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

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

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).

I attended Wolter Kluwer webinar last Wednesday on Malaysia’s Sales Tax and Service Tax (SST) expansion highlighted a simple but powerful message: minor changes in tax law can result in major consequences for businesses.

The session brought together top tax experts from KPMG, PwC, EY, and RDS Law. They broke down the July 2025 changes, explained the government’s motives, and gave practical advice for businesses on how to prepare.

The expansion of SST may look like just another compliance update, but in reality, it reshapes how companies price, contract, and plan their operations.

Why the Government Expanded SST

According to the panel, the main reason is revenue. Malaysia needs to widen its tax base to support national finances.

  • The Finance Ministry expects RM5 billion extra revenue this year and RM10 billion next year.

  • Essential goods (rice, sugar, basic meat, medical supplies) remain exempt.

  • Higher thresholds aim to shield small players and lower-income households.

But the truth is, all businesses and consumers will feel the pinch. Even if the government says B40 won’t be burdened, higher costs ripple through supply chains and end up in everyone’s wallet.

For now, this is seen as a substitute for GST, not a full replacement. The government admits GST has strengths, but timing, system readiness, and politics make it unsuitable to reintroduce immediately.

Expansion of Sales Tax

The biggest shock came from the sales tax changes:

  • 486 new tariff lines moved from exempt to 5% tax.

  • Everyday items now cost more e.g. imported fruits, yogurt, butter, salmon.

  • Industrial and commercial goods (machinery, compressors, boilers, conveyors) also attract 5% or 10%.

  • Premium consumer goods like racing bicycles, art pieces, candles, high-end watches now fall under 10% tax.

Impact

  1. Pricing pressure : Businesses face higher landed costs. Some may mark up prices beyond 5% just to be “safe,” adding further inflation.

  2. Supply chain review : Companies need to rethink sourcing, pricing, and competitiveness.

  3. Structural shift : Malaysia is moving closer to a broad-based consumption tax, but without GST’s input tax credit, costs will cascade down the chain.

Bottom line : expect costs to rise across industries.

Expansion of Service Tax

Service tax used to cover a narrow range of services. From July 2025, it expanded into several new areas:

1. Rental & Leasing (Group K)

  • Now taxed at 8%.

  • Exemptions for residential properties, MSMEs, and finance leases.

  • But landlords and tenants in commercial properties must factor in the extra cost.

This is sensitive because leasing underpins retail, logistics, and industrial operations. Higher costs may:

  • Reduce REIT income and tenant demand.

  • Push businesses to downsize or even operate from residential houses to avoid tax.

  • Trigger disputes on lease classification (operating vs finance lease).

Even small things like leasing a photocopier or coffee machine now attract service tax.

2. Construction Services

  • Entire construction works now taxed at 6%, threshold RM1.5 million.

  • Covers installation, renovation, demolition, and repairs not just building.

  • Residential builds are exempt, but mixed developments (residential + commercial) fall under tax.

This causes huge uncertainty. Developers face confusion : ministers say one thing, customs officers say another. Industries like healthcare fear that even installing MRI machines could be considered “construction.”

Margins in construction are already thin (2-3%). Adding 6% may push some projects into losses or abandonment.

3. Financial Services (Group H)

  • Previously limited to credit cards and insurance.

  • Now includes fees, commissions, and similar charges.

  • Exemptions for interest and dividends remain.

This impacts banking, Islamic finance, digital banking, and unit trusts. The main challenges are system readiness and awareness. Businesses must be careful with exemptions ie if you miss one condition, you lose the relief.

4. Healthcare & Education

  • Private healthcare for non-Malaysians is taxed (threshold RM1 million).

  • Private education taxed for:

    • Non-Malaysians in higher education.

    • Local students if annual fees exceed RM60,000 per child.

Effectively, this targets “premium services” just like premium goods.

Key Industry Concerns

1. Double Taxation

Construction contracts risk being taxed twice (materials + services). The government is reviewing guidelines to allow separation of billing,

2. Stamping of Contracts

For transitional exemptions, contracts must be stamped. Businesses complain this mixes two different laws (Stamp Act vs Service Tax Act).

3. Thin Margins & Cash Flow

Construction and hospitality players say the new tax eats into already tight margins. Without input tax credit, SST becomes a direct cost of doing business.

4. Tenant-Landlord Tension

Commercial landlords may try to pass on 8% to tenants. Some may absorb it, others may restructure leases. Retailers in malls with turnover-based rents will be hit hardest.

Practical Advice from the Panel

  1. Conduct an SST Assessment

    • Identify which revenue streams are taxable under the new rules.

    • Check for available exemptions before rushing to register.

  2. Review Contracts

    • Especially leasing, rental, and construction agreements.

    • Check if you qualify for transitional relief.

  3. Seek Written Confirmation

    • If unsure, write to Customs HQ.

    • Get black-and-white rulings for audit defence.

  4. Use Exemptions Properly

    • MSME exemption, B2B exemption, group relief (where available).

    • But comply with conditions – no shortcuts.

  5. Update Pricing Strategies

    • Don’t blindly increase prices. KPDNHEP may investigate profiteering.

    • Perform cost analysis, justify increases, and communicate with customers.

  6. Leverage E-Invoicing Systems

    • Many businesses already upgraded for e-Invoice.

    • Use the same systems to handle SST compliance.

  7. Monitor Updates

    • Customs is still refining rules.

    • Check MITI/Customs portals for new guidelines.

Final Takeaway

The expansion of SST is not just a technical update – it is a game-changer for Malaysian businesses.

  • Sales tax expansion means almost everything, from yogurt to industrial machinery, now attracts tax.

  • Service tax expansion hits construction, rental, financial services, healthcare, and education.

  • Costs will rise, margins will shrink, and compliance will get more complicated.

For businesses, the message is clear:

  • Don’t wait until Customs knocks on your door.

  • Review contracts, update systems, and seek advice now.

  • Tax is a “painful medicine,” but with planning, you can minimise the side effects.

Update from our past blog on SST Expansion

17/7/2025 Sales & Service Tax (SST) Expansion … What Businesses Need to Know Post-1 July 2025

https://www.ktp.com.my/blog/what-is-the-scope-expansion-of-sst-in-malaysia-2025/17july2025

PS : Authored by Mr Koh Teck Peng, the Group Principal, in his personal LinkedIn post

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