quoted Lloyd Chan, a senior analyst with MUFG Bank, as saying that the ringgit was the world’s best-performing currency against the US dollar over the last quarter.

Data from Bloomberg for the period between June 27 and Sept 27 showed that the ringgit has appreciated 14.35% against the US dollar, beating gold, which rose by 14.2%, into second place.

Strengthen food security

Meanwhile, Rajah Rasiah of Universiti Malaya said while the rising ringgit may discourage exports and increase imports, it would also lower imported inflation, particularly food inflation.

He called on Putrajaya to focus on strengthening food production to overturn its reliance on food imports and ease Malaysia’s chronic food trade deficit.

This includes enhancing the production of padi, vegetables and fruit items such as chillies, cucumber and tomatoes; and root crops such as onions, ginger, garlic and potatoes.

Carrot and stick

Rajah also called on the government to raise the volume and service quality of healthcare to lessen the burden faced by the B60, referring to the income group making up the bottom 60% of households ranked by income.

However, a key strategy should be raising productivity through industrial upgrading from low- and medium-value added activities to high-value added activities.

“Government policies must stimulate such a structural change if its objective of raising median household income from RM2,600 in 2023 to RM4,510 in 2030 is to be achieved,” he said.

Rajah called for a “carrot and stick” approach using incentives and grants to effect this structural change, citing South Korea, Taiwan, Singapore and China as examples.

“In South Korea and Taiwan, the government offers incentives, guaranteed purchase price and technology support for those approved to be in such schemes.

However, those unable to meet the specified standards will have their benefits quickly withdrawn,” he said.