Kuala Lumpur, June 12, 2025 – The Federation of Malaysian Manufacturing (FMM) expresses serious concern over the impending enforcement of the expanded Sales and Service Tax (SST) scope effective July 1, 2025, as gazetted by the Government. FMM acknowledges the Government’s objective to increase revenue and widen the tax base; however, the scale and timing of the expansion raise major challenges for business readiness, particularly for the manufacturing sector and manufacturing-related services. According to estimates by the Ministry of Finance, the SST expansion is expected to generate around RM5 billion in additional revenue in 2025. Although this may support the Government’s fiscal objectives, the additional tax burden will be largely borne by businesses and has serious implications for operating costs, investment decisions, and long-term business sustainability.

Under the new Sales Tax Orders, 4,806 tariff lines are now subject to 5% tax, covering a wide range of previously exempt goods. These include high-value food items as well as a broad spectrum of industrial goods, such as industrial machinery and mechanical appliances, electrical equipment, pumps, compressors, boilers, conveyors, and furnaces used in manufacturing processes. The 5% rate also applies to tools and apparatus for chemical, electrical, and technical operations, significantly broadening the range of taxable inputs used in production and operations. Only 359 Harmonised System (HS) codes have been retained as exempt or zero-rated, primarily essential goods such as rice, vegetables, meat, sugar, milk, medical supplies, and agricultural inputs. With Malaysia’s tariff system comprising 11,442 HS codes, this expansion results in approximately 97% of goods now subject to sales tax, marking a major structural shift from a previously narrower tax base to one where nearly all categories including industrial and commercial inputs are now taxable.

The expanded scope now places a direct tax burden on machinery and equipment typically classified as capital expenditure. This includes items critical to upgrading production lines, automating processes, and scaling operations. The imposition of sales tax on capital goods is expected to increase investment costs, potentially delaying business expansion and dampening overall investment appetite across key manufacturing and commercial sectors.

While no penalties will be enforced for non-compliance until December 31, 2025, the July 1, 2025, implementation date leaves companies with less than three weeks to reconfigure systems, assess product classifications, apply for exemptions, and communicate pricing changes to customers. FMM reiterates that many newly impacted manufacturers particularly those previously not registered under SST require more time to prepare and comply. While FMM was consulted on the expansion of the sales tax and provided input that led to the retention of exemptions for essential goods, no consultation was held on the expansion of the service tax, which carries equally significant implications. This is especially relevant for manufacturers that also provide services such as leasing of heavy machinery, construction, installation, and other technical services. The absence of early engagement has created uncertainty and implementation challenges for affected businesses now facing service tax obligations.

The impact is especially acute in the service sector, where the scope of service tax has been significantly broadened to include new categories such as rental and leasing, construction services, financial services, healthcare, and education. For instance, leasing and rental services are now subject to service tax at the rate of 8% when they involve goods or premises used for commercial or business purposes, and when the value of taxable services reaches RM500,000 within a 12-month period. This includes the leasing of machinery, vehicles, equipment, and commercial or industrial buildings. While exemptions are available for micro, small and medium enterprises (MSMEs) with annual taxable turnover below RM500,000 and for residential property rentals, the inclusion of commercial and industrial property rentals is expected to increase costs for businesses occupying retail, warehousing, and office spaces, as well as those relying on leased equipment to support their operations.

FMM’s initial estimates indicate that businesses in logistics, manufacturing, and retail that rely on rented premises could face annual cost increases ranging from RM24,000 to RM60,000 per premises due to the 8% service tax. For example, a business paying RM25,000 per month in commercial rent would incur an additional RM2,000 per month, or RM24,000 per year, in service tax. Larger facilities with monthly rents of RM50,000 to RM60,000 could see annual tax costs rise to RM48,000 to RM57,600 respectively. These additional costs may either be passed on to consumers or force businesses to scale back operations. Similarly, rising taxes on financial and logistics services, which form integral components of business operations, will cascade throughout supply chains, impacting investment decisions, export competitiveness, and overall business viability.

FMM welcomes the Government’s decision to exempt long-standing, non-reviewable contracts signed before July 1, 2025 from service tax for 12 months. However, clearer and more practical transition guidelines are urgently needed, particularly for manufacturers engaged in mixed supplies and service providers navigating overlapping tax thresholds.

FMM urges the Government to undertake a comprehensive review of the SST expansion, supported by a full economic impact assessment covering effects on the Consumer Price Index (CPI), input costs, SME resilience, and overall business competitiveness. The Government must also engage more closely with stakeholders to align the rollout timeline and administrative processes with operational realities. In this regard, FMM strongly urges the Government to further delay the enforcement of the expanded SST scope beyond the scheduled date of July 1, 2025, until the review is completed and the necessary implementation readiness across industries is ensured. FMM also calls for a broader exemption list, particularly for capital expenditure items such as machinery and equipment used in production, as taxing these inputs will directly affect investment decisions, industrial upgrading, and long-term competitiveness. In addition, FMM urges the Government to reevaluate the inclusion of construction services as well as leasing and rental services, given their far-reaching cost implications across sectors. These measures will increase operational expenses and are expected to cascade through supply chains. We are deeply concerned and caution that the untimely implementation of the expanded scope of taxes will exert inflationary pressure, as businesses already grappling with rising costs including the ongoing and unresolved impact of US reciprocal tariffs on exports, may have no choice but to pass these additional burdens on to consumers.

While a comprehensive review and deferral of the SST expansion is urgently needed in the short term, FMM believes that Malaysia must ultimately transition to a more robust and future-ready tax framework. FMM reiterates its call for the reintroduction of the Goods and Services Tax (GST) and strongly urges the Government to reconsider its approach and halt the expansion of the SST, which, in its current form and timing, is highly damaging to industry and undermines Malaysia’s export competitiveness as a trading nation. Instead of widening a narrow and cascading tax system that raises costs and distorts supply chains, GST offers a more efficient, transparent and broad-based solution. A well-designed GST that zero-rates exports and essential goods would minimise tax-on-tax effects, improve compliance and sustainably grow the Government’s revenue base. Crucially, it would enable a faster reduction in the fiscal deficit and national debt while providing the policy flexibility to reduce direct taxes such as corporate and personal income tax. This shift would make Malaysia a more competitive and attractive investment destination and support long-term economic resilience.