Saifudin & Co

Overview of Malaysia's SST Expansion July 2025

The Malaysian government's expansion of the Sales and Service Tax (SST), effective July 1, 2025, marks the most comprehensive indirect tax reform in recent years. Originally announced in Budget 2025 and gazetted on June 9, 2025, this expansion significantly broadens Malaysia's tax base while implementing targeted measures to minimize impact on essential goods and small businesses.

Key Changes and New Tax Categories

Rental and Leasing Services - 8% Service Tax

The most impactful change affects rental and leasing services, now subject to 8% service tax with a revised registration threshold of RM1 million annually (increased from the original RM500,000 following public feedback).

Services Subject to 8% Tax:

Commercial property rentals (offices, shop lots, warehouses)
Movable asset leasing (vehicles, machinery, equipment)
Specialized asset leasing (yachts, helicopters, exhibition equipment)
Cross-border leasing of Malaysian-located assets

Key Exemptions for Rental Services:

Residential property rentals
Reading materials and educational resources
Tangible assets located outside Malaysia
Financial leasing arrangements
Rentals within Special and Designated Areas
B2B subletting arrangements (with proper documentation)

Construction Services - 6% Service Tax

Construction services become taxable at 6% for providers with annual revenue exceeding RM1.5 million, including residential buildings on mixed development land.

Construction Tax Coverage:

General construction and renovation work
Residential and commercial building construction
Infrastructure development projects
Specialized construction services

Construction Service Exemptions:

Federal or state government projects
Public facilities within residential developments
Contracts signed before June 9, 2025 (12-month exemption period)

Financial Services - 8% Service Tax

Fee-based and commission-based financial services are now subject to 8% service tax, with registration threshold increased to RM1 million annually.

Taxable Financial Services:

Banking services by regulated and unregulated providers
Insurance brokerage and underwriting
Trade finance and commercial lending fees
Investment advisory and wealth management
Credit and charge card services (RM25 annual tax per card)

Financial Services Exemptions:

Basic banking services for consumers
Shariah-compliant financing arrangements
Foreign exchange gains and capital market services
Government financial services

Healthcare Services - 6% Service Tax

Private healthcare services for non-Malaysian citizens are subject to 6% service tax for operators with annual revenue exceeding RM1.5 million. Malaysian citizens remain fully exempt across all healthcare categories.

Private Education Services - 6% Service Tax

Private education services face 6% service tax, specifically targeting high-end private schools charging over RM60,000 per student annually and non-citizen higher education students. Malaysian citizens are exempt.

Government Revisions Following Public Feedback

Increased Registration Thresholds

In response to industry concerns, the government announced three major revisions on June 27, 2025:

Rental and Leasing Services: Registration threshold increased from RM500,000 to RM1 million
Financial Services: Registration threshold increased from RM500,000 to RM1 million
Beauty Services: Completely removed from SST expansion

Additional Sales Tax Exemptions

Selected imported fruits now exempt from Sales Tax:

Imported apples, oranges, and mandarin oranges
Imported dates
All locally grown fruits remain exempt

Registration and Compliance Requirements

Registration Timeline and Process

Businesses must register for SST if their annual taxable services exceed the prescribed thresholds. The registration process involves:

Determining eligibility based on 12-month revenue assessment
Completing registration with Royal Malaysian Customs Department
Implementing tax collection and remittance systems
Training staff on SST compliance requirements

Grace Period and Penalty Waiver

The government provides a compliance grace period until December 31, 2025, with no prosecution or penalties for businesses actively working toward compliance. However, this requires documented evidence of compliance efforts.

