Effective 1 July 2025, the Government will implement a significant expansion of the scope of Sales Tax and Service Tax (“SST”). Although this expansion was first announced during Budget 2025 and initially scheduled to take effect on 1 May 2025, its implementation was subsequently postponed. The new effective date, 1 July 2025, was officially confirmed in a press release issued by the Ministry of Finance (“MOF”) on 9 June 2025.
This alert outlines the scope of the SST expansion and highlights key areas that affected businesses should be aware of.
SERVICE TAX
Pursuant to Service Tax (Amendment) Regulations 2025 (“Service Tax Amendment Regulations”), the scope of taxable services prescribed under the First Schedule of the Service Tax Regulations 2018 (“STR”) has been expanded to include the following services:
Group C – Beauty Services (8%)
Group H – Financial Services (8%)
Group I – Private Healthcare Services (6%)
Group K – Rental or Leasing Services (8%)
Group L – Construction Works Services (6%)
Group M – Education Services (6%)
The nature of services, applicable tax rates, registration thresholds, and exemptions are summarised in the table below:
|
No. |
Scope of the Taxable Service[1] | Excluded Services[2] | Registration Threshold (RM)[3] | Service Tax Rate[4] |
Exemptions[5] |
|
1. |
Beauty Services
Beauty treatments including facials, manicures & pedicures, hair treatments, tattoo services, spa, and slimming treatments[6]. |
N/A |
500,000 |
8% |
N/A |
|
2. |
Financial Services
Provision of financial services — such as insurance, takaful, financial leasing, factoring, trade financing, credit facilities, or Shariah-compliant financing services — when offered for a fee, commission, or similar payment[7]. |
|
500,000 |
8% |
|
|
3. |
Private Healthcare Services
Provision of healthcare services, practice of traditional and complementary medicine, and allied health services such as physiotherapy, medical physic, and nutrition[10]. |
|
1,500,000 |
6% |
|
|
4. |
Rental or Leasing Services
Provision of rental or leasing of all types of tangible assets, including any ancillary or bundled services[12]. |
|
500,000 |
8% |
|
|
5. |
Construction Works Services
Construction, extension, installation, repair, demolition or maintenance of buildings, roads, drainage, railways, bridges, electrical or mechanical works, gasworks or waterworks[16]. |
|
1,500,000 |
6% |
|
|
6. |
Education Services
Includes: (1) Private preschools, primary, secondary, and post- secondary education services that charge tuition fees exceeding RM60,000 per student per academic year; and (2) Higher education and education services provided by language centres to non-citizens[18]. |
|
Nil |
6% |
Malaysian citizens holding OKU cards |
*N.B.: Exemptions and/or reliefs highlighted in red are based on announcements made by the MOF and have not yet been formally legislated.
Key Considerations for Affected Businesses
1. Ascertaining Registration Timeline
(a) For businesses that have not register for service tax, it is crucial to understand the methodology for calculating the service tax registration threshold in order to determine when the obligation to register arises.
(b) Affected businesses are required to make a reasonable estimate of the value of taxable services to be provided over the 12-month period from 1 July 2025 until 30 June 2026. If the total value exceeds the relevant prescribed threshold, an application for service tax registration must be submitted by 31 August 2025 at the latest. This assessment can be carried out by ascertaining the value of existing contracts and making a reasonable projection of taxable turnover over the 12-month period.
(c) It is important to note that the computation of taxable turnover must include the value of taxable services that qualify for exemption (see Column 6 – Exemptions above). For the avoidance of doubt, services excluded from the definition of taxable services (see Column 3 – Excluded Services above) should not be included in the computation of the registration threshold.
(d) The earliest date for which an unregistered business may begin charging service tax is 1 September 2025, based on the estimated timeline below:
(i) If the business meets the registration threshold as of 1 July 2025, it becomes liable to register by 31 July 2025, under Section 12(2) of the Service Tax Act (“STA”).
(ii) The business must apply for registration by 31 August 2025, pursuant to Section 13(1) of the STA.
(iii) Upon approval, the effective date of registration will generally be 1 September 2025, from which point the business is required to charge service tax on the provision of its taxable services.
2. Transitional Rules for Services Spanning the Effective Date & Payments Received before 1.7.2025
(a) Businesses must take note of the applicable transitional rules. Pursuant to subregulation 3A(b) of the STR, where a newly taxable service spans across the effective date of the change (1.7.2025), service tax shall be imposed only on the portion of the service attributable to the period after the effective date. However, if payment is received before the effective date in respect of a newly taxable service to be provided on or after 1.7.2025, no service tax shall be charged. For the avoidance of doubt, no service tax shall be chargeable on any newly taxable services rendered before 1.7.2025, even if the payment is received after that date.
