Tax on tax in SST

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THE sales and service tax (SST), which was significantly expanded two months ago, is set to drive up prices of goods and services, bringing a heavier burden for the man in the street.

Here’s why. The SST is likely to have a “tax-on-tax” effect.

Unlike the goods and services tax (GST), the SST has no input tax credit mechanism – meaning businesses cannot reclaim the tax they pay on inputs.

These costs are typically passed down the line to consumers. “The government expects to collect an additional RM5bil in revenue this year from the expanded SST scope, raising its 2025 collection forecast to RM51.7bil from RM46.7bil earlier.

“The bigger collection is achieved due to a higher rate and an expanded scope, but without the GST’s input credit mechanism. This indicates that the expanded SST will be more cumbersome and cost ineffective for businesses and the rakyat,” chartered accountant Datuk Koong Lin Loong tells StarBiz 7, adding that consumers may end up bearing more than just the headline 6% or 8% SST rate.

The SST regime was broadened to include five new service categories – rental or leasing, construction, financial services, healthcare and education.

In trying to ease the burden of every-day Malaysians, the new SST framework only taxes discretionary items and imported goods that were previously exempted, while maintaining a 0% rate for their local substitutes.

There are other exemptions in the form of group relief (which entails transactions between business units within the same corporate group) and business-to-business (B2B) dealings (involving taxable services provided between SST-registered businesses).

These exemptions were intended to ease the cascading impact of the expanded SST tax.

Smaller enterprises are also shielded – there will be no SST for companies with an annual income of less than RM1mil in financial services, rental and leasing, and RM1.5mil for construction and private healthcare services players.

Still, industry groups argue these safeguards fall short because exemptions are tightly defined and many inputs still attract the SST.

Enjoying the B2B exemption isn’t easy – a contractor paying for the services of architects, engineers and accountants, would not qualify for the exemption even though the work could all be related to the same project.

The contractor would fall under the construction services category, while the others fall under professional services.

Thannees Tax Consulting Services Sdn Bhd managing director S M Thanneermalai says B2B exemptions need to be broadened so that whenever a service tax-registered business acquires a taxable service from another, the exemption would apply. “This is important to avoid the tax-on-tax effect. Without it, the cascading effect will continue, with extra costs for consumers,” he says.

While key building materials such as cement, sand and iron remain exempt from the sales tax, Thanneermalai points out that when a firm provides construction services, it includes goods like cement and bricks.

The service tax is charged on the full contract value – labour and building materials included.

“Unless contracts are split between goods and services, which does not happen in most cases, the tax exemption on building materials offers little real relief,” he says.

Even though construction work on purely residential buildings and public housing are exempt from the SST, Ernst and Young Tax Consultants Sdn Bhd (EY) indirect tax partner Yeoh Cheng Guan notes that developers of mixed development projects – which bundle commercial and residential properties – are subject to the 6% SST on the entire project value.

“Under current regulations, the SST applies to the full mixed development contract, even though standalone residential properties are exempt. Developers face an additional 6% service tax.

“As a result, some companies are delaying their launches of such projects pending further clarity from the authorities. For ongoing projects, related charges such as project management, architectural and engineering fees also attract the SST, inflating development costs.

“The narrow B2B exemption makes it difficult for companies to offset these taxes, putting further pressure on already slim margins for developers,” he says.

Then, there are the malls. Lease agreements allow landlords to automatically pass on the SST to tenants. One tier-one mall owner says some of his tenants have already raised prices.

Things are likely to get heated come year-end when tenancies come up for renewal. Tenants are likely to ask for some kind of reprieve.

JLL Malaysia head of research and consultancy Yulia Nikulicheva, however, believes most landlords are taking a strategic approach, allowing time for tenants to adapt to the new conditions.

“Most are demonstrating greater flexibility during lease negotiations. Only a few projects are implementing rental rate adjustments,” she says.

It will come down to bargaining power, says Rahim & Co International Sdn Bhd director real estate agency Siva Shanker.

He reckons some landlords of offices may be more willing to absorb costs if occupancies are low, considering the oversupply situation now.

The same could apply for the lower-tier malls. But for the tier-one office and malls with high occupancy rates, tenants may have slim pickings.

Given that the expanded SST scope disproportionately impacts sectors with higher rental expenditures, as the 8% charge is calculated as a percentage of rental payments, segments characterised by either higher rental rates (office and retail) or substantial real estate footprints (retail and logistics) are experiencing the greatest impact.

“The office and retail sectors appear to be the most significantly affected,” Nikulicheva says.

Ultimately, the outcome at the end of the supply chain remains unchanged: higher costs from the SST will push tenants to adjust prices.

Consumers may not see it in their receipt for a cup of coffee or a pair of shoes, but the hidden SST costs will be embedded into the final price tag. Still, cost-pass-through strategies may not always be viable.

UOB senior economist Julia Goh says essential goods and services – such as basic food items, public transport, utilities and healthcare – tend to have more stable or “sticky” demand, meaning people continue to rely on them even when prices rise.

However, consumers may adjust their lifestyles in response to cost increases. For example, those who previously opted for private healthcare or personal transport may shift towards public services to manage expenses.

“In contrast, demand for non-essential items like dining out, branded clothing or entertainment is more flexible. Businesses here may be less able to pass on cost increases directly, as consumers are more likely to cut back or switch to lower-cost alternatives,” she says.