Unpopular tax hands fresh ammo to Malaysia PM's foes

An unpopular new consumption tax has handed fresh ammunition to critics of Malaysia's embattled prime minister, with angry consumers complaining it has sent some prices surging, and economists warning it could harm growth.

The government on April 1 introduced the six-percent Goods and Services Tax (GST), which taxes transactions throughout the business supply chain and replaces earlier sales and service taxes on end-consumers that ranged from 6 to 10 percent.

The government had said the more streamlined tax regime would lead to lower prices for many key items and boost government revenue in Southeast Asia's third-largest economy.

Experts agree Malaysia's biggest tax reform in decades is necessary -- fewer than three million of the country's 30 million people pay income tax, and high government debt has economists worried.

But implementation has been marked by mass confusion over how the tax works, its array of exemptions, and contradictory government statements, with many businesses hiking prices amid the uncertainty.

The issue sparked a May Day protest by thousands of opponents and has provided fresh fodder for ruling-party forces seeking Prime Minister Najib Razak's ouster over allegations of corruption and mismanagement.

"We are victims of a mismanaged economy. (The GST) hurts the poor and the middle-class like me," said Kuala Lumpur pre-school teacher Siti Nora Manaf, 62.

- Belt-tightening -

Like many Malaysian consumers, she already faced rising costs, with the ringgit currency at its weakest in years due to concerns over the impact of soft world oil prices. Malaysia is heavily dependent on energy exports.

Siti Nora said the price of a bag of rice -- supposedly exempt from the GST -- has jumped 40 percent since April 1 amid the confusion. She has begun growing vegetables in the small garden at her home, while slashing other living costs.

Najib last month defended the tax as "an important reform that will help us build a stronger, more sustainable and transparent economy".

He has said short-term pain was unavoidable, while vowing to clamp down on profiteering.

But critics question the timing of the GST's introduction.

After Malaysia's economy grew 6 percent last year, the World Bank in January forecast a slowdown in 2015 to a still-enviable 4.7 percent, citing the oil-price woes.

Malaysian consumers also shoulder some of Asia's highest levels of personal debt, increasing public sensitivity to price shocks.

"Everyone's wallet is being hit. Salaries are not going up, and going forward consumers will face a hard time," said Paul Selvaraj, head of the Federation of Malaysian Consumers Associations.

Chua Hak Bin, a Bank of America Merrill Lynch economist, said the GST will crimp the domestic spending that Malaysia's economy increasingly relies on as export markets have softened.

"There will be a pullback in consumer spending and it could last until September due to waning consumer sentiment," Chua said.

He added, however, that scrapping the GST would be a "disaster" that would shatter investor confidence.

Economists remain guardedly optimistic on the financial outlook, and foreign investment remains solid.

But worried comparisons are being made with Japan, which raised its consumption tax last year, a move blamed for stifling consumer spending and triggering a recession.

- Mounting trouble for PM -

Anger over the tax comes as Najib is struggling to fend off a persistent campaign for his ouster by influential former prime minister Mahathir Mohamad.

Najib was weakened by 2013 polls in which the long-ruling coalition nearly lost power, and his reputation has been hammered this year by a drip-feed of damaging allegations of fraud at a debt-ridden state investment company he oversees.

Najib has skirted demands that he explain how hundreds of millions of dollars have allegedly gone missing from deals involving 1Malaysia Development Berhad (1MDB).

He has denied wrongdoing and ordered government auditors to examine 1MDB's books.

The opposition has repeatedly warned that Najib's government will use taxpayer money to bail out 1MDB, which is mired in $11 billion in debt. Officials have said there will be no bailout.

Reports of his family's lavish lifestyle also have stoked public anger.

Najib, who is also finance minister, has been under pressure to get Malaysia's financial house in order amid warnings of a possible sovereign credit downgrade over rising government debt.

The government says an estimated $6 billion in additional annual revenue will be raised by the GST, which exempts politically sensitive staples such as rice, sugar, and cooking oil.

But opponents of the GST say consumers are being stuck with the bill for a system in which huge sums of money are allegedly wasted by the government or go missing each year, and have demanded administrative reforms first.

"There is a genuine need for more money in government coffers, but public confidence in how it will be spent is low," Malaysia political analyst Bridget Welsh wrote in an essay this week.

"The GST has become a problem for Najib and this problem is only likely to intensify as the politics surrounding the measure grow more contentious."