RHB Research expects the upcoming expansion of the sales and service tax (SST), set to take effect on 1 July, to have a minimal influence on inflation. 

The anticipated impact for the second half of the year is 0.3% year-on-year, with average inflation for 2025 forecast to reach 1.7% under the expanded tax, compared to 1.6% without any fiscal changes. Despite the adjustment, RHB is maintaining its full-year consumer price index (CPI) forecast at 2.2%.

The tax revision will largely apply to discretionary spending, including luxury items, entertainment, and certain lifestyle services. Items classified as essential, such as food, healthcare, utilities, and public transport, are expected to remain outside the tax scope. This is intended to shield average households from rising costs, limit inflationary pressures, and preserve spending on basic necessities.

From a fiscal perspective, the revised SST is projected to contribute around RM5 billion in additional government revenue during the second half of the year, bringing the total for the year to an estimated RM10 billion. These projections are based on Malaysia’s CPI composition, which was used to ensure that vital goods and services remain untaxed.

RHB has kept its gross domestic product (GDP) growth forecast for 2025 at 4.5% and reiterated its inflation outlook of 2.2%. It considers the government’s fiscal deficit target of 3.8% of GDP for 2025 to be realistic, supported by the increased revenue from the SST expansion. This added fiscal capacity is expected to aid in efforts to reduce the deficit further, with a goal of reaching 3% of GDP by 2026.

Overall, the expansion of the SST is seen as a balanced measure aimed at strengthening public finances while avoiding significant disruption to the economy or additional strain on consumer wellbeing.

(Source: The Edge)

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• Consumer Spending
• CostOfLiving
• FiscalPolicy
• Inflation
• RHB Research
• Sales and Service Tax