Service Tax and Its Recent Implications on the Logistics Industry

The Ministry of Finance (MOF) has refined the scope of service tax exemptions to alleviate the direct impact on people's living costs and the cascading tax incidences in the logistics sector. The Government aims to mitigate the tax's effect on people's cost of living and maintain the competitiveness of the nation's service sectors by providing service tax exemptions for logistics sector and maintenance services. To further preserve the country's competitiveness, the Government will also not impose service tax in free zones.

Additional Service Tax Exemption Scope for Logistics Sector

In order to ease the tax impact on daily logistics operating activities, and ultimately the consumers, the Government has agreed on the following:

• Amendments to Group J: Logistics Services in First Schedule, Service Tax Regulations 2018, whereby Item 1(a) in relation to logistics services, and Item 1(b) pertaining to delivery or distribution or transporting services have been merged into a single item.
  
  By combining these two items into one, the exemption scope for Business-to-Business (B2B) activities has widened, whereby logistics service providers classified under Item 1(a) are now no longer required to incur service tax for acquiring delivery, distribution or transporting services that previously had been listed under Item 1(b).
  
  Prior to this amendment, logistics service providers under Item 1(a) were entitled to tax exemptions for acquiring services under the same item only.
  
  
• All services under Group J: Logistics Services provided in or between Special Area / Designated Area, between Special Area and Designated Area, or vice versa are not subject to service tax, except for Customs Agent services which remains taxable for service tax.

• Exemption for ocean freight charges for all goods delivered by sea mode, limited to these routes / destinations:
  • Peninsular Malaysia to Sabah / Sarawak / Labuan;
  • Sabah / Sarawak / Labuan to Peninsular Malaysia; and
  • Between Sabah, Sarawak and Labuan.

These enhancements are additions to the widening of service tax exemption scope for logistics sectors as announced on 11th March 2024.

Additional Service Tax Exemption Scope for Maintenance Services

The Government has also agreed to provide service tax exemptions for maintenance services for the following items:

With this, all maintenance and repair services at residential premises such as roof upgrades or for any items and/or fixtures attached to or part of the residential premise’s structure such as lifts, air conditioners and water heaters are not subject to service tax.

The service tax rate’s increase from 6% to 8% that came into effect on 1st March 2024 is concentrated on services that are discretionary in nature and B2B activities that do not directly impact the people. The increase does not involve key essential services that are part and parcel of people’s lifestyle such as food and beverage, telecommunications and vehicle parking.

Recommendations to Use the Following Incoterms in Contracts or Terms of Sale

All logistics services rendered for import or export shipments including logistics management services, warehousing or warehousing management services, freight forwarding services, haulage, Customs agent, port or airport services, shipping services (domestic), aviation services or cold chain facilities services that are borne fully by the foreign supplier or foreign buyer will not be subject to tax as the logistics service providers will be invoicing / billing the foreign importer or exporter. To benefit from this exemption, businesses are encouraged to utilize the following Incoterms in contracts or terms of sales:

• For exports using the Incoterms Free Carrier (FCA): The Malaysian seller / exporter is responsible for export Customs clearance and delivering the goods to the carrier at the specified place of delivery. The seller is only responsible for loading the goods if their place of business is the same as the delivery location. The foreign buyer / importer assumes all risks and responsibilities, including all logistics services from the factory / warehouse to their own premises. Since the foreign buyer is responsible for logistics services, even if they use local service providers, no service tax is levied on the services rendered in this transaction.
• For imports using Incoterms Delivered at Place (DAP): When using DAP for importing goods, the foreign seller / exporter is responsible for delivering the goods to the specified destination, ready for unloading. All risks and costs up to unloading are borne by the seller. However, the Malaysian buyer / importer is still responsible for import Customs clearance and duties, and other import formalities. Since the foreign seller / exporter covers the logistics costs, even if they use local service providers, no service tax is levied on the services rendered in this transaction.

Threshold Value for Sales and Service Tax (SST) Registration

The threshold value for service tax registration for taxable persons providing logistics services is RM500,000 over a 12-month period. Service providers who exceed this prescribed threshold value of taxable services are required to register under the Service Tax Act 2018. The application for registration must be submitted to the RMCD not later than the last day of the following month. Once registered, the registered persons are obligated to collect, file and pay the taxes to the RMCD regularly.

Penalties for Non-Compliance

Conclusion

The attention for service tax compliance should increase following the implementation of e-Invoicing. For goods sold by a foreign seller to a Malaysian buyer, in other words for importation of goods, the reference number of Customs Form No. 1 (K1) “Declaration of Goods Imported” is required to be stated in an e-Invoice. With real-time data and an informative database, the tax authority can now swiftly carry out audits and identify discrepancies, abnormal and peculiar transactions or even potential frauds through the e-Invoicing model as it provides a clear audit trail with improved traceability. What’s more, the Inland Revenue Board of Malaysia (IRBM) had made it clear since the start that pursuant to Section 138(4)(aa) of the Income Tax Act 1967, e-Invoicing information will be shared with the RMCD. Therefore, businesses are advised to pay heed to the service tax compliance requirements as they are required to include the necessary particulars under the applicable laws, rules and regulations of the Sales and Service Tax Act 2018 for e-Invoicing purposes and to avoid imposition of multifold penalties.

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.