Effective 1 July 2025, rental and leasing services will be subject to an 8% service tax under Group K, First Schedule of the Service Tax Regulations (STR) 2018. This marks a significant expansion of the service tax regime, impacting a wide range of businesses engaged in leasing or renting tangible assets in Malaysia.
Table of contents
- Who is affected
- What services are taxable
- What services are not taxable
- Exemptions
- Transitional provisions
- Administrative responsibilities
- Accounting for service tax
- Sector-specific changes
- Additional clarifications
- What should businesses do
Who is affected
All persons providing rental or leasing services, excluding the Federal Government, State Governments and Local Authorities, will be liable for service tax once their annual taxable turnover exceeds the registration threshold. The threshold, initially set at RM500,000, has now been revised upward to RM1 million over a 12-month period.
Rental or leasing services refer to any arrangement (written or verbal) in which one party grants another the right to use a tangible asset for a specified period.
What services are taxable
Taxable rental and leasing services include:
- Renting or leasing tangible assets located in Malaysia to both local and overseas customers.
- Providing rental services that include maintenance, repairs or other related services.
- Rental of animals or plants.
- Importing rental or leasing services from overseas.
- Operating leases.
The list is not exhaustive and covers any rental or leasing service integral to the arrangement between a registered person and their customer.
What services are not taxable
The following rental or leasing services fall outside the scope of service tax:
- Rental or leasing of housing accommodations (e.g. terrace houses, apartments, bungalows, condominiums, serviced suites, etc.).
- Rental of reading materials.
- Rental or leasing of assets located outside Malaysia.
- Rental or leasing services between Special Areas or Designated Areas (e.g. free zones).
- Financial leasing services, which involve the transfer of asset ownership at the end of the lease.
Exemptions
Several exemptions are available under the revised framework:
- Government-related Services: The Federal Government and State Governments are exempted from both charging and paying service tax. Local Authorities are also granted an exemption from charging and paying service tax, but only for the period from 1 July 2025 to 30 September 2025. Effective 1 October 2025, any services provided or acquired by local authorities will be subject to service tax.
- Business-to-Business (B2B) Subleasing: Under the Service Tax Order (Persons Exempted from Payment of Tax) 2018, registered persons under Group K who sublet or sublease the same type of taxable service (not for personal use) may qualify for exemption, provided certain conditions are met. Where the premises are sublet or sublease partially, the exemption applies solely to the sublet or sublease portion. In cases where no sublet or sublease takes place during a taxable period, the business must self-account and declare the service tax accordingly.
- Micro and Small Enterprises: Businesses with an annual turnover below RM1 million renting from registered persons may enjoy an exemption, subject to specified conditions. One key condition is that the tenant must submit a declaration and register via the MyPMK system developed by the Royal Malaysian Customs Department (RMCD). [Subsection 34(3) Service Tax Act (STA) 2018]
- Non-reviewable Contracts (contracts without price revision clause): Exemption for a transitional period of one (1) year [1 July 2025 to 30 June 2026], subject to prescribed conditions. Services provided from 1 July 2026 onwards are subject to service tax. [Subsection 34(3) STA 2018]
- Group Relief: Rental or leasing services provided by one company to another within the same corporate group may qualify for group relief, whereby such services are exempted from service tax, subject to conditions.
- Exemption from Compound, Prosecution and Penalty (until 31 December 2025): Businesses may be eligible for an exemption from compound, prosecution and penalty for certain offences committed up to 31 December 2025. The offences covered under this exemption include late registration, late submission of returns, late payment, incorrect declarations (such as under-declaration or underpayment), as well as errors related to invoices, credit notes or debit notes. This exemption is subject to specific conditions.
Transitional provisions
For lease or rental agreements spanning before and after 1 July 2025, only the portion of services provided from 1 July 2025 onwards will be subject to service tax. Advance payments made prior to this date for post-1 July 2025 services will not be taxed.
Administrative responsibilities
For new registrants, total taxable turnover must be assessed over a rolling 12-month period (current month and next eleven (11) months). If the total exceeds RM1 million, registration is mandatory by the end of the following month.
Registered persons must:
- Charge and collect service tax on taxable services.
- Issue invoices as prescribed under the STA 2018.
- Submit SST-02 returns electronically and pay service tax by the due date.
- Maintain proper records for seven (7) years.
Those already registered under other taxable services must update their registration to include Group K (rental or leasing services).
Accounting for service tax
Service tax must be accounted for:
- Upon receiving payment; or
- After 12 months from the date of service provision if payment is not received, whichever comes first.
For imported services, tax is due upon receipt of invoice or payment made, whichever occurs earlier.
Sector-specific changes
Several key updates have been made to rental-related services across different categories:
- Rental of Space: Effective 1 July 2025, rental of space previously under Group B has now been reclassified under Group K.
- Passenger Vehicle Rentals: Services such as hire and drive car rentals, charter bus services and excursion bus services, previously under Group I, will also fall under Group K.
- Licensing Requirements Removed: Effective 1 July 2025, the requirement to be licensed under the Land Public Transport Act 2010, the Commercial Vehicles Licensing Board Act 1987 or the Tourism Vehicles Licensing Act 1999 is no longer a condition for liability to register. Any person providing hire and drive car services, charter bus services or excursion bus services must register for service tax if the value of such services exceeds the prescribed threshold.
- Hire Car Services: These will no longer be considered taxable services effective 1 July 2025.
Additional clarifications
- Refundable Deposits: Not subject to service tax unless it forms part of the payment.
- Penalties for Late Payment of Rental: These are not considered a provision of taxable services and therefore not subject to service tax.
What should businesses do
Businesses involved in rental or leasing services should reassess their taxable turnover in light of the revised RM1 million threshold. Those meeting the criteria must register under the STA 2018 and begin complying with invoicing, filing and payment obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Pugaleshwaran Raja Kumaran is the Executive Director, Tax at ThinkTx Consultants Sdn Bhd. He is a Licensed Tax Agent specialising in a full range of taxation services from corporate and personal tax advice to estate planning and special taxation litigation support. His focus area also includes expatriate tax compliance, planning and advisory. Additionally, he manages all manner of engagements from complex high-stake deals to single transactions and multi-jurisdictional matters. Steffi Manisha Arokiam is the Associate Director at ThinkTx Consultants Sdn Bhd. An experienced tax adviser with more than 5 years in the industry, Steffi has managed a diverse portfolio of clients including MSMEs and public listed companies. Her focus area includes tax advisory, transfer pricing and international tax. She is also a Chartered Accountant, member of Chartered Tax Institute of Malaysia (CTIM) and a Certified HRDC Trainer.
Steffi Manisha Arokiam is the Associate Director at ThinkTx Consultants Sdn Bhd. An experienced tax adviser with more than 5 years in the industry, Steffi has managed a diverse portfolio of clients including MSMEs and public listed companies. Her focus area includes tax advisory, transfer pricing and international tax. She is also a Chartered Accountant, member of Chartered Tax Institute of Malaysia (CTIM) and a Certified HRDC Trainer.
