The FMM also expressed frustration that while it was consulted on the sales tax expansion — leading to retained exemptions for essential goods — there was "no consultation" on the equally significant expansion of the service tax.

This oversight is particularly impactful for manufacturers who also provide services such as heavy machinery leasing, construction and technical services. "The absence of early engagement has created uncertainty and implementation challenges for affected businesses now facing service tax obligations," Soh said.

The impact, according to Soh, is also acute in the service sector, where the scope of service tax has been broadened to include rental and leasing, construction, financial, healthcare and education services.

Specifically, an 8% service tax will now apply to leasing and rental services for commercial or business goods and premises, and when the value of taxable services reaches RM500,000 annually. This includes the leasing of machinery, vehicles, and commercial or industrial buildings.

FMM estimates indicate that businesses in logistics, manufacturing and retail relying on rented premises could see annual cost increases of RM24,000 to RM60,000 per premises that may either be passed on to consumers or force businesses to scale back operations.

“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,” Soh said.

Rising taxes on financial and logistics services will also "cascade throughout supply chains, impacting investment decisions, export competitiveness, and overall business viability," Soh said.

The federation called on the government to postpone the enforcement of the expanded SST until a full economic impact assessment is completed. It also urged the inclusion of broader exemptions, particularly for capital equipment.

In the meantime, FMM said there is urgent need for clearer transition guidelines, particularly for manufacturers engaged in mixed supplies and service providers navigating overlapping tax thresholds. It reiterated that many newly affected manufacturers, especially those previously unregistered under SST, require more time to prepare and comply with the changes.

Although there are no penalties for non-compliance until Dec 31, 2025, the July 1 implementation date provides companies with less than three weeks to adjust, Soh said.

"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," Soh said.

FMM also reiterated its call for the reintroduction of the goods and services tax (GST), as it "strongly urges the government to reconsider its approach to and halt the expansion of the SST, which in its current form and timing is highly damaging to industries".

"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," Soh added.