(TAX UPDATE) Service Tax Update 2025: Construction Industry Can Now Separate Materials from Labour to Reduce SST Exposure

Introduction

Big news for Malaysia’s construction industry.
On 24 October 2025, the Royal Malaysian Customs Department released Service Tax Policy No. 7/2025, effective retrospectively from 1 July 2025.

This long-awaited clarification finally confirms that itemised billing, separating construction materials and labour in your invoice, is officially recognised for service tax purposes.

In simple terms:
If you split your invoice between “materials” and “services”, only the services part is subject to 6% service tax.
If you lump them together (“包工包料”), the entire invoice will still be taxed.

Key Summary

Here’s what you need to know about Service Tax Policy 7/2025:

Separate Itemisation = Tax Savings
Clearly list construction materials and service charges in your invoice.
Only the service portion will be taxed.
The materials portion will be exempted since sales tax has already applied to those goods.

Lump-Sum Invoice = Full Tax
If your invoice combines both without breakdown, the full contract value attracts 6% service tax.
This rule applies even if materials form the bulk of the cost.

Retrospective Effect (From 1 July 2025)
The policy is effective retrospectively, so businesses that overpaid can consider issuing credit notes and adjusting SST-02 filings.
Refund processes are possible but may create cash flow disadvantages.

Proper Documentation is Crucial
Keep records showing how prices for goods and services were determined.
Invoices must clearly separate both components.
Contracts (BQ, quotation, or agreement) should align with the invoicing format.

Installation Services Are Included
The policy extends to installation services under CIDB’s definition of “construction services.”
EPCC contracts (engineering, procurement, construction, and commissioning) and ship or platform construction are also covered.

SME Implications

This policy offers welcome relief but also introduces new compliance risks for SMEs.

Lower SST Exposure
Builders can now reduce service tax by correctly itemising.
Transparent billing can make your quotes more competitive in tenders.

Accounting System Updates
Ensure your accounting or invoicing software can handle split entries between materials and services.
Mistakes here can lead to underpayment or overpayment of SST.

Contract Alignment
Even though the STP doesn’t require your Bill of Quantities (BQ) to be itemised, your invoice must be.
Contractors should review existing contracts to see if amendments are needed.

Tax, Audit, and Stamp Duty Impact
Changes in invoicing affect classification, whether it’s supply of goods or provision of services, which may also impact income tax treatment and stamp duty computation.

KTP’s View

At KTP, we welcome this clarification.
It brings long-needed consistency between construction services and other mixed-supply industries like repair and maintenance.

However, the devil lies in the details.
Many SMEs will need to revise their billing systems, contract templates, and accounting entries.
In the 8% SST era, every percentage point affects profit margins, and poor documentation can turn tax savings into future audit headaches.

“This isn’t just a tax issue, it’s a cash flow and compliance strategy.”

Call to Action

Construction companies, developers, and accountants should review their invoicing format immediately.
Don’t wait until Customs or LHDN audits knock on your door.

KTP can help you:

Review your invoice and contract templates
Align accounting systems with SST-02 requirements
Prepare documentation for retrospective adjustments

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