Hybrid GST-SST System: Economist Dr Carmelo Ferlito Raises Concerns
Economist Dr Carmelo Ferlito says Malaysia should favour a simple GST over an increasingly complicated hybrid GST-SST system, while reducing other taxes and strengthening fiscal discipline.
- Dr Carmelo Ferlito is sceptical of a GST-SST hybrid, arguing tax systems work best when simple, transparent and stable.
- Ferlito prefers a straightforward GST reintroduction paired with lower taxes and targeted aid for vulnerable households.
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An economist remains sceptical that the government’s proposed hybrid of the Goods and Services Tax (GST) and existing Sales and Service Tax (SST) would work effectively, arguing that a tax system is most efficient when it is simple, transparent and stable.
Center for Market Education Sdn Bhd CEO Dr Carmelo Ferlito said the proposal should not be confused with the introduction of a completely new “hybrid tax system”, as the government was instead looking at incorporating elements of GST into the already implemented SST.
“And on this, I tend to be sceptical, as taxation works well when it is straightforward, easy to implement and stable over time,” he told TRP.
Ferlito said while he understood the political rationale behind retaining elements of the existing SST while adopting some features of GST, he remained unconvinced that combining the two would deliver a better tax structure.
He argued that GST was structurally superior to SST because it offered a broader tax base, greater transparency and caused fewer distortions throughout the production chain.
“Instead of creating an increasingly complicated hybrid, I would prefer a simple GST accompanied by lower taxes elsewhere and targeted assistance for genuinely vulnerable households,” he said.
Ferlito said the input-tax-credit mechanism was at the heart of GST’s efficiency, allowing businesses to offset tax paid on inputs against tax collected on their sales.
“Once you introduce that systematically (GST’s mechanism), you are essentially rebuilding a GST or VAT system. There is a limit to how much GST efficiency can be imported into SST without turning it into GST,” he explained.
Complexity Could Create More Distortions
Ferlito said attempts to simultaneously broaden the tax base while shielding large portions of consumption could ultimately make the system more complicated and vulnerable to distortions.
“The efficiency of GST comes precisely from having a broad base and avoiding multiple layers of taxation throughout production. Trying simultaneously to obtain a broad tax base while shielding most consumption is contradictory. Numerous exemptions and special rates would make the system more complex, create distortions and encourage lobbying,” he said.
He suggested that if GST were to be reintroduced, it should instead form part of a wider reform package involving reductions in other taxes, particularly those that create greater economic distortions.
Ferlito also called for a review of the current system of advance corporate taxation, arguing that it could place unnecessary pressure on businesses by requiring them to estimate and pay taxes on profits before those profits had actually been realised.
“This is why I would accompany the reintroduction of GST with lower income taxes and, in particular, the abolition of the absurd system of advance taxation paid now by firms,” he said.
Lower-Income Households Need Protection
Ferlito also acknowledged that consumption taxes could place a relatively heavier burden on lower-income households, as they generally spend a larger share of their income.
However, he said the solution should not be to make the tax structure increasingly complicated.
“Consumption taxes can weigh relatively more heavily on lower-income households because they consume a larger proportion of their income. But the better solution is not to complicate the tax itself. Keep the tax simple and reduce income taxes,” he said.
Ferlito said a broad GST could ultimately provide a more coherent and sustainable revenue base than an increasingly complicated SST, but cautioned against using tax reform simply as a means of continuously increasing government revenue.
“Malaysia does not simply need a better tax-collection machine; it needs fiscal discipline. If GST were reconsidered, I would support it as part of a revenue-neutral reform that reduces other, more distortionary taxes—not as an instrument for continuously expanding government revenue.”
No Rush To Introduce New Tax System Says The Government
The proposal is still at an early stage, with Finance Minister II Datuk Seri Amir Hamzah Azizan tasked with conducting a comprehensive study before presenting his findings to the Cabinet.
Communication Minister Datuk Seri Fahmi Fadzil yesterday said the study would examine lessons from Malaysia’s previous GST implementation as well as weaknesses under the current SST system, stressing that no decision had been made and the matter would not be rushed.
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