Impact Assessment for Different Business Sectors

Property and Real Estate Sector

Commercial property owners and real estate management companies face the most significant impact from the 8% rental service tax. Key considerations include:

Lease agreement restructuring and renegotiation
Pricing strategy adjustments to account for tax burden
Tenant communication and relationship management
Cash flow impact assessment and planning

Equipment Leasing and Rental Businesses

Vehicle rental, machinery leasing, and equipment rental companies must evaluate:

Revenue threshold monitoring for registration requirements
Competitive pricing in the new tax environment
Contract terms and conditions updates
Customer retention strategies

Construction Industry

Construction companies and contractors need to consider:

Project bidding and pricing adjustments
Existing contract implications and variations
Subcontractor relationship management
Cash flow planning for tax obligations

Strategic Business Preparation Steps

Immediate Actions (July-September 2025)

Revenue Assessment: Calculate annual revenue for each service category to determine registration requirements
System Preparation: Upgrade accounting and invoicing systems for SST compliance
Contract Review: Assess existing agreements and plan necessary amendments
Staff Training: Educate finance and operations teams on new requirements

Medium-term Implementation (October-December 2025)

Registration Completion: Complete SST registration with Royal Malaysian Customs
Pricing Strategy: Implement revised pricing structures
Customer Communication: Inform clients about tax changes and pricing impacts
Compliance Testing: Conduct trial runs of new systems and processes

Compliance Best Practices

Documentation and Record Keeping

Maintain comprehensive records including:

Revenue calculations and threshold assessments
Customer contracts and service agreements
Tax collection and remittance documentation
Exemption claims and supporting evidence

System Integration Requirements

Ensure accounting systems can handle:

SST rate application and calculation
Customer exemption status tracking
Monthly return preparation and submission
Audit trail maintenance for compliance verification

Common Implementation Challenges and Solutions

Threshold Monitoring and Compliance

Challenge: Accurately tracking revenue to determine registration requirements.

Solution: Implement monthly revenue monitoring systems with automated alerts for threshold proximity.

Customer Relationship Management

Challenge: Managing customer reactions to price increases from tax implementation.

Solution: Proactive communication strategy explaining regulatory requirements and value proposition maintenance.

System Integration Complexity

Challenge: Integrating SST requirements with existing ERP and accounting systems.

Solution: Phased implementation approach with professional system integration support.

Industry-Specific Guidance

Shopping Mall and Retail Space Operators

Tenant lease agreement updates required
Service charge restructuring considerations
Mixed-use development tax implications
Tenant communication and support strategies

Vehicle Rental and Fleet Management

Short-term vs long-term rental tax implications
Corporate client contract negotiations
Insurance and maintenance service bundling
Cross-border rental considerations

Machinery and Equipment Leasing

Industrial equipment rental tax compliance
Construction equipment short-term rental
IT equipment and technology leasing
Maintenance service separation requirements

Enforcement and Compliance Monitoring

Royal Malaysian Customs Department Role

The Royal Malaysian Customs Department serves as the primary enforcement agency, providing:

Registration and compliance guidance
Industry-specific implementation support
Audit and verification services
Penalty assessment and collection

Compliance Support Resources

Businesses can access support through:

SST Call Centre: Multiple dedicated phone lines
Official guidelines and FAQs from MOF and Customs
Industry association guidance and updates
Professional tax advisory services

Future Outlook and Additional Considerations

Potential Further Expansions

While beauty services were removed from the current expansion, businesses should monitor future developments in:

Digital services and e-commerce taxation
Professional services scope expansion
International tax harmonization efforts
Additional threshold adjustments based on economic conditions

Economic Impact Assessment

The SST expansion is projected to:

Increase government revenue for public service improvements
Broaden the tax base beyond traditional manufacturing
Align Malaysia with international indirect tax practices
Support infrastructure development and social programs

Conclusion and Action Items

Malaysia's SST expansion represents a fundamental shift in the country's indirect tax landscape, requiring immediate attention from affected businesses. While the government has provided a grace period and revised thresholds based on public feedback, successful compliance requires proactive planning and professional guidance.

Critical Action Timeline:

Immediately: Assess revenue thresholds and service categorization
September 2025: Complete system upgrades and staff training
October 2025: Begin registration process with Royal Malaysian Customs
November 2025: Finalize pricing strategies and customer communication
December 2025: Complete compliance testing and documentation

Businesses that begin preparation now will be better positioned to navigate the transition successfully while minimizing operational disruption and maintaining competitive advantage in the evolving tax environment.