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Could a 2% increase in Service Tax significantly impact SMEs?

This post delves into the broader implications of such tax hikes across supply chains and offers strategies to mitigate rising operating costs.

While not revolutionary, the anticipated 2% Sales and Service Tax (SST) hike will undoubtedly affect Malaysian SMEs, contributing to the government's projected RM9 billion revenue boost. Adapting to evolving policies is integral to business in Malaysia, necessitating a comprehensive understanding of their potential impact and proactive planning.

Let's explore.

Consider the indirect implications of Service Tax (SST) on supply chains, akin to a game of passing on increasing costs. According to a November 2023 report from The Edge Malaysia, the non-creditable nature of SST results in a 'tax-on-tax' scenario along the supply chain. SMEs, reliant on outsourcing, are particularly affected as they engage numerous external service providers, each facing heightened tax burdens. A case study on a chair manufacturer in Segambut highlighted in The Edge Malaysia revealed that despite a 10% sales tax on chairs, the effective tax rate surged to 17.5% after factoring in costs incurred by other supply chain members.

Assessing the taxable services your business utilizes is crucial for estimating the potential impact of a 2% increase in Service Tax. Here's a condensed list of common taxable services outlined in the Service Tax Act 2018:

  • Professional Services: Advocates, solicitors, syarie lawyers, public accountants, licensed surveyors, professional engineers, architects, consultancy services (excluding research and development), information technology services, employment agencies, private agencies.

  • Other Service Providers: Insurance and takaful, telecommunications and paid television services, customs agents, parking operators, motor vehicle service or repair centers, courier service operators, hire and drive motor vehicle services, advertising, domestic flights (excluding Rural Air Services).

While this list covers general services, the full range of taxable services is detailed in the Service Tax Act 2018. The impact of the 2% Service Tax increase depends on the number of services your business utilizes, with some exceptions.

The Royal Malaysian Customs Department (RMCD) announced exemptions from the 2% SST increase for F&B, telecommunications, parking provision, and logistics services. Credit card and charge card services remain at RM25/year, benefiting businesses relying heavily on transport and credit card transactions.

However, essential professional services like Information Technology, Marketing, Accounting, Legal, and HR are subject to the increase. With every service provider having their own obligations, the cascading effect results in higher overall taxes for businesses.

To mitigate the impact, SMEs can consider three strategies:

  • In-house hiring of professionals to eliminate reliance on external service providers and associated SST.

  • Engaging vendors that don't meet SST thresholds to avoid indirect tax burdens, prioritizing quality and reliability.

  • Negotiating fixed-price contracts with vendors to offset the 2% increase and ensure cost stability, highlighting the importance of proactive contract management.

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