From 6% to 8% Service Tax (SST) – Understanding the Adverse Impact

What Is SST?

In 2018, Malaysia’s Ministry of Finance announced the abolishment of the Goods and Services Tax (GST) and its replacement with the Sales and Service Tax (SST), marking another reform of the local tax system.

To provide the public with a buffer, a tax holiday was declared on 1 June 2018, during which the GST rates were reduced from 6% to 0%, signalling the transition from GST to SST.

However, the impact on the public was felt on 1 September 2018, when the SST was officially imposed at a rate of 6%.

The Two Elements of SST

Sales Tax A single-stage tax is charged on goods imported or produced locally. This tax is applied either when the goods are brought into the country or when they are sold by the manufacturer.

Service Tax A tax on services consumed in Malaysia, charged by a registered service provider operating their business.

The Increase of SST

Just as citizens had become accustomed to the 6% SST rate, the government announced another increase, raising the SST rate from 6% to 8%, effective from 1 March 2024. However, some services, fortunately, will be remained at the old 6% rate.

Tax Hike Exemptions

As reported by ASEAN Briefing, certain services are exempted from the recent tax increase, including:

-          Food and beverages (Group B)

-          Parking services (Group I)

-          Logistics (Group J) – newly charged at 6%

-          Telecommunication services (Group I)

All other taxable services not listed above, such as brokerage, accommodations, legal, accounting, engineering, IT, karaoke, and digital services, will be subject to the new 8% rate.

Additionally, the new SST rate only applies to electricity services exceeding 600 kWh. With this provision, nearly 85 percent of electricity customers will not be affected by the SST. Furthermore, the government continues to offer SST exemption for clean water supply services.

For more details, please refer to: https://www.douglasloh.com/post/malaysia-sst

The Adverse Impact

For businesses, the situation is uncertain. While certain businesses may be able to absorb the 2% increase, others could face challenges, especially given Malaysia's weakening ringgit and slowing growth in China.

While big companies with healthy profits might hardly notice the hike, smaller enterprises, which make up 97% of Malaysia's economy, are exceptionally vulnerable to the impact of the SST hike.

This implies that businesses will face additional strain from the 2% SST increase, potentially leading to higher prices for goods in order to maintain profit margins. Over time, rising production costs may be passed on to consumers to bear.

The Motive Behind the Tax Hike

With the intent of expanding the country's revenue base and stabilizing its fiscal policy, this initiative is anticipated to generate an additional RM3 billion in revenue, significantly contributing to the reduction of fiscal deficits and the enhancement of public services and infrastructure. It also aims to boost the government's cash flow and reduce reliance on other potentially unstable sources.

The increase is deemed necessary to reduce government debt. However, many question why citizens have to further control their spending to settle the country’s debt. This query has prompted deep reflection, as confidence in the Ringgit Malaysia has already waned, with the ringgit reaching its lowest level since the Asian financial crisis in February 2024, marking a 26-year low.

Conclusion

In summary, the Malaysian government’s decision to raise the service tax rate from 6% to 8% represents a strategic move aimed at bolstering fiscal sustainability and funding essential national projects. However, this change also presents challenges and opportunities for the economy, businesses, and consumers alike.

While businesses and citizens may not have a say in the tax hike, they can take measures to use their available finances wisely. At last, Malaysians do sincerely hope that the 8% SST increase can revive the Malaysian market and strengthen its depreciating currency.

If you need proper advice on the tax hike, do contact us to relieve your headaches, we will always be your professional tax advisors in Kuala Lumpur.