This article first appeared in Forum, The Edge Malaysia Weekly on September 28, 2026 - October 4, 2026

The government reintroduced the sales tax and service tax, collectively known as SST, on Sept 1, 2018. It replaced the goods and services tax (GST), which had been in place since April 2015. At the time, GST was seen as too broad-based and burdensome for ordinary Malaysians. Some businesses also welcomed the change because of slow GST refunds and other implementation challenges.

SST was preferred because it was narrower in scope and would affect fewer people. In 2018, there were only six groups of taxable services, generally taxed at 6%. For goods, about 55% of the roughly 11,500 tariff lines were subject to sales tax at 5% or 10%.

Over time, SST changed. As the government looked for ways to raise more revenue, the scope of SST began to widen, especially for service tax.

In 2019, Malaysian businesses were required to self-account for service tax on prescribed taxable services acquired from overseas providers. Digital services followed in 2020. In 2024, the scope expanded further to include logistics, brokerage, karaoke, maintenance and repair services. The general service tax rate was also increased to 8%, although some categories remained at 6%.

A major expansion then took effect on July 1, 2025. Under service tax, new taxable services included rental and leasing, construction works, private education, fee-based financial services and private healthcare. For sales tax, taxable tariff lines increased from about 45% to about 85% of the roughly 11,500 tariff lines. To cushion the impact, some service tax categories stayed at 6%, and the sales tax rate was not increased.

With that, SST is no longer the narrow-based tax it used to be.

This wider scope is reflected in the revenue numbers. SST collection was RM27 billion in 2019 and remained relatively stable up to 2021. As the scope expanded, collection rose to RM31.3 billion in 2022 and RM35.4 billion in 2023.

In 2024, SST collection reached RM44.7 billion, close to the final full-year GST collection in 2017. The 2025 expansion is projected to add around RM5 billion in that year and an annualised RM10 billion going forward.

The Finance Ministry noted in August 2025 that service tax now applies to roughly 70% of the services economy, compared with about 76% under GST — figures that are now fairly close. Similarly, the gap in tariff lines for goods subject to sales tax has narrowed considerably, with 85% now subject to sales tax compared with about 95% under GST in 2017.

SST has clear advantages. It is simpler to administer than a multi-stage GST. It also keeps selected everyday consumer goods out of scope. In its original narrower design, most small businesses did not need to register.

The drawback is that SST is a single-stage tax with no input tax credit mechanism. This means tax can become embedded in prices as goods and services move through the supply chain.

This cascading effect matters more now because many more business inputs are taxable. For example, a sales tax-registered manufacturer may pay service tax on rental, logistics, construction, maintenance and similar services, but receive no credit for that tax.

That cost is then built into the price of goods and may be taxed again through sales tax. The result is higher prices in the local market and a potential loss of export competitiveness.

Some industry analyses suggest that in certain supply-chain scenarios involving both sales tax and service tax, the combined effect on final consumer prices can be comparable to, or in some cases higher than, what a credit-based GST would produce on the same transaction.

The government has recently indicated it does not intend to reintroduce GST in its previous form, with Prime Minister Datuk Seri Anwar Ibrahim stating a preference to avoid a tax that applies broadly across the entire population. At the same time, the question of cascading has drawn continued attention from economists, trade associations and opposition figures.

On Aug 19, 2026, the prime minister directed the Ministry of Finance to conduct a study of a hybrid SST system that would retain SST as the foundation while considering selected GST features, such as input tax credits.

Views on this proposal vary: some commentators see it as a practical middle path, while others have questioned how different a hybrid model would be from GST itself, or whether it might be simpler to consider a full transition.

Several ideas have been raised in industry and policy discussions. They include:

•     A limited input tax credit mechanism for registered businesses.

•     Broader business-to-business exemptions.

•     Higher registration thresholds for smaller businesses.

•     Longer transition periods for existing contracts.

•     Better sequencing with other cost-related policy changes, such as minimum wage adjustments and utility tariffs.

•     Clearer and faster exemption and refund processes, especially for exporters.

Supporting measures already in place include price monitoring by the Ministry of Domestic Trade and Cost of Living under the Price Control and Anti-Profiteering Act 2011, as well as the phased rollout of mandatory e-invoicing through MyInvois. These measures may improve transaction visibility and tax administration over time.

Malaysia is not the only jurisdiction using a single-stage sales tax rather than a full value-added tax (VAT) or GST; Puerto Rico and most US states operate similarly. However, the majority of countries worldwide — around 175 of 193 UN member states — use a credit-based VAT or GST system, largely because it avoids the cascading effect associated with single-stage taxes. Malaysia’s ongoing study of a hybrid model may be an attempt to draw on that same design principle while keeping the broader SST framework in place.

There are arguments in favour of a hybrid SST, as well as for a return to a full-fledged GST, and there will no doubt be further discussions and consultations on the way forward. That said, there appears to be general agreement on one critical point: the cascading impact of SST should be addressed by allowing some form of credit for tax incurred on business-to-business transactions. The fact that the government is now looking into this is, in our view, a move in the right direction.

Tan Eng Yew is the indirect tax leader of Deloitte Malaysia

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