What should Malaysian businesses expect from the SST expansion in Budget 2026?

SST expansion from 1 July 2025: What has changed and what to expect in Budget 2026.

In brief

• Malaysia’s SST scope expansion from 1 July 2025 is a major shift in indirect tax policy.
• Businesses face compliance challenges while consumers may see changes in prices.
• Budget 2026 is expected to fine-tune the regime, including B2B exemptions and possible governance frameworks.

The Malaysian government’s expansion of the Sales Tax and Service Tax (SST) scope, effective from 1 July 2025, represents one of the most significant changes in the country’s indirect tax framework in recent years. Announced under Budget 2025, the move is part of the broader strategy to enhance fiscal resilience by widening the tax base while seeking to maintain fairness by keeping daily essentials untaxed. As with any major tax reform, businesses and consumers need to understand how they will be impacted and what actions they need to take.

Policy overview and adjustments

The scope of the Sales Tax has been expanded to impose tax on certain categories of goods previously exempted, particularly non-essential and luxury items. This includes selected food items, high-end consumer products, artwork and other goods that were historically outside the Sales Tax net. In parallel, the Service Tax regime was also broadened to cover new categories of services, i.e. rental and leasing, construction, education, financial services and healthcare. Providers of these services would need to adapt their pricing, contracts and compliance frameworks to incorporate the new tax obligations.

Further to the above changes, the government has continued to be receptive to feedback from the public and business community and has made refinements to the implementation details based on input received. Beauty services, which were initially meant to be included within the expanded Service Tax scope, were withdrawn at the final stage after taking into consideration public sentiment and the potential impact on households and small businesses. The threshold for rental and leasing services, as well as financial services, has been raised from the originally proposed RM500,000 to RM1 million, a concession to ease the entry burden of smaller service providers. Further, the rental of ships and aircraft has been exempted from Service Tax to maintain the competitiveness of these industries and to mitigate the risk of local ship and aircraft owners seeking to register these assets abroad. 

Impact to service providers

The expanded scope of SST required immediate action by impacted parties. Manufacturers and importers must now account for Sales Tax on goods that were previously exempt, requiring not only adjustments to systems and processes but also communication with suppliers and customers to explain potential price revisions.

For the services sector, certain industries, such as construction, are grappling with complex implementation issues and are continuing to provide their input to the authorities. For example, under the current Service Tax (Amendment) Regulations and accompanying guides, the tax applies broadly to construction works, including mixed development projects that combine residential, commercial and public facilities. As the rules stand, the entire project value of a mixed development, rather than only the commercial portion, is subject to Service Tax. Developers and contractors have requested that the tax be confined to the commercial component only, in line with the overarching intention to shield necessities from additional taxation.

Providers of rental and leasing services, meanwhile, must now manage the implications of being brought into scope, albeit at a RM1,000,000 threshold. This higher threshold has provided relief for smaller operators, but larger landlords must still contend with transitional contracts, invoicing changes and customer communication.

It is welcome to note that, the Royal Malaysian Customs Department (RMCD) has offered temporary waivers of penalties for non-compliance up to the end of 2025, to allow businesses time to adapt.

Consumer considerations

From the consumers’ perspective, when designing the expanded SST, care was taken to avoid burdening households with new taxes on daily essentials. The withdrawal of beauty services from scope was, in part, motivated by concerns that the inclusion of such services could contribute to rising cost of living pressures for middle-income households. At the same time, consumers purchasing high-end goods, imported items and luxury services can expect to bear higher costs, in line with the government’s aim of applying tax more progressively. The SST expansion may also influence consumer behaviour and how consumers adjust their spending patterns in response to these changes will be closely watched over the coming quarters.

Tax compliance considerations for business

Businesses may be uncertain on whether they need to charge Service Tax on certain transactions. In cases of doubt, some service providers may have adopted a prudent approach by charging tax to avoid the risk of under-collection. However, this strategy carries its own risks, as customers may resist paying Service Tax if they believe this should not apply, leading to disputes and strained relationships. On the other hand, if businesses choose not to charge and the RMCD subsequently rules the service to be taxable, they will be liable for back taxes and penalties. This dilemma has made clear the importance of further guidance, plain-language rulings and industry-specific clarifications from the RMCD. Taxpayers should also consider seeking rulings from RMCD on areas of uncertainty.

Further, the SST expansion requires businesses to update their accounting systems, invoicing formats and reporting processes so that tax is calculated and recorded accurately. With more goods now subject to Sales Tax, businesses must reassess product classifications, update tax codes and apply the correct Sales Tax rate, either 5% or 10%, based on the type of goods. Similarly, for services, it is crucial to apply the correct Service Tax rate of either 6% or 8%, depending on the nature of the service. Applying the wrong SST rate may result in undercharging that could lead to penalties, or overcharging, which may cause customer dissatisfaction and disputes.  Businesses should undertake periodic “health checks” to confirm that they are adopting the appropriate treatment, to identify errors and to reduce the risk of repeated errors.  Where omissions are noted, voluntary disclosures to the RMCD should be considered to mitigate the risk of penalties.

Looking ahead to Budget 2026

Public statements ahead of the Budget announcement have focused on broader themes, such as subsidy rationalization, governance reforms and measures to attract high-value investments. In the area of indirect tax, no sweeping new announcements are anticipated, although adjustments or targeted reliefs may still be introduced to ease compliance and address specific industry concerns.

Foremost among these is the scope of business-to-business (B2B) exemptions under the Service Tax regime. At present, B2B exemptions are narrowly defined, applying only when a taxable person acquires the same type of taxable service that it provides. This narrow construction may leave legitimate B2B transactions being subject to cascading tax, raising costs across supply chains. A more expansive approach, where exemptions are granted for services acquired for the onward provision of any type of taxable services to end customers (regardless of whether the acquired services are the same type as those provided) would alleviate this burden and reduce disputes. Such a reform would be in line with the government’s broader objective of supporting business competitiveness while maintaining fairness in tax collection.

It is also possible that further sector-specific policies or clarifications would be issued, with services providers in areas such as rental and construction expected to continue engaging with the RMCD to share their views. The updates made after the initial SST expansion announcements demonstrate that the government is listening; and Budget 2026 could provide an opportunity for similar refinements where the tax has been shown to have disproportionate or unintended effects.