Can Service Tax Increasing By 2% Impact SMEs That Much?

In this post, we invite you to take a step back and take in the big picture of how Service Tax hikes imposed on one end of a supply chain can cascade to every player, and explore options to minimise increases in operating costs.

While not earth-shattering, the 2 per cent Sales and Service Tax (SST) hike will absolutely be felt by Malaysian SMEs given the government’s predicted RM9 billion revenue boost.

Like it or not, evolving policy is part of doing business in Malaysia, and decision makers would be wise to understand how and where it can affect them and plan accordingly. 

Let’s begin.

The ‘invisible cost’ of SST

Think of tax rates and supply chains as a game of hot potato, where those further down the line must pass on or absorb ever increasing amounts.

In a story published on November 2023 by leading financial journal The Edge Malaysia, the final tax nature of Service Tax (meaning taxpayers cannot claim a credit for incurring it) was cited as causing a ‘tax-on-tax’ effect along supply chains.  

As SMEs heavily rely on business process outsourcing, a typical business engages multiple external service providers who themselves rely on other service providers, all of which now face increased tax burdens.

In fact, the story in The Edge Malaysia mentioned a case study done on a chair manufacturer in Segambut, where chairs incurred a sales tax of 10%, but after accounting for costs by others in the supply chain, the effective tax rate was 17.5%!

How many taxable services do you rely on?

Knowing all taxable services your business engages can help estimate how much an additional 2 per cent could cost. Below is a list of common business-related taxable services as found in the Service Tax Act 2018.

Category	Type of Service
Professional Services	a. Advocates, solicitors  b. Syarie Lawyer c. Public accountant d. Licensed or registered surveyor e. Professional engineering f. Architect g. Consultancy services excluding  research and development companies h. Information technology services j. Employment agency  k. Private agency
Other Service Providers	a. Insurance and takaful b. Telecommunication and paid television service provider  c. Customs Agent (No threshold) d. Parking operator e. Operator of motor vehicle service or repair centre or provides of motor vehicle or repair service f. Courier service operator g. Hire and drive motor vehicle and hire motor vehicle h. Advertising i. Domestic flight except Rural Air  Services

To keep the information digestible, we’ve only included general services, and you can find a full list of taxable services in the Service Tax Act 2018.

Obviously, the more services your business is paying for, the greater the impact of the 2% Service Tax increase, with several exceptions.

Exceptions to 2% Service Tax increase

Sometime this year, the Royal Malaysian Customs Department (RMCD) announced on their website that F&B, telecommunication, provision of parking spaces, and logistics services would be exempt from the 2 per cent SST increase.

The RMCD also announced that credit card and charge card services remain at RM25/year.

If your business heavily relies on transport services and credit card transactions, this is certainly good news.

Most essential business services are NOT exempt

If your business relies on the following professional services, expect an increase in prices:

• Information Technology
• Web Design and Development
• Social Media Marketing
• Human Resources
• Call Center/Customer Service
• Digital/Content Marketing
• SEO (Search Engine Optimization)
• Accounting
• Data Security
• Recruitment
• Legal Services
• Management Consulting

And as mentioned, every service provider inevitably has service providers of their own, meaning the further down a supply chain you are, the higher the total amount of effective tax your business must deal with. 

3 ways SMEs can reduce Service Tax impact

Assuming the goal is to avoid direct and indirect costs caused by a Service Tax increase, let’s approach a solution from several angles. 

Option 1: Move professional services in-house

Hiring a professional for your company removes reliance on external service providers and
service tax obligations. Though hiring is never the cheapest solution, employee salaries and
benefits are actually tax deductible unlike SST.

In house professionals also allow for far more tailored service to your business, and the opportunity to use their skills as part of a value-add package for clients.

Option 2: Hire providers that don’t meet SST threseholds

By moving your business to vendors that do not meet SST registration thresholds, these vendors will not be obliged to charge and collect service tax, and this can indirectly lead to cost savings for your business.

Of course, quality and reliability should always be prioritised to ensure this does not backfire.

Also, if a vendor is any good, they will inevitably meet the SST thresehold eventually, so expect to constantly be on the lookout for newer providers.

Option 3: Negotiate contracts with fixed prices

Instead of adopting a ‘wait and see’ attitude towards the service tax increase, take a proactive stance by bringing it up with your vendors. Lock in current rates, or at least negotiate a lower rate for next year, to buffer the impact of the 2% increase. This is why contract negotiations are one of our six essential SME legal services.

Let MISHU plan your tax strategies

The 2% SST increase is significant, but with the right tax strategies based on your goals and needs, you can mitigate its impact on your business. Speak to our tax advisors today to see how can balance the interests of both customers and shareholders.