Malaysian Ministry of Finance 2025 Budget Proposal
On October 18, 2024, the Malaysian Ministry of Finance presented its 2025 Budget Speech, introducing several notable changes to the country’s tax regime aimed at broadening the tax base and enhancing revenue collection. These proposals reflect Malaysia’s ongoing efforts to optimise its fiscal position while adjusting to evolving economic needs.
However, no mention was made of the reintroduction of Malaysian GST which had been rumoured.
One of the central pillars of the 2025 budget is the expansion of the Sales and Services Tax (SST) framework, specifically in the areas of non-essential goods and business-to-business (B2B) services. Starting May 1, 2025, the Malaysian government will implement the following measures:
- Expansion of Sales Tax to Non-Essential Goods:
The sales tax regime, previously focused on essential goods, will be expanded to include non-essential goods. This policy shift reflects a broader strategy to widen the tax base and align the sales tax structure with modern consumption patterns. Non-essential goods typically refer to luxury items, discretionary consumer products, or items not considered necessities. By taxing these goods, the government aims to ensure that its tax system captures a broader range of economic activities, particularly those in sectors with higher disposable incomes. - Extension of Service Tax to B2B Commercial Services:
In addition to expanding the sales tax, the 2025 budget proposes to extend the service tax to encompass B2B commercial services. Historically, Malaysia’s service tax has been primarily applied to final consumers, leaving many B2B transactions outside the tax net. By broadening the scope of taxable services to include those that occur between businesses, the Ministry of Finance seeks to close loopholes and ensure that taxation better reflects the full spectrum of economic interactions. This extension is designed to improve tax neutrality and reduce distortions between different sectors of the economy. It may also bring Malaysia more in line with global best practices, where B2B services are often included in the tax base to prevent cascading tax effects and promote transparency in taxation.
These adjustments come as part of a broader fiscal reform agenda that balances the need for enhanced revenue generation with a commitment to ensuring economic growth and development.
Malaysia’s Sales and Services Tax (SST)
SST was reintroduced in September 2018 after the Goods and Services Tax (GST), which had been implemented in 2015, was repealed. The SST regime replaced GST as part of the new government’s policy direction at the time, underpinned by political and economic considerations.
Structure of SST
Malaysia’s SST is composed of two elements:
- Sales Tax: Levied on the manufacture or importation of taxable goods, with rates typically ranging from 5% to 10%. The sales tax applies only at a single stage, usually when the goods are first sold by a manufacturer or importer.
- Service Tax: Applied to specific services, including hospitality, telecommunications, and professional services, with a rate of 6%. Initially focused on consumer-facing services, it has been progressively expanded in scope.
Unlike GST, which operated as a multi-stage tax collected at every stage of the supply chain, SST is a single-stage tax system. This makes SST simpler in some respects but also more prone to economic distortions. For example, businesses may face input tax costs under SST that are not present under a GST regime, where input tax credits can be claimed. Despite these differences, the government favored SST for its perceived simplicity and alignment with previous tax regimes.
