Madeline Berma, a senior fellow at Institut Masa Depan Malaysia, said the country would struggle to strengthen its social safety nets without the additional revenue.
Malaysia is among the lowest tax-revenue collectors in Southeast Asia.
Madeline said Malaysia’s tax-to-gross domestic product (GDP) ratio stood at just 12.5% last year, well below the Organisation for Economic Co-operation and Development’s average of 34.1%.
“Malaysia’s inadequate social protection stems from several factors, including low tax revenue and income inequality.
“In terms of social spending as a percentage of GDP, Malaysia lags behind both high- and upper-middle-income countries,” she told FMT.
“Fiscal reforms – including increasing tax revenue – are vital to creating enough fiscal space to boost social spending and deliver more targeted assistance.”
Madeline said the SST expansion, which kicks in on July 1, is projected to increase tax revenue by more than RM5 billion.
She said this will allow Putrajaya to channel additional funds to direct cash assistance programmes, such as Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (SARA).
She also said the higher tax revenue could be used to finance improvements to infrastructure and public services, which would in turn raise productivity levels and help narrow the gap between the rich and poor.
Such fiscal reforms, she added, could help resolve two major shortcomings in Malaysia’s social protection system – insufficient coverage and inadequate benefits.
“This is especially relevant for informal workers and in addressing gaps in retirement, health and injury coverage,” she said.
Treasury secretary-general Johan Mahmood Merican previously said the expansion of the SST was necessary to strengthen Malaysia’s fiscal position by increasing revenue for better social protection – without burdening the majority of the population.
He said the move was expected to benefit 5.4 million lower and middle-income Malaysians.
On June 9, the finance ministry announced that essential goods would remain tax-exempt, while a 5% to 10% SST would apply to non-essential items such as king crab, salmon, truffle mushrooms and imported fruits.
The scope of the service tax will also be widened to include rentals, leasing, construction, financial services, private healthcare and private education.
However, public healthcare for Malaysians will remain SST-exempt.
Addressing the potential impact of the expanded SST, Madeline acknowledged that some companies may pass on the increase in costs to consumers. However, she expects the impact to be minimal, since essential goods are not affected.
Expand post-retirement protection
Meanwhile, economist Barjoyai Bardai proposed that workers who have contributed to the Social Security Organisation (PERKESO) for more than two years be eligible for protection after retirement, as part of a comprehensive long-term social protection plan.
The academic at the Malaysian University of Science and Technology called for such contributors to be given a pension equivalent to half of their last drawn salary.
He also suggested making contributions mandatory for micro, small and medium enterprise owners and self-employed individuals – including farmers, fishers and service providers – under a takaful scheme, to ensure effective protection.