Category: Brief Takes

PUTRAJAYA: The expansion of the Sales and Service Tax (SST) can generate the necessary revenue to raise national coffers, says Finance Minister II Datuk Seri Amir Hamzah Azizan.

Reintroducing the previous Goods and Services Tax (GST) system would require a transition period of up to two years for new industries that were created during the SST implementation, he said.

“The industries must be coached on how to do it and new systems need to be installed. It is not just a matter of turning on and off again,” said Amir Hamzah in an interview with Sunday Star.

The GST was repealed by the then Pakatan Harapan government in 2018.

It was implemented in April 2015 under the administration of then prime minister Datuk Seri Najib Razak.

MPs have since called for the revival of the GST, arguing it is a more effective taxation system than the current SST as it tackles the shadow economy where billions are lost in tax leakages.

Amir Hamzah said the SST has been around for over four decades and it is a much more familiar system for local businesses.

“Reintroducing GST means educating the whole system. For SST, we can expand the scope because it is just a small expansion each time. The gazettement and all are easy to administratively manage,” he said.

He said the expansion of the SST scope announced in Budget 2025 is expected to generate an extra RM5bil in revenue for the nation.

He added that the expanded SST will generate the necessary revenue to enhance the fiscal space of the government.

“Fiscal balance is important because if we have fiscal balance, then we can start investing in the right things that the economy and the rakyat need,” he said.

In December last year, Deputy Finance Minister Lim Hui Ying said the list of services subject to SST will be announced in early 2025 before its implementation on May 1.

Last month, the Finance Ministry said the finalised SST scope of expansion and the review of the SST rates will be gazetted through subsidiary legislation in the first quarter of 2025 after the engagement process with ministries and industry stakeholders are completed.

The Finance Ministry and the Customs Department are actively conducting engagement sessions with the relevant parties to finalise the scope and tax rate.

In a written parliamentary reply, the Finance Ministry said that Putrajaya will propose to maintain 0% tax rates on essential goods, while the rates of 5% and 10% will be extended to non-essential goods, high-value, imported and processed goods.

Article Link: https://www.thestar.com.my/news/nation/2025/03/09/sst-expansion-will-help-boost-national-revenue 

The Sales Tax Audit is triggered through the Risk Assessment Technique where the registered manufacturers are assigned a weightage for the level of risk. The higher the weightage the more frequent the sales tax audits will be conducted. It must be borne in mind that when a sales tax audit is triggered off, the sales tax auditor spends a considerable amount of time preparing for the audit, gathering information from various sources. The sales tax auditor is also well trained at the Malaysian Customs Academy where he or she has attended courses in various aspects of customs auditing. One of the courses he or she has attended is the study of behavior where the auditor is required to observe the behavior of the taxpayer. Apart from this, the auditor is also well-versed with the provisions of the Sales Tax Act, Regulations and Order, which means that you will be facing an auditor who is highly prepared to conduct the audit. It is highly advisable to have a review done before the audit.

Triggers for a Sales Tax Audit

Audits are initiated based on the Risk Assessment Technique (RAT), which evaluates manufacturers according to risk factors such as:

• Turnover fluctuations
• Inconsistent tax filings
• Input tax claims or exemptions usage

Manufacturers with higher risk weightage undergo more frequent audits.

The Role of the Customs Auditor

Sales tax auditors are trained at the Malaysian Customs Academy, where they receive instruction in:

• Advanced customs auditing techniques
• Interpretation of the Sales Tax Act, Regulations, and Orders
• Behavioral observation to detect potential discrepancies
• Evaluation of input and output records for compliance

Auditors combine technical knowledge with investigative skills to assess adherence to legal requirements.

Preparing for a Sales Tax Audit

Audit readiness involves:

1. Internal Reviews – Reconciling sales, purchases, and production records
2. Documentation Verification – Ensuring all exemptions, claims, and filings are supported by evidence
3. Staff Training – Educating teams on proper documentation and compliance protocols
4. Expert Consultation – Engaging experienced auditors to pre-empt potential findings

Being prepared ensures that interactions with auditors are professional, efficient, and fully compliant with regulations.

Common Areas of Scrutiny

During audits, manufacturers are typically reviewed for:

• Proper use of exempted raw materials and machinery
• Accurate filing of sales tax returns
• Compliance with LMW or MIDA exemption conditions
• Complete and organized documentation for all transactions

Any discrepancies can result in financial penalties, interest, or enforcement actions, making preparation essential.

Dossnett Consulting Sdn Bhd Expertise

We provide pre-audit and audit advisory services to help manufacturers:

• Identify and correct potential compliance gaps
• Prepare documentation according to Malaysian Customs standards
• Navigate audits efficiently with minimal business disruption
• Maintain ongoing compliance through internal controls

Conclusion:

A sales tax audit is a critical aspect of Malaysian tax compliance. By understanding the audit process, maintaining meticulous records, and leveraging expert guidance, manufacturers can minimize risk, remain fully compliant, and optimize operational efficiency.

