Expansion Of Sales And Service Tax ("SST") Scope

- How they may impact your Business

Following the recent revision of Sales Tax and expansion of the scope of Service Tax which came into effect on 1 July 2025 (the "Effective Date"), the Government has announced a grace period extending until 31 December 2025, to ease the transition for the changes. During this period, no penalties will be imposed on companies that have made efforts to comply with the newly revised SST framework.

Key Points

The most notable revisions include:

1. Sales Tax

Sales tax rate remains unchanged for essential goods consumed by the public (rate of 0%), while sales tax at rates of 5% or 10% will apply to premium discretionary and non-essential goods (including but not limited to wood, iron, steel, industrial machinery and drones).

2. Service Tax

Service tax has been expanded to the following:

• 8% service tax for leasing and rental services for commercial or business goods and premises (including the leasing of machinery, vehicles, and commercial or industrial buildings);
• 6% service tax for construction works (excludes construction of residential building and public facilities related to residential building) related to infrastructure, commercial buildings and industrial facilities;
• 8% service tax for financial services;
• 6% service tax for healthcare services; and
• 6% service tax for education services by private schools and institutions.

On 27 June 2025, the Government had announced that:

1. Beauty services are now excluded from the expanded SST;
2. Registration threshold for service tax on leasing or rental, and financial services has been raised to RM1 million;
3. Threshold for businesses to be subject to service tax on rental services has been raised to RM1 million in total annual sales; and
4. Select imported fruits (i.e. imported apples, oranges, mandarin oranges and dates) are exempted from Sales Tax.

Examples

1. Some points to assess whether your rent is subject to the 8% service tax

1. If the leasing or rental is for commercial or business goods and premises.
2. If the lessee / landlord earns over RM1 million in total annual sales on rental.
3. Exemption for non-reviewable contracts:
   A 12-month exemption for the period from 1 July 2025 to 30 June 2026 is given to non-reviewable contracts. A non-reviewable contract shall be for a fixed contract value and shall not contain price revision clauses or value adjustment mechanisms, examples:

• 1. rent for the rental period is fixed and shall not be tied to market rate.
  2. rent shall not be reviewable or renegotiable, and the landlord is not allowed to revise the rent.

4. Stamped by LHDN on or before 9 June 2025

The abovementioned 12-month exemption applies to non reviewable contracts signed and stamped on or before 9 June 2025, provided that they are not amended or renewed during the period.

2. Service tax and construction work services
3. 1. Service tax will apply to any construction work services, excluding construction work for residential buildings and public facilities related to those residential buildings. Notably, construction services under contracts for mixed-use buildings are subject to service tax.
   2. There is an exemption for construction work service providers whose value of taxable services do not exceed RM1.5 million within a 12 month period. Construction work services that are fully completed before the Effective Date are not subject to service tax (regardless of whether invoice was issued or payment was received after the Effective Date).
   3. Additionally, retention sum payments related to construction work services may be subject to service tax, depending on when the construction work services were contracted and when the services were completed. Liquidated and ascertained damages (usually incurred due to delays in the completion of the project) are however not subject to service tax.

Below is a non-exhaustive list of exemptions provided (subject to specific conditions):

1. Business to business transactions is only exempted from service tax if both the service provider and service recipient are registered for service tax and provide the same taxable service.
2. Rental or leasing services provided to tenants with Small & Micro Enterprise status.
3. Group relief for rental or leasing services provided by one company to another company within the same corporate group.

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The expanded scope of the SST has numerous implications, and depending on the nature of your business and transactions, there may be significant implications. Some key points to consider will be the scope of services that are acquired or provided, inter-company transactions (in particular whether exemptions apply), and also whether contracts are reviewable. Additionally, Sales Tax may apply to various goods, not previously subject to such tax, which will impact costing, particularly if you are in certain industries (e.g. the construction industry).

While the above provides a general overview of the available exemptions, it is important to note that the applicability of any exemption is assessed on a case by-case basis, and a similar scenario with different factual circumstances, may lead to a different outcome. Accordingly, businesses are strongly advised to seek professional advice before relying on such exemptions.

For prudence, we would advise that you consider the above changes and how they may impact your business operations, and where necessary, seek professional advice. There may also be a need to review your contracts to ensure that they take into account these revisions and implications accordingly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.