(b) The following examples illustrate three common scenarios in which the transitional rules may apply:
(i) Scenario 1: Services Spanning Across 7.2025
Company A provides construction services to Company B. The work commences on 1 June 2025 and is completed on 31 August 2025. An invoice is issued on 1 September 2025, and payment is received on 2 September 2025. Only the portion of the service rendered after 1 July 2025 is SUBJECT TO SERVICE TAX, as the services span across the effective date and payment is received after 1 July 2025.
(ii) Scenario 2: Invoice Issued Before 1.7.2025 But No Payment Received
Company A issues an invoice to Company B on 1 June 2025 for construction services. However, the services only commence on 1 August 2025 and are completed on 1 September 2025, with payment received only on 2 September 2025. This transaction is SUBJECT TO SERVICE TAX, as the services are provided after 1 July 2025 and no payment was received prior to 1 July 2025.
(iii) Scenario 3: Full Payment Received Before 1.7.2025
Company A issued an invoice to Company B on 1 June 2025. Company A received full payment on 30 June 2025. The construction work commences on 1 August 2025 and is completed on 1 September 2025. This transaction is NOT SUBJECT TO SERVICE TAX, as full payment was received before 1 July 2025, even though the services are performed later.
3. B2B Exemptions
(a) Businesses should familiarise themselves with, and where applicable, make use of the B2B Exemptions to mitigate additional service tax costs. Under the Service Tax (Persons Exempted from Payment of Tax) (Amendment) Order 2025 (“Service Tax Exemption Amendment Order”), B2B exemptions have been granted to:
(i) Group K- Rental or leasing services;
(ii) Group L- Construction works services; and
(iii) Group H- Finance services (restricted to service recipients regulated by the Labuan Financial Services Authority)
(b) Subject to specific conditions prescribed for each category of newly taxable services, the following general conditions must be met to qualify for B2B Exemptions for Groups K and L [19]:
(i) Both the service provider (“A”) and the service recipient (“B”) must be registered for service tax in respect of the relevant taxable service, under the same taxable group (i.e. Group K or Group L)
(ii) B must provide the same taxable service (i.e. sublease/sublet for Group K; construction service for Group L) to another party; and
(iii) The service provided by B to the other party is for the same purposes of subletting or subleasing or construction service, and not for personal consumption.
(c) However, as noted in the Customs Guideline[20], Customs has taken the position that the B2B exemption for rental or leasing services only applies during the period of active sublease. If the property is held without being re-leased or resold, the primary lessee must account for service tax during the interim periods:
(i) Example 1: Company A rents a building to Company B for the period of 1 July 2025 to 31 December 2025, intended for subleasing. However, Company B begins subleasing the building to Company C only on 1 September 2025. For the initial period from 1 July 2025 to 31 August 2025—when there is no active sublease—Company B does not qualify for the B2B exemption and is liable to pay service tax to Company A. In contrast, from 1 September 2025 to 31 December 2025, when the building is subleased to Company C, the B2B exemption applies. Accordingly, no service tax is payable by Company B to Company A, as Company B qualifies for the B2B Exemption. We are of the view that Customs’ interpretation appears inconsistent with the Service Tax Exemption Amendment Order, as the wording of the Order does not distinguish between active and inactive sublease periods.
(d) While the MOF has previously announced that group reliefs would be available for rental or leasing services[21], it is important to note that, at the time of writing, such reliefs have not been reflected in the legislation, particularly in paragraphs 3 and/or 3A of the First Schedule to the STR.
4. MOF’s Exemptions for Specific Industries Pending Further Details
(a) The MOF has announced a 12-month service tax exemption for non-reviewable contracts involving the provision of rental/leasing services and construction services. [22].
(b) Based on the Customs Guidelines[23], any contract that offers no opportunity for review (i.e. non-reviewable contract) is granted 1 year exemption from the effective date, subject to prescribed conditions which have yet to be announced.
(c) A potential contention lies in the interpretation and scope of what constitutes a “Non-Reviewable Contract”. To date, no express definition or clarification of the term “non-reviewable contracts” has been announced.
(i) It is worth noting that under the previous GST regime, Section 187(3)(a) of the repealed GST Act 2014 defined “contract with no opportunity to review” as “any written contract or agreement which has no provision for a general review of the consideration for the supply for such a period until a review opportunity arises”.
(ii) “Review opportunity” was further defined under the repealed GST Act 2014 as an opportunity that arises for the supplier under the contract to:
(d) It is uncertain whether similar definitions would be adopted for the SST regime, businesses should remain vigilant and monitor official updates. Once the relevant criteria are released, they should carefully review and examine the terms of their contract to determine whether the MOF exemption applies.
