Malaysia’s expanded sales tax to hit key petrochemicals from 1 July

SINGAPORE (ICIS)–Malaysia’s revised sales and services tax (SST) framework officially takes effect on 1 July, with the expanded scope now set to include a 5% tax on an extensive range of petrochemical products, including polyethylene (PE) and polypropylene (PP).

• Critical raw materials for downstream industries affected
• Capital expenditure items like machinery now taxed
• Malaysian industry body calls for further delay in implementation

The government had first announced the revision of items subject to the sales tax on 18 October 2024, as part of its fiscal consolidation strategy under the 2025 budget.

Under the updated framework, more than 4,800 harmonized system (HS) codes will now fall under the 5% sales tax bracket.

Goods exempted from the updated sales tax include specific petroleum gases and other gaseous hydrocarbons that are currently under HS code 27.11.

These include liquefied propane, butanes, ethylene, propylene, butylene, and butadiene. In their gaseous state, the list includes natural gas used as motor fuel.

The measure, aimed at broadening the country’s tax base and increasing revenue, was originally slated to begin on 1 May, but was delayed for two months after manufacturers urged policymakers to refrain from adding to their financial burden.

The July revision of Malaysia’s sales tax and the expansion of the service tax scope involve several key changes.

The sales tax rate for essential goods consumed by the public will remain unchanged, while a 5% or 10% sales tax will be applied to discretionary and non-essential goods.

The scope of the service tax will be broadened to include new services such as leasing or rental, construction, financial services, private healthcare, education, and beauty services.

This includes critical raw materials for various downstream industries, from plastics and packaging to automotive manufacturing.

Previously, many of these materials were zero-rated under the SST.

The Federation of Malaysian Manufacturers (FMM) has publicly criticized the decision, calling it “highly damaging to industries” in a statement released on 12 June.

According to estimates by the Ministry of Finance, the SST expansion is expected to generate around ringgit (M$) 5 billion in additional government revenue in 2025.

“Although this may support the government’s fiscal objectives, the additional tax burden will be largely borne by businesses and has serious implications for operating costs, investment decisions, and long-term business sustainability,” FMM president Soh Thian Lai said in a statement.

Soh highlighted that with this expansion, around 97% of goods in Malaysia’s tariff system will now be subject to sales tax, representing a significant departure from a previously narrower tax base, to one where nearly all categories including industrial and commercial inputs are now taxable.

Under the new sales tax order, 4,806 tariff lines are now subject to 5% tax, covering a wide range of previously exempt goods, according to the FMM.

These include high-value food items, as well as a broad spectrum of industrial goods, such as industrial machinery and mechanical appliances, electrical equipment, pumps, compressors, boilers, conveyors, and furnaces used in manufacturing processes, it said.

The 5% rate also applies to tools and apparatus for chemical, electrical, and technical operations, significantly broadening the range of taxable inputs used in production and operations.

“The expanded scope now places a direct tax burden on machinery and equipment typically classified as capital expenditure. This includes items critical to upgrading production lines, automating processes, and scaling operations,” Soh said.

The FMM “strongly urges the government to further delay the enforcement of the expanded SST scope beyond the scheduled date of 1 July”, until the review is complete, and industries are ready.

They also calling for a broader exemption list, especially for capital expenditure items like machinery and equipment, and a re-evaluation of including construction, leasing, and rental services, which they warn will “increase operational expenses and are expected to cascade through supply chains.”

“We are deeply concerned and caution that the untimely implementation of the expanded scope of taxes will exert inflationary pressure, as businesses already grappling with rising costs … may have no choice but to pass these additional burdens on to consumers,” the FMM added.

The FMM has urged the government to postpone the implementation, citing insufficient lead time for businesses to adapt and calling for a comprehensive economic impact assessment.

Malaysia’s manufacturing purchasing managers’ index (PMI) continued to contract in May, with a reading of 48.8, according to financial services provider S&P Global.

Beyond the direct sales tax on goods, the revised SST also introduces an 8% service tax on leasing and rental services for commercial or business goods and premises.

This could further compound cost burdens for capital-intensive sectors, including parts of the petrochemical industry that rely on leased machinery and industrial facilities.

Focus article by Nurluqman Suratman

Thumbnail image: PETRONAS Towers, Kuala Lumpur
(Sunbird Images/imageBROKER/Shutterstock)