(TAX UPDATE) Sales & Service Tax (SST) Expansion … What Businesses Need to Know Post-1 July 2025

(TAX UPDATE) Sales & Service Tax (SST) Expansion … What Businesses Need to Know Post-1 July 2025

Introduction

Since the gazettement of the expanded Sales Tax and Service Tax (SST) laws on 9 June 2025, there has been a wave of developments and clarifications from the Ministry of Finance (MOF) and the Royal Malaysian Customs Department (RMCD).

These updates bring wide implications for businesses across various industries – especially those in financial services, rental or leasing, construction, education, and private healthcare.

If your business provides rental or leasing services, deals in financial commissions, or even leases laptops or printers, you’ll want to read this. Here's what we think matters most to you.

1. New Service Tax Policies Effective from 1 July 2025

RMCD released five new Service Tax Policies (STP) to guide the implementation of the expanded service tax. These policies provide exemptions and transitional relief for selected services under Section 34(3)(a) of the Service Tax Act 2018.

The five policies cover:

  • Financial Services (STP 1/2025)

  • Rental or Leasing Services (STP 2/2025)

  • Construction Works Services (STP 3/2025)

  • Education Services (STP 4/2025)

  • Private Healthcare Services (STP 5/2025)

Among the most notable updates :

  • Non-reviewable contracts : A grace period applies to pre-existing contracts in financial, rental, leasing, and construction services. These contracts are exempt from service tax for a period of one year starting 1 July 2025, provided they meet specific conditions.

  • B2B exemption for financial services : Businesses that receive financial services may enjoy exemptions, reducing cost burdens within the supply chain.

  • Group relief : Group companies offering rental or leasing services among themselves may apply for group relief exemptions to avoid double taxation.

Businesses should revisit their contracts and internal arrangements to assess how these exemptions apply and whether any reclassification is needed.

2. Higher Registration Thresholds for Financial and Rental Services

Previously, the service tax registration threshold stood at RM500,000 annually. This has now been doubled to RM1 million for:

  • Rental or leasing services (Group K)

  • Financial services that are fee- or commission-based (Group H)

What this means:

  • If your revenue from these services is below RM1 million in a 12-month period, you are not required to register for service tax under these groups.

  • However, if you voluntarily register, you must charge service tax accordingly and comply with all relevant obligations.

This change is pending formal amendment to the regulations, but RMCD has announced it in advance to help businesses prepare.

3. SMEs Get Exemption from Rental Service Tax – With Conditions

A major concern, especially among smaller businesses, is the impact of service tax on rental expenses.

To cushion the blow, tenants who qualify as Small and Micro Enterprises (SMEs) with annual sales not exceeding RM1 million are exempted from paying service tax on rental and leasing services.

But this exemption comes with a few conditions:

  • The tenant must declare their SME status using the MyPMK system.

  • The RM1 million annual sales threshold must be based on the latest income declared to LHDN.

  • Annual updates to RMCD are required to maintain the exemption status.

Business owners need to be cautious : If RMCD finds any false or inaccurate declarations, the unpaid tax will be recovered from the tenant. This places the onus on the tenant to declare accurately and maintain records.

RMCD has published a user guide for the MyPMK platform to ease the registration process.

4. Beauty Services Are Out – No Longer Taxable

Previously, certain beauty services (Group C) were subject to service tax. However, effective from 1 July 2025, this category will no longer be taxable.

If your business was registered solely under this group, you should:

  • Review your registration status

  • Apply for cancellation of registration if RMCD has not done so already

Again, the formal regulation update is pending, but the announcement offers early relief to affected businesses.

5. Voluntary Registration for New Taxable Services

Newly affected businesses can apply for voluntary registration starting 28 June 2025.

  • If you apply in June 2025, your effective registration date will be 1 July 2025.

  • If you apply in July 2025, your effective registration will start from 1 August 2025.

Why register early?

  • Early registration means you can start charging service tax from 1 July, but it also allows you to claim available exemptions, such as B2B or C1/C3 exemptions, earlier.

  • For some businesses, this might be a strategic move to remain competitive or to ensure cost neutrality when dealing with clients who are already registered.

6. Updating Your Existing Registration

For businesses already registered under SST but expanding into new taxable services or adjusting tariff codes (e.g. due to changes in Sales Tax rates), updates can be made from 20 June 2025 onwards.

The new taxable categories or codes will become effective from 1 July 2025.

Make sure to:

  • Review your current services against the new Group K and other taxable services

  • Update your registration accordingly on the MySST system

7. What Falls Under Group K – Rental and Leasing Services

Here’s a non-exhaustive list of services now taxed at 8% under Group K:

  • Commercial space rentals (offices, shoplots, SOFO, etc.)

  • Leasing of laptops, printers, machinery, and equipment

  • Car rental, charter buses, and excursion buses

  • Bundled services like rental with maintenance or support

  • Leasing of animals or plants (e.g. horses for events)

  • Leasing of Malaysian assets to overseas clients

  • Imported rentals (reverse charge mechanism applies)

  • Subleasing or subletting arrangements

However, not everything is taxable. The following are exempt:

  • Residential rentals (including serviced apartments and SOHO units)

  • Rental of books or magazines

  • Leasing of assets located entirely outside Malaysia

  • Finance leases (e.g. hire purchase contracts)

  • Subleasing between registered Group K businesses

  • Rentals to SMEs with under RM1 million sales

  • Non-reviewable contracts (subject to conditions)

  • Rental within or between Designated or Special Areas

  • Group rental between companies under the same group

8. Obligations for Registered Persons

If your business is registered for service tax, here are your key responsibilities:

  • Charge service tax on all taxable services

  • Issue valid invoices and receipts with tax breakdown

  • Submit bi-monthly SST returns

  • Keep SST-related records for seven years

If your company already provides other taxable services, make sure to add Group K to your profile if you begin offering rental or leasing services.

9. Why This Matters – Impact Assessment Needed

The expansion of SST is more than just a compliance update – it can affect your cash flow, pricing structure, and competitive edge.

We strongly encourage all businesses, especially those in rental, leasing, or financial services, to carry out a thorough impact assessment. This includes:

  • Reviewing existing service agreements

  • Reassessing pricing strategies

  • Evaluating eligibility for exemptions

  • Updating contracts with new SST clauses if necessary

  • Monitoring revenue levels to avoid accidental non-compliance

Even if you're under the RM1 million threshold today, one large contract could tip the scale.

10. Final Thoughts – Stay Alert, Stay Informed

The government is still engaging with industry stakeholders, and we expect more clarification on grey areas in the coming months. RMCD has been proactive in issuing user guides, FAQs, and policy documents. However, businesses must also do their part to stay compliant.

At KTP, we continue to monitor the changes closely. If you need help assessing your exposure, updating your registrations, or managing SST risks in your contracts, feel free to reach out.

We’re here to support your business as you adapt to these changes.

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