Sharp Increase in Tax Scope
Under the new Sales Tax Orders, 4,806 tariff lines are now subject to 5% sales tax, extending taxation to a wide range of goods that were previously exempt. These include not only high-value food items, but also critical industrial inputs such as machinery, pumps, compressors, furnaces, and equipment used in manufacturing and technical operations. Only 359 HS codes remain zero-rated or exempt—mainly essential goods such as rice, vegetables, and medical supplies—meaning approximately 97% of goods under Malaysia’s 11,442 tariff lines are now taxable. This marks a fundamental shift in the country’s tax structure.
“The expanded scope now places a direct tax burden on machinery and equipment typically classified as capital expenditure… expected to increase investment costs, potentially delaying business expansion and dampening overall investment appetite.”
Service Sector Hit Hard
The broadening of the service tax is particularly alarming. New inclusions—such as leasing, construction, healthcare, education, and financial services—are now taxed at 8% once they cross RM500,000 in taxable turnover. While exemptions for MSMEs and residential rentals exist, the inclusion of commercial property leasing is expected to inflate operational costs significantly.
“A business paying RM25,000 monthly in rent will face an additional RM2,000 per month, or RM24,000 annually in service tax… larger operations may see annual tax costs surge to RM60,000.”
This added burden, FMM warns, will likely be passed on to consumers, exacerbating inflationary pressures and weakening supply chain resilience.
Implementation Concerns
FMM is especially concerned about the tight implementation timeline. With less than three weeks to prepare, companies must update systems, reassess product classifications, apply for exemptions, and communicate new pricing. Additionally, many manufacturers previously outside SST’s purview now face complex compliance obligations.
Although the Government has granted a grace period until December 31, 2025, no penalties will be enforced until then, the lack of clear transitional guidelines—especially for businesses dealing in mixed supplies—further compounds uncertainty.
“No consultation was held on the expansion of the service tax, which carries equally significant implications.”
Call for Reassessment and Policy Reform
FMM is urging the Government to defer the SST expansion and conduct a full economic impact assessment covering effects on CPI, SME resilience, input costs, and competitiveness. It also recommends an expanded exemption list, especially for capital equipment and machinery, to preserve investment momentum.
Additionally, FMM has reiterated its call for the reintroduction of the Goods and Services Tax (GST) as a more efficient and transparent alternative to SST:
“Instead of widening a narrow and cascading tax system… GST offers a more efficient, transparent and broad-based solution… zero-rating exports and essential goods would minimise tax-on-tax effects, improve compliance, and sustainably grow the Government’s revenue base.”
In conclusion, FMM cautions that the untimely and broad expansion of SST threatens cost stability, business sustainability, and Malaysia’s export competitiveness. It urges the Government to recalibrate its tax policy for the sake of long-term economic resilience and investor confidence.
