Cross-Border Spending Pressures Malaysia

For Malaysia, the decision to expand SST from mid-2025 was never taken in isolation. It sits within a competitive regional landscape where neighbours such as Singapore and Thailand already operate established value-added tax (VAT) or goods and services tax (GST) systems. In an era of tightly linked supply chains and footloose capital, the impact of taxation on cross-border competitiveness is impossible to ignore. While domestic considerations of revenue, inflation, and equity dominate the political debate, international comparisons reveal both the strengths and vulnerabilities of Malaysia’s chosen approach.

Singapore’s GST is set at 9 percent, having risen incrementally in recent years. It is broad-based, applying to most goods and services with carefully designed offsets for low-income households. The regime is simple, predictable, and paired with a robust compliance framework, making it relatively easy for firms to navigate. Thailand, on the other hand, operates a VAT at 7 percent, one of the lowest in the region, but with a narrower base and periodic political debates over whether to raise it. Both systems are designed with an explicit recognition that in open economies, tax design must balance domestic needs with regional competitiveness.

Malaysia’s expanded SST differs in structure. Unlike VAT or GST, SST is levied at specific points in the production chain rather than comprehensively across all stages of value addition. This narrower base, paired with higher nominal rates on certain services, creates an uneven playing field. For businesses straddling borders—say, a logistics firm operating in Johor and Singapore, or an e-commerce platform servicing both Kuala Lumpur and Bangkok—the differences in tax architecture can shape strategic decisions about where to invest, expand, or even book transactions.

One immediate concern is that higher effective SST costs may erode Malaysia’s attractiveness as a production and services hub. For manufacturers integrated into regional supply chains, SST on intermediate goods can accumulate into hidden costs, raising export prices relative to competitors. A Thai-based supplier operating under VAT can reclaim input credits, ensuring exports remain competitively priced. Malaysian exporters, by contrast, may struggle with uncredited SST embedded in inputs, putting them at a relative disadvantage in price-sensitive global markets.

For investors comparing jurisdictions, predictability often trumps rate. Singapore’s transparent GST framework, even at 9 percent, is viewed as more investment-friendly than Malaysia’s evolving SST regime, which can appear fragmented and subject to carve-outs. This perception matters in sectors such as digital services, where global firms weigh where to anchor regional hubs. If compliance is smoother across the causeway, Malaysia risks losing ground.

The competitiveness issue is not confined to corporate decisions. Households, too, are sensitive to tax differentials, particularly in border regions. Residents of Johor have long crossed into Singapore for work and shopping, and SST expansion risks widening the incentive for cross-border spending. Even small differences in effective prices for electronics, household goods, or services can tilt consumer choices when travel is relatively easy. Similarly, Malaysian tourists visiting Thailand may increasingly view purchases abroad as better value, especially if VAT refunds for tourists make goods cheaper than their SST-inclusive equivalents at home.

The rise of the digital economy complicates matters further. With platforms like streaming services, online marketplaces, and fintech apps operating seamlessly across borders, tax design influences not just competitiveness but collection feasibility. Singapore and Thailand have moved swiftly to integrate foreign digital providers into their GST/VAT nets, requiring registration and compliance for cross-border services. Malaysia’s expanded SST includes digital services, but enforcement remains patchier. This creates two problems: lost revenue as foreign providers slip through the net, and a competitive disadvantage for local providers who face compliance costs that overseas rivals may sidestep.

Recognising these challenges, Malaysia has pursued selective carve-outs and exemptions, particularly for palm-based oleochemicals, to preserve competitiveness in strategic industries. But carve-outs are a double-edged sword: while they protect targeted sectors, they fragment the tax base, complicate compliance, and can invite lobbying. More importantly, selective relief cannot substitute for structural alignment. As long as SST remains narrower and less neutral than VAT/GST, systemic competitiveness concerns will persist.

One option under discussion among policymakers and industry groups is whether Malaysia should eventually pivot back toward a broad-based GST, abandoned in 2018 amid political backlash. Advocates argue that GST would align Malaysia with regional peers, reduce distortions, and provide a more stable revenue stream. Critics counter that the political cost remains high and that the memory of unpopular price hikes under GST lingers. The SST expansion, in this light, is seen as a pragmatic compromise—an incremental step to raise revenue without reopening the GST debate.

At the heart of the issue lies a trade-off: Malaysia’s SST expansion may serve domestic fiscal needs but risks placing the country at a disadvantage in regional competition. The extent of this disadvantage will depend on how efficiently the regime is administered, how effectively exemptions are targeted, and whether complementary measures—such as investment incentives or export facilitation—can offset the added costs.

For businesses, the calculation is pragmatic: can they absorb or pass through SST costs while remaining competitive with peers in Singapore or Thailand? For households, the calculation is equally practical: does shopping abroad, physically or digitally, stretch the ringgit further than buying at home? For policymakers, the challenge is strategic: can Malaysia sustain revenue growth without eroding its attractiveness as a hub in Southeast Asia’s interconnected economy?

Financial advisory firm Fintrade Securities notes that competitiveness is not purely about tax rates. Malaysia retains structural advantages—land availability, a large domestic market, resource wealth, and proximity to major shipping lanes. If SST revenue is channelled into improving infrastructure, logistics efficiency, and education, these broader advantages could outweigh the drag of a less efficient tax system. In this sense, SST expansion could paradoxically strengthen competitiveness, but only if the proceeds are visibly reinvested in productivity-enhancing ways.