MALAYSIA plans to introduce a goods and services tax (GST) of 4 per cent by mid-2011, a top finance official said yesterday.

The consumption tax - on the drawing board for almost two decades - is expected to generate an additional RM1 billion (S$408.6 million) of revenue, Second Minister of Finance Ahmad Husni Hanadzlah told reporters yesterday.

Malaysia expects a 2009 budget deficit of 7.6 per cent of gross domestic product - the biggest since 1987 and adding to more than 10 years of continuous deficits.

Fitch Ratings has cut Malaysia's long-term local-currency rating to 'single-A' from 'single-A plus' on concern over the growing budget deficit and lower revenue collection.

Mr Husni's comments echo recent statements by Prime Minister Najib Razak in New York.

The government may also be heeding institutional advice. The International Monetary Fund said recently that it 'has become a matter of urgency' for Malaysia to introduce a GST.

Mr Husni said yesterday: 'The introduction of the tax is to ensure we have a sustainable financial position and revenue source. Currently we have a narrow base and a tax system that relies heavily on petroleum.'

Oil accounts for 45 per cent of government revenue.

The broad-based GST is expected to replace an existing sales and services tax of 5-10 per cent levied on a narrow range of items.

But Mr Husni said essential items such as agricultural products, poultry and livestock products, sugar, rice, flour, cooking oil and eggs will be exempt from the new tax.

Similarly, services such as public transport, school and factory buses, tolls, healthcare and education will not be taxed.

The GST proposal will be submitted to parliament in the current session that ends in mid-December, Mr Najib said on Tuesday.

Mr Husni said the tax will be implemented 18 months later.

Whether the government will actually go through with the proposals is another matter.

Systems for enforcing a GST have been in place since the early 1990s but even a strong leader like former prime minister Mahathir Mohamad hesitated at implementing it.

His successor Abdullah Ahmad Badawi said he would - but baulked after the ruling National Front fared badly in the March 8 general elections.

It also isn't clear if income and corporate taxes will be cut if a GST is introduced. Analysts say the many GST exemptions will limit the extra tax the government will collect, and therefore limit potential reductions in other taxes.