Service Tax Treatment for Construction Works

A Welcome Move by Kastam

Date: 29 October 2025 When construction work services were first brought under Service Tax in July 2025, the entire contract value (covering both services and materials) was taxable. In response to industry feedback, the Royal Malaysian Customs Department (RMCD) has now issued Service Tax Policy No. 7/2025 to make the rules fairer and more practical.

Under the new rule, starting 1 July 2025, if a contract clearly separates the value of goods (for example, building materials, parts, or equipment) from the value of installation or construction services, service tax will apply only to the service portion, while the goods remain exempt. However, if the contract combines both under one total price, service tax will be charged on the full amount.

Example: If a contractor issues a contract showing RM900,000 for materials (such as cement, steel, and fittings) and RM100,000 for installation work, service tax applies only to the RM100,000 for installation services. However, if the contract lists a single lump-sum amount of RM1 million without separating materials and services, then service tax will be charged on the entire RM1 million.

This is a welcome move by the RMCD. However, businesses should ensure that the breakdown between goods and services is reasonable and reflects market value, to avoid triggering the anti-avoidance provisions under the Service Tax Regulations.

Further Reference:

Please also refer to Service Tax Policy No. 3/2025 (Construction Works) – Amendment No. 1, which took effect on 1 July 2025. The amendment introduces several key updates, including:

• Grace period until 31 December 2025 – Exemption from prosecution, penalties, and late registration or payment for construction service providers.

• Government exemption – Construction services provided to the Federal and State Governments are exempt from service tax.

• Local authorities exemption – Applicable from 1 July to 30 September 2025.

• Non-reviewable contracts – Fixed-price contracts signed and stamped before 1 July 2025 are exempt from service tax until 30 June 2026, subject to specific conditions.

• Residential projects exemption – Covers the construction of residential buildings and certain public facilities within mixed-use developments.

• B2B exemption for consultancy services – Applies to consultancy work under valid design-and-build contracts, provided registration and documentation requirements are met.

• Transitional B2B relief – Newly registered construction service providers (registered by July 2025 and applied by 31 August 2025) may claim refunds of service tax paid, if all qualifying conditions are fulfilled.