Call for greater clarity on SST provisions
Call for greater clarity on SST provisions
Businesses need to prepare for further refinements to the Sales and Service Tax (SST) framework following recent expansions introduced since 2024, a tax expert said.
BDO Malaysia Head of Tax Advisory and Executive Director David Lai said additional guidance could be issued to clarify the interpretation and application of the relevant provisions under the SST expansion.
"For sales tax, this includes revisiting the list of exempted manufacturing activities and providing clearer definition for the activities which do not qualify as manufacturing to better reflect the evolving nature of modern-day business activities, such as the application of vertical farming and tissue culture in the context of agriculture.
"For service tax, clearer definitions and illustrative examples should be provided for overlapping services, such as construction versus maintenance and leasing versus logistics, to reduce ambiguity," he told Business Times in an interview.
Lai said sector-wide issues also warrant attention, noting that although the list of exempted goods has significantly reduced, the exemptions available to manufacturers remain limited.
He added that to alleviate the cascading effect on manufacturing inputs, the government could consider expanding the Sales Tax (Person Exempted from Payment of Sales Tax) Order 2018 to include more essential items consumed locally.
In the construction sector, Lai expects an apportionment mechanism could be applied to mixed development projects, and the business-to-business (B2B) exemption should extend to professional services within construction contracts.
During the July-August 2025 transitional period, some manufacturers who were not yet registered for sales tax may have faced higher input costs and were unable to pass the tax on to customers.
Lai said to ease their financial burden, the Finance Ministry or Customs Department should provide sales tax refunds or deductions for manufacturing inputs acquired or imported during this transitional period.
He asuggested that for controlled items, exemptions should cover not only inputs used in manufacturing but also controlled items that are reared, harvested, sourced, or extracted locally in Malaysia.
"This is particularly important given rising global uncertainty, driven by wars, trade tensions, and shifting US policies, which have significantly increased the cost of such inputs.
"For instance, animal feed, which is predominantly imported, has seen notable price hikes in recent years," he said.
Navigating SST Overlaps and Rising Costs
Lai said there is overlap between sales tax and service tax, which poses challenges for certain businesses.
"For example, a manufacturer registered for sales tax may also perform installation work, such as an interior decoration company that manufactures its own furniture and fittings.
"While installation works are excluded from sales tax, they may be subject to service tax.
"This requires careful analysis of contract terms, and in some cases, the manufacturer may need to register for and collect both taxes," he noted.
Lai also highlighted that rising SST costs are affecting key sectors in Malaysia, where tenants in offices and retail spaces face higher operating expenses, slowing leasing activity and limiting rental growth.
He said construction developers face tighter profit margins from cascading taxes, while retailers are hit by higher rents and sales tax on goods.
Lai said in response to this, businesses are adapting by renegotiating leases, revising contracts, streamlining projects, holding off price hikes, improving efficiency and leveraging digital platforms to manage costs and maintain competitiveness.
Nevertheless, Lai said the government's decision to reverse the proposed tax on beauty and wellness services and scrap the high-value goods tax (HVGT) reflects a strategic and responsive approach to fiscal policy, balancing revenue generation with economic and social considerations.
He said this shows the government is willing to listen and adapt, prioritising economic inclusivity and public sentiment.
Businesses Expected to Pass Costs to Consumers
According to Lai, businesses may consider passing on most of the additional tax costs to consumers due to the impact on their bottom line.
He explained that in sectors such as retail and food and beverage, higher rental and fit-out costs resulting from the eight per cent SST on commercial leasing make it difficult for operators to absorb expenses, which may in turn lead to price increases.
He said for consumer goods, companies selling non-essential or luxury items are also expected to pass on costs, particularly where profit margins are tight and these goods are affected by the recent sales tax expansion.
"However, this is not always the case and depends on the nature of the business. In situations where consumer sentiment remains weak, making price hikes risky for demand, businesses may choose to absorb costs.
"Price-sensitive sectors, such as mass-market retail or small food and beverages (F&B) outlets, may accept lower margins to stay competitive.
"Factors such as long-term business relationships and strategies to mitigate business volatility also influence decisions, with the goal of ensuring customer retention," he added.
