Sales Tax in Malaysia: A Guide for Foreign Investors

Malaysia’s tax framework has undergone significant changes over the years, affecting businesses and foreign investors. One key component of this system is the sales tax (ST), which forms part of the sales and service tax (SST) regime. Introduced in 2018 to replace the goods and services tax (GST), Sales tax applies to specific goods manufactured in Malaysia and imported into the country. The decision to revert to SST was aimed at reducing the tax burden on consumers and simplifying the tax system for businesses.

However, for foreign investors, understanding how Sales Tax affects pricing, compliance, and supply chain costs remains a critical part of doing business in Malaysia.

What is sales tax and how does it work?

sales tax in Malaysia is a single-stage tax applied at the point of manufacturing or importation of taxable goods. Unlike GST, which operates on a multi-stage input-output tax credit mechanism, Sales Tax is levied only once, making it simpler but potentially more costly for businesses in the supply chain.

Key features of Malaysia’s sales tax

• Single-stage taxation: Levied only once, either at the manufacturer’s or importer’s level.
• Applicable to goods, not services: Sales Tax applies exclusively to goods, whereas Service Tax applies to taxable services.
• Variable tax rates: Sales Tax rates are primarily 5% or 10%, though certain goods may be taxed at a different rate or exempted altogether.
• Exemptions available: Raw materials, machinery, and certain essential goods may qualify for exemptions.

Registration requirements for foreign companies

Foreign businesses looking to manufacture or import goods into Malaysia must assess their Sales Tax obligations. Understanding registration requirements is crucial for avoiding penalties and ensuring smooth operations.

Who needs to register?

• Manufacturers: Businesses engaged in the production of taxable goods within Malaysia.
• Importers: Companies bringing taxable goods into Malaysia for distribution or sale.
• Businesses exceeding the sales threshold: The threshold for mandatory registration varies by industry and product category.

How to register for sales tax in Malaysia

1. Check eligibility: Determine if your business is required to register based on annual sales turnover and business activity.
2. Apply online: Registration is done through the MySST portal managed by the Royal Malaysian Customs Department (RMCD).
3. Submit supporting documents: Provide company registration details, business licenses, and financial records.
4. Await approval: Once approved, a Sales Tax registration number will be issued, allowing the business to charge and remit Sales Tax.

How sales tax affects foreign investors

Sales tax has several implications for foreign companies operating in Malaysia, particularly those involved in manufacturing, importation, and distribution. Unlike GST, sales tax is not recoverable as an input tax, meaning businesses must absorb the cost, which can increase operational expenses. For foreign investors establishing manufacturing plants, it is essential to assess the tax burden on raw materials and finished goods. Importers must also consider the cumulative impact of import duties and sales tax when pricing their products.

Additionally, businesses that operate across multiple supply chain stages may experience tax-compounding effects, impacting profit margins and competitiveness.

Compliance, reporting, and filing requirements

Foreign businesses registered for Sales Tax must adhere to Malaysia’s compliance and reporting regulations. Failure to do so may result in penalties and legal consequences.

Filing and payment obligations

• Filing frequency: Sales Tax returns must be filed every two months.
• The due date for payment: Sales Tax payments must be made by the last day of the following month after the taxable period.
• Record-keeping requirements: Businesses must maintain tax records for at least seven years for audit and verification purposes.

Penalties for non-compliance

• Late filing: RM 50 per day of delay (subject to a maximum limit).
• Late payment: 10% penalty for the first 30 days, increasing if further delayed.
• Incorrect tax declaration: Heavy fines or possible prosecution under the Sales Tax Act.

Exemptions and incentives: How to minimize sales tax liability

The Malaysian government provides various exemptions and incentives to ease the sales tax burden for businesses and investors. Foreign investors should be aware of these to optimize their tax planning.

Certain raw materials, machinery, and intermediate goods used in manufacturing may qualify for exemptions, helping businesses lower costs. Further, companies operating in free trade zones (FTZs) or licensed manufacturing warehouses (LMWs) may benefit from full or partial exemptions. Investors should also explore sector-specific incentives provided under Malaysia’s investment promotion schemes, which can further reduce tax liabilities.

Future outlook: Will Malaysia reinstate GST?

There has been ongoing speculation about whether Malaysia will reintroduce the goods and services tax to replace the current SST system. While the government has not announced an official decision, foreign investors should remain informed about potential tax policy changes. If GST is reinstated, it could introduce a multi-stage tax structure that allows businesses to reclaim input tax, potentially reducing the overall tax burden. However, transitioning from SST to GST would require firms to overhaul their accounting and tax reporting processes.

Conclusion: Key takeaways for foreign investors

Sales tax in Malaysia plays a significant role in the country’s tax system, impacting businesses engaged in manufacturing and importation. For foreign investors, understanding how ST works, complying with registration and reporting obligations, and leveraging available exemptions are essential for smooth business operations.

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