The last several years have seen a raft of tax increases across Southeast Asia. Singapore has raised its Goods and Services Tax (GST) twice in the last two years, bringing it up to 9 percent as of 2024. Malaysia increased its Sales and Services Tax (SST) from 6 percent to 8 percent this year and is set to expand the list of taxable services in 2025. Indonesia raised its Value Added Tax (VAT) to 11 percent in 2022, and is set to hike the rate to 12 percent in the beginning of 2025, although lawmakers are facing public pressure to delay or modify the increase.
How do we explain this enthusiasm for taxes in the region, and what does it mean? Well, the first thing you will notice is that all or most of these measures are designed to increase taxes on consumption. When you buy a good from a store or hire someone to perform a service, you will pay a higher tax rate.
Consumption taxes are sometimes considered regressive because they impact any consumer who buys a good or service, regardless of income level or ability to pay. By comparison, real estate taxes, income taxes, or inheritance taxes can be targeted in ways that apply to high income or high net worth individuals. With a consumption tax, everybody pays.
The reasons why a country chooses to raise taxes on consumption as opposed to income or other forms of economic activity or assets are complex and vary from case to case. But it is interesting that most countries in the region seem to be showing a preference, at least right now, for raising revenue by taxing consumption.
Another question is why now? And the obvious answer is because we recently went through a global pandemic. During the pandemic, virtually every country in Southeast Asia went to extraordinary lengths to inject fiscal stimulus into their economies while the world was on lockdown. This required them to run large deficits and in most cases borrow to do so.
Now that the pandemic is over and economic activity is recovering in much of the region, governments are looking to consolidate their balance sheets and get deficits and public debt levels back under control. This generally involves some combination of reduced spending and increased revenue, from taxes or otherwise. We see this pretty clearly in Malaysia’s 2025 budget, where the government is cutting subsidies and widening the tax base to boost revenue. As a result, the deficit is projected to shrink as a percentage of GDP.
In other countries, like Indonesia, tax reform has been a priority for several years, even before the pandemic. The VAT hike scheduled for next year should be viewed in that context, as part of an ongoing effort to shore up the state’s fiscal capacity through higher taxes and better enforcement. Although people are generally opposed to higher taxes, it’s worth noting that state revenue in Indonesia has increased considerably as a result of these reforms.
On the other hand, countries that have been slower to raise taxes, like Thailand and the Philippines, are now finding themselves on somewhat more precarious fiscal footing. The Philippines recently considered imposing modest tax increases on junk food and sweetened drinks, but even this was deemed too much of a burden on consumers and shelved. Not unrelatedly, the Philippines is set to run a fairly high fiscal deficit next year.
Thailand is also projecting a sizable deficit in 2025 as it tries to spend its way out of an economic slowdown. Doing so will be more sustainable if it can generate some revenue through the tax office. But when reports surfaced that the government was contemplating hiking the VAT from 7 to 15 percent, public backlash forced officials to walk it back. Thailand’s consumption tax has been set at 7 percent since 1992, so it’s due for an increase as a simple matter of fiscal reality, but doubling it in one go was never likely to be a winning strategy.
Ultimately, no one likes paying taxes. They open up complex questions about how the burden of supporting government services should be allocated between consumers, businesses, workers, and so on. But recent experience in Southeast Asia appears to have taught us one thing: after a global pandemic where the state had to stretch its balance sheet to keep the economy from collapsing, it’s probably a good idea to try and get additional tax revenue from somewhere.
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