Sales tax is levied on sales taxable finished goods sold in the domestic market. Exported sales of taxable goods are exempted from sales tax. The Sales Tax Registration has to be applied to the Royal Malaysian Customs Department when the company reaches the total sales turnover of RM500.000. As sales tax is a single stage tax, the company is given sales tax exemption on inputs for their manufacturing process. However there is no import duty exemption given to imported raw materials, components, packing materials machinery and equipment, spare parts and accessories. The company has to apply to MIDA for this exemption.

Overview of Sales Tax

Sales tax is a single-stage tax levied on finished goods sold in Malaysia. Manufacturers whose total turnover reaches RM500,000 are required to register with the Royal Malaysian Customs Department. Exported goods, however, are exempt from sales tax, which provides cost efficiency for export-oriented operations.

Sales Tax Exemptions for Manufacturers

Registered manufacturers benefit from input tax exemptions, which include:

• Raw materials and components
• Packing materials
• Machinery, equipment, and spare parts

For imported inputs, duty exemptions are not automatically granted. Companies must apply to the Malaysian Investment Development Authority (MIDA) to secure duty relief. From an audit perspective, both sales tax and duty exemptions are highly scrutinized to ensure proper use.

Compliance Obligations

Manufacturers must:

1. Register accurately with Customs once turnover thresholds are met
2. Maintain complete documentation, including invoices, purchase orders, and production records
3. File timely and accurate sales tax returns
4. Ensure internal controls are in place for audit readiness

Failure to meet these requirements can trigger audits and penalties, highlighting the need for precise record-keeping and compliance strategies.

Audit Perspective

Auditors from the Malaysian Customs Academy are trained to:

• Analyze input tax claims
• Detect inconsistencies in exemption usage
• Review compliance with the Sales Tax Act, Regulations, and Orders

Manufacturers should treat audits as a validation of compliance rather than a punitive process. Preparing accurate documentation and implementing internal checks are key to a smooth audit experience.

Dossnett Consulting Sdn Bhd Expertise

Our team at Dossnett Consulting Sdn Bhd provides:

• Guidance on sales tax registration and compliance
• Support for MIDA duty exemption applications
• Pre-audit reviews to identify potential compliance gaps
• Practical strategies to maintain audit-ready operations

Conclusion:

Sales tax compliance in Malaysia requires precision, technical knowledge, and preparation. By understanding obligations, claiming exemptions correctly, and implementing internal controls, manufacturers can operate efficiently while minimizing audit risks.

The Licenced Manufacturing Warehouse is an export-oriented manufacturing company with a number of facilities. It’s advantage is that all raw materials, components, packing materials, machinery and equipment, spare parts and accessories, whether imported or purchased from a local supplier, are given import duty and sales tax exemption. This is a very useful facility for the LMW as it helps them in the management of their cash flow. However, they must comply to many rules and regulations.

What is a Licensed Manufacturing Warehouse (LMW)?

A Licensed Manufacturing Warehouse is a government-approved manufacturing facility where operations are primarily export-oriented. Its key advantage is the import duty and sales tax exemption on:

• Raw materials
• Components
• Packing materials
• Machinery and equipment
• Spare parts and accessories

These exemptions apply whether the inputs are imported or purchased locally. From a compliance perspective, this arrangement allows manufacturers to streamline cash flow while remaining fully accountable to Malaysian Customs regulations.

Benefits of Operating an LMW

1. Financial Efficiency Through Duty and Tax Exemption
   LMWs can maintain a healthier cash flow, as upfront import duties and sales tax on production inputs are exempted.
   
2. Export-Driven Operations
   Being export-focused aligns with Malaysia’s national trade strategy, making LMWs eligible for incentives under the Sales Tax Act and Customs regulations.
   
3. Audit-Ready Framework
   LMWs must maintain meticulous records of all transactions, imports, and usage of materials. These requirements ensure audit-readiness, reducing the risk of non-compliance penalties

Compliance Requirements for LMW Operators

Operating an LMW comes with stringent obligations under Malaysian law, including:

• Maintaining comprehensive records of imported and local inputs
• Using exempted materials exclusively for approved manufacturing processes
• Filing accurate and timely customs declarations
• Observing proper inventory control, storage, and disposal of inputs

Non-compliance can result in penalties, revocation of LMW status, and seizure of goods. From an audit perspective, these areas are commonly scrutinized by Malaysian Customs auditors trained at the Malaysian Customs Academy.

Dossnett Consulting Sdn Bhd Expertise

At Dossnett Consulting Sdn Bhd, we specialize in guiding LMW operators through compliance, audit preparation, and customs procedures. Our auditors help:

• Implement internal controls aligned with customs regulations
• Prepare for scheduled or risk-based audits
• Ensure proper documentation to withstand scrutiny

Conclusion

The LMW scheme is a strategic tool for export-oriented manufacturers. By combining tax advantages with robust compliance and audit-readiness, companies can optimize operations and maintain regulatory confidence.