5. Imported Taxable Services
(a) Another key area that businesses should be mindful of is the treatment of imported taxable services[24]. Since 1 January 2019, imported taxable services have been subject to service tax under Section 7(b) of the Service Tax Act 2018. This means that all businesses, regardless of their service tax registration status, must account for and remit service tax to Customs for taxable services acquired from overseas service providers.
(b) Service tax registrants are required to declare the value of their imported taxable services in their service tax returns (i.e. SST-02 return form) and remit the service tax to Customs.
(c) Non-service tax registrants who acquire imported taxable services in carrying on their business are required to account for service tax using the SST-02A return form and remit the tax to Customs.
(d) Businesses may be subject to prosecution or a late payment penalty of up to a maximum of 40% of the unpaid service tax if failing to comply.
(e) According to the MOF’s announcement on 11 June 2025, a grace period until December 2025 will be granted, for which no penalties will be imposed on companies that “genuinely have made the effort to comply with the newly revised SST”[25]. Given that the criteria for penalty remission have not yet been announced, businesses are advised to take a prudent approach and take all reasonable steps to ensure compliance.
6. Identifying and Managing Downstream Service Tax Liabilities
(a) Affected businesses must also examine the terms of their existing contracts to ascertain whether the contract terms allow for the additional service tax to be passed on to the service recipient.
(b) This includes reviewing contractual relationships, pricing strategies, and supply structures, both within and outside the organisation. A clear understanding of who bears the tax burden is critical to avoid unexpected financial impact or disputes with customers.
(c) To properly evaluate the legal and commercial implications of these changes, businesses are strongly encouraged to seek professional legal advice when complication arises.
SALES TAX
Reclassification of Goods: Adjusted Rates
For sales tax, the Minister has gazetted two key subsidiary legislations, namely the Sales Tax (Rate of Sales Tax) Order 2025 (“Sales Tax Order”) and the Sales Tax (Goods Exempted from Sales Tax) Order 2025 (“Sales Tax Exemption Order”) — both of which will take effect from 1 July 2025.
As summarised in the table below, these Orders recalibrate the current multi-rate sales tax regime by reclassifying goods which fallen within the 0%, 5%, and 10% tax bands.
|
Change in Sales Tax Rate |
||
| Taxable Goods | Previous Rate |
Current Rate |
| Silk |
0% |
5% |
| Imported fruits – including bananas, assortment of berries, avocadoes and mangoes. |
0% |
5% |
| Premium fish varieties – including salmon and cod fish. |
0% |
5% |
| Truffle mushroom |
0% |
5% |
| Pharmaceutical inputs – such as antibiotics. |
0% |
5% |
| Construction inputs – including iron, steel, quicklime and bitumen. Basic construction materials such as cement, stones and sand remain exempted. |
0% |
5% |
| Industrial machinery – excluding agricultural and livestock machinery. |
0% |
5% |
| Tungsten waste and scraps |
0% |
10% |
| Racing bicycles |
0% |
10% |
| Antique hand-painted artworks |
0% |
10% |
| Vessels used exclusively to transport passengers |
0% |
10% |
Pursuant to the Sales Tax Exemption Order and the MOF’s announcement[26], a wide range of daily essential goods will continue to be exempt from sales tax (i.e. subject to 0% sales tax). These include:
Notably, the items stated above are not exhaustive. The applicable sales tax rate is strictly determined based on the classification of the goods under the relevant HS Code or tariff code. This underscores the importance of accurate HS classification. Where there is uncertainty regarding the appropriate tariff code, businesses are encouraged to apply for Customs HS Classification Advice or obtain an official Customs Ruling on the tariff code used.
Under the revised sales tax regime, businesses should be particularly mindful of the following transitional rules introduced to ensure a smooth transition:
1. Timing of Invoices Determines Applicable Tax Rates
(a) Affected business must ascertain the correct timeline where the new sales tax rate comes into play. The transitional rules applicable for sales tax are different as compared to the transition rules applicable for service tax. As clarified in Paragraph 3(a) of the Sales Tax Order:
(i) For invoices issued before 1 July 2025, the goods must apply the existing sales tax rates, even if the delivery of goods occurs after the effective date.
(ii) Invoices issued on or after 1 July 2025 must apply the new rates in accordance with the Sales Tax Order.
2. Sales Tax Treatment on Disposal or Usage of Taxable Goods
(a) Under Paragraph 3(3) of the Sales Tax Order, if a registered manufactureruses or disposes of taxable goods on or after 1 July 2025, the new sales tax rate would be applicable, even if the usage or disposal has been recorded in the accounting entry earlier.
Conclusion
In light of the above, businesses must remain vigilant and take proactive steps to assess the impact of the revised SST framework. This includes reviewing the nature of services provided or goods manufactured/ imported to determine the correct tax treatment and registration obligations. Where uncertainties or complexities arise, it is strongly recommended that businesses seek professional or legal advice to ensure full compliance and to mitigate potential risks.