This article appeared in the New Straits Times on 9 October 2025, based on an interview with David Lai, Executive Director and Head of Tax Advisory at BDO Malaysia.
BDO Malaysia Head of Tax Advisory and Executive Director David Lai said additional guidance could be issued to clarify the interpretation and application of the relevant provisions under the SST expansion.
"For sales tax, this includes revisiting the list of exempted manufacturing activities and providing clearer definition for the activities which do not qualify as manufacturing to better reflect the evolving nature of modern-day business activities, such as the application of vertical farming and tissue culture in the context of agriculture.
"For service tax, clearer definitions and illustrative examples should be provided for overlapping services, such as construction versus maintenance and leasing versus logistics, to reduce ambiguity," he told Business Times in an interview.
Lai said sector-wide issues also warrant attention, noting that although the list of exempted goods has significantly reduced, the exemptions available to manufacturers remain limited.
He added that to alleviate the cascading effect on manufacturing inputs, the government could consider expanding the Sales Tax (Person Exempted from Payment of Sales Tax) Order 2018 to include more essential items consumed locally.
In the construction sector, Lai expects an apportionment mechanism could be applied to mixed development projects, and the business-to-business (B2B) exemption should extend to professional services within construction contracts.
During the July-August 2025 transitional period, some manufacturers who were not yet registered for sales tax may have faced higher input costs and were unable to pass the tax on to customers.
Lai said to ease their financial burden, the Finance Ministry or Customs Department should provide sales tax refunds or deductions for manufacturing inputs acquired or imported during this transitional period.
He asuggested that for controlled items, exemptions should cover not only inputs used in manufacturing but also controlled items that are reared, harvested, sourced, or extracted locally in Malaysia.
"This is particularly important given rising global uncertainty, driven by wars, trade tensions, and shifting US policies, which have significantly increased the cost of such inputs.
"For instance, animal feed, which is predominantly imported, has seen notable price hikes in recent years," he said.
Navigating SST Overlaps and Rising Costs
Lai said there is overlap between sales tax and service tax, which poses challenges for certain businesses.
"For example, a manufacturer registered for sales tax may also perform installation work, such as an interior decoration company that manufactures its own furniture and fittings.
"While installation works are excluded from sales tax, they may be subject to service tax.
"This requires careful analysis of contract terms, and in some cases, the manufacturer may need to register for and collect both taxes," he noted.
Lai also highlighted that rising SST costs are affecting key sectors in Malaysia, where tenants in offices and retail spaces face higher operating expenses, slowing leasing activity and limiting rental growth.
He said construction developers face tighter profit margins from cascading taxes, while retailers are hit by higher rents and sales tax on goods.
Lai said in response to this, businesses are adapting by renegotiating leases, revising contracts, streamlining projects, holding off price hikes, improving efficiency and leveraging digital platforms to manage costs and maintain competitiveness.
Nevertheless, Lai said the government's decision to reverse the proposed tax on beauty and wellness services and scrap the high-value goods tax (HVGT) reflects a strategic and responsive approach to fiscal policy, balancing revenue generation with economic and social considerations.
He said this shows the government is willing to listen and adapt, prioritising economic inclusivity and public sentiment.
Businesses Expected to Pass Costs to Consumers
According to Lai, businesses may consider passing on most of the additional tax costs to consumers due to the impact on their bottom line.
He explained that in sectors such as retail and food and beverage, higher rental and fit-out costs resulting from the eight per cent SST on commercial leasing make it difficult for operators to absorb expenses, which may in turn lead to price increases.
He said for consumer goods, companies selling non-essential or luxury items are also expected to pass on costs, particularly where profit margins are tight and these goods are affected by the recent sales tax expansion.
"However, this is not always the case and depends on the nature of the business. In situations where consumer sentiment remains weak, making price hikes risky for demand, businesses may choose to absorb costs.
"Price-sensitive sectors, such as mass-market retail or small food and beverages (F&B) outlets, may accept lower margins to stay competitive.
"Factors such as long-term business relationships and strategies to mitigate business volatility also influence decisions, with the goal of ensuring customer retention," he added.
This article appeared in the New Straits Times on 9 October 2025, based on an interview with David Lai, Executive Director and Head of Tax Advisory at BDO Malaysia.