Beyond GST vs SST: A fairer way to tax

The government is studying proposals that combine elements of the goods and services tax (GST) and the sales and service tax (SST), along with a sovereign wealth fund model for fiscal management.

Malaysia is at a critical crossroads in fiscal management. The country is trying to fix public finances while protecting the welfare of the people. Policymakers are debating the merits of a hybrid GST-SST model against the option of a sovereign wealth fund.

OECD economic surveys of Malaysia flag Malaysia’s relatively low tax-to-gross domestic product (GDP) ratio, at around 12.6%. They recommend revenue-raising reforms to support fiscal sustainability, social spending and the transition to high-income status.

The IMF similarly finds Malaysia’s tax-to-GDP ratio to be low, and says proper reforms could raise a further 3% of GDP

The current debate grows out of the country’s difficult experience with GST in 2015-18). That model broadened the tax base but met with public resistance because of its regressive nature.

The SST that replaced it, still in force today, narrowed the tax base but has generated less revenue.

For civil society and advocates of social justice, judging these models must go beyond revenue alone. The real question is whether these fiscal choices advance fairness, protect the marginalised and uphold transparent governance – rather than deepen inequalities already built into the system.

The case against a hybrid tax

The core problem with any consumption-based tax, including a hybrid GST-SST model, is that it hits the poor hardest. In Malaysia, the bottom 40% of households spend roughly 70% of their income, compared with just 40% for the top 20%. So, a flat consumption tax of even 5% takes away 3.5% of a bottom 40% household’s income, but only 2% of a top 20% household’s.

This imbalance widens wealth inequality – effectively taxing those who can least afford it.

Supporters of a hybrid GST-SST model argue it could raise substantial annual revenue, about RM30bn-40bn. In theory, this could fund social programmes and infrastructure.

But this model carries real risks. The transition often fuels inflation, causing short-term hardship for lower-income families.

Overcoming this unfairness also requires strong, well-targeted support – including direct cash transfers, zero-rating of essentials such as food and healthcare, and progressive changes to income tax.

In the past, the civil services tasked with delivering these fixes have struggled with leakages, exclusion errors and bureaucratic inefficiency.

And without firm guarantees of targeted redistribution, a hybrid consumption tax remains a blunt instrument that falls too heavily on the poor.

What a wealth fund could do

By contrast, the sovereign wealth fund model offers a compelling long-term alternative. Rather than taking wealth directly from people’s spending, a sovereign wealth fund could pool capital from government-linked investment companies, retained earnings and national resource revenues.

Invested globally, the fund could generate steady returns to finance public services and, crucially, pay dividends directly to lower-income groups.

This approach has greater potential to be progressive, since it puts national wealth to public use rather than adding new costs to household budgets.

International models offer useful lessons for Malaysia.

The Alaska Permanent Fund invests oil revenues and pays annual dividends to all residents, averaging $1,000 to $2,000 a year.

Norway’s Government Pension Fund Global invests surplus oil revenues, with strict rules against domestic investment to avoid distorting the economy.

Singapore’s Temasek and GIC invest strategically in local and international assets, with the returns funding government spending.

What separates these models is their main purpose – whether they act as fiscal buffers (Norway), sources of citizen dividends (Alaska), or strategic investment vehicles (Singapore).

Malaysia would need to weigh these goals against its own national priorities and economic conditions.

Recent projections suggest four of the five major government-linked investment firms will see higher dividend income in 2026, with combined distributions potentially reaching RM20bn.

But the current distribution model channels dividends mainly to government entities rather than directly to the public.

Five major government-linked investment companies together manage assets of more than RM1.5tn and generate substantial annual profits. The five are Khazanah Nasional, the national sovereign wealth fund; PNB, which runs bumiputra unit trusts; the Employees Provident Fund, the retirement scheme for private-sector workers; KWAP, the pension fund for civil servants; and the Armed Forces Fund Board (LTAT).

A citizen dividend model would redirect part of these firm’s dividends straight to the people instead of channelling them mainly to government coffers. This idea draws on Alaska’s Permanent Fund Dividend programme, which pays annual sums to all residents from state oil revenues.

In Malaysia, this could take the form of:

• A sovereign wealth fund mechanism that invests globally and pays out the returns
• Annual dividend payments of RM500 to RM1,000 for all adults
• Targeted extra payments for lower-income households
• A universal basic income floor funded by the firms’ returns

The impact on household income could be significant, especially for lower-income groups. A RM1,000 annual dividend would equal roughly 6.7% of income for the bottom 20% of households – enough to offset the consumption tax burden from a 5% hybrid GST-SST rate.

Yet this approach faces real challenges too, from fiscal sustainability to conflicting investment mandates and governance complexities.

The sovereign wealth fund model also comes with governance challenges. It would need major restructuring of existing state assets, which demands firm political will.

Without full transparency, independent oversight and insulation from political interference, a sovereign wealth fund risks becoming another route for elite capture, mismanagement or opaque financial engineering.

And because it takes five to ten years to set up, such a fund cannot address immediate fiscal shortfalls. That gap could be filled hastily by regressive taxation instead.

A hybrid path forward

A straight choice between a hybrid consumption tax and a sovereign wealth fund is a false one. The fairest and most sustainable path for Malaysia lies in a carefully calibrated, integrated system that puts social justice first.

First, any expansion of the consumption tax must be strictly limited. A modified, low-rate SST of around 2% to 3%, applied only to non-essential items currently exempt, could raise modest immediate revenue. This must be legally tied to automatic, direct cash transfers that offset the exact tax burden carried by lower-income households, so the vulnerable bear no net loss.

Second, the government must at the same time lay the groundwork for a transparent, democratically accountable sovereign wealth fund. This fund should pool government-linked investment companies’ dividends and resource revenues, governed by strict statutory safeguards against political interference.

The fund’s mandate must explicitly include distributing dividends to low-income and middle-income groups. This would directly counteract any remaining unfairness from the consumption tax.

Finally, this hybrid system must be anchored by progressive taxation on higher incomes and wealth.

A tax on fewer than 0.01% of people in Malaysia – the very wealthy – through a wealth tax, capital gains tax and windfall profit levies could raise an extra RM10bn a year. This money that would go a long way towards the country’s social and economic development.

Relying too heavily on consumption taxes or state investment returns alone is not enough. True fiscal justice means asking those with the broadest shoulders to pay more, closing tax loopholes and ensuring corporate tax compliance.

Multinational companies’ consolidated profits should also be taxed globally, based on a fair and principled formula that recognises developing countries’ contributions as producers.

For Aliran and the wider civil society movement, support for any fiscal policy must be conditional. It must be judged on its real impact on the most marginalised – not the elegance of its economic projections.

A hybrid system that pairs a light-touch, heavily mitigated consumption tax with a transparent, dividend-yielding sovereign wealth fund offers a workable way forward.

But its success will depend entirely on political will, institutional transparency and an uncompromising commitment to equity.

Without these foundations, any fiscal reform risks becoming another way of shifting wealth upwards – leaving ordinary people to carry the cost of the nation’s financial consolidation.

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