This alert is written by Ivy Ling Yieng Ping, Partner, and Charlene Woon Zi Xuan, Pupil of LHAG’s Tax, Customs and Trade.
For any inquiries, please contact Partner Ivy Ling Yieng Ping (il@lh-ag.com).
REFERENCES
[1] See Column 2, First Schedule of the STR
[2] These are the services excluded from the scope of taxable service. See Column 2, First Schedule of STR; Also see paragraph 2 of the Appendix to MOF’s press release: https://www.mof.gov.my/portal/en/news/press-release/targeted-revision-of-sales-tax-rate-and-expansion-of-service-tax-scope-effective-1-july-2025
[3] Column 3, First Schedule of the STR as amended by regulation 3 of the Service Tax Amendment Regulations
[4] See paragraph 3 of the Service Tax (Rate of Tax) Order 2018 as amended by paragraph 3 Service Tax (Rate of Tax) (Amendment) Order 2025
[5] See Paragraph 2 of the Service Tax Exemption Amendment Order
[6] See MOF announcement: https://www.mof.gov.my/portal/en/news/press-release/targeted-revision-of-sales-tax-rate-and-expansion-of-service-tax-scope-effective-1-july-2025; Also see definition of “wellness centre” under regulation 2 of STR
[7] Column 2, First Schedule of STR as amended by regulation 3(h) of the Service Tax Amendment Regulations
[8] See paragraph 2(iii)(c) of the Appendix to MOF’s press release: https://www.mof.gov.my/portal/en/news/press-release/targeted-revision-of-sales-tax-rate-and-expansion-of-service-tax-scope-effective-1-july-2025
[9] See paragraph 2(iii)(c) of the Appendix to MOF’s press release: https://www.mof.gov.my/portal/en/news/press-release/targeted-revision-of-sales-tax-rate-and-expansion-of-service-tax-scope-effective-1-july-2025
[10] Amended through regulation 2(a) of the Service Tax (Amendment) Regulations 2025
[11] See Column 4, Item 7 of the Service Tax (Persons Exempted from Payment of Tax) Order 2018
[12] See Column 2, Group K, First Schedule of STR 2018 as amended by regulation 3(j) of the Service Tax Amendment Regulations
[13] See paragraph 2(i)(c) of the Appendix to MOF’s press release: <https://www.mof.gov.my/portal/en/news/press-release/targeted-revision-of-sales-tax-rate-and-expansion-of-service-tax-scope-effective-1-july-2025>
[14] See paragraph 30 of Customs Guideline: Rental or Leasing Services (Panduan: Perkhidmatan Sewaan Atau Pajakan) as at 9 June 2025
[15] See paragraph 31 of Customs Guideline: Rental or Leasing Services (Panduan: Perkhidmatan Sewaan Atau Pajakan) as at 9 June 2025
[16] See definition of “construction works” under regulation 2 of STR as amended by regulation 2 of Service Tax Amendment Regulations
[17] See paragraph 57 of Customs Guideline: Construction Works Services (Panduan: Perkhidmatan Kerja Perkhidmatan) as at 9 June 2025
[18] See column 1, Group M, First Schedule of STR as amended by regulation 3(j) of the Service Tax Amendment Regulations
[19] Column 4, Schedule of the Service Tax (Persons Exempted From Payment of Tax) (Amendment) Order 2025 as amended by paragraph 2 of Service Tax Exemption Amendment Order
[20] Customs Guideline: Rental or Leasing Services (Panduan: Perkhidmatan Sewaan Atau Pajakan) as at 9 June 2025
[21] See paragraph 2(i)(c) of the Appendix to MOF’s press release: https://www.mof.gov.my/portal/en/news/press-release/targeted-revision-of-sales-tax-rate-and-expansion-of-service-tax-scope-effective-1-july-2025
[22] <https://www.mof.gov.my/portal/en/news/press-release/targeted-revision-of-sales-tax-rate-and-expansion-of-service-tax-scope-effective-1-july-2025>
[23] See paragraph 31 of Customs Guideline: Rental or Leasing Services as at 9 June 2025; Also see paragraph 57 of Customs Guideline: Construction Works Services as at 9 June 2025
[24] “Imported taxable service” is defined in section 2(1) of the Service Tax Act 2018 as “any taxable service acquired by any person in Malaysia from any person who is outside Malaysia”
[25] <https://www.mof.gov.my/portal/en/news/press-release/clarification-on-sst-expansion>
[26] See paragraph 1 of the Appendix to MOF’s press release: < https://www.mof.gov.my/portal/en/news/press-release/targeted-revision-of-sales-tax-rate-and-expansion-of-service-tax-scope-effective-1-july-2025>
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