What Is Indirect Tax in Malaysia? A Complete Guide for SMEs

Indirect tax refers to tax collected by businesses on behalf of the government when goods or services are sold. 

Unlike direct tax (which individuals or companies pay directly to LHDN), indirect taxes are embedded in the price customers pay, meaning businesses act as the government’s collectors.

In Malaysia, indirect taxes include:

• Sales and Service Tax (SST)
• Excise Duty
• Customs Duty (Import & Export)
• Digital Service Tax (DST)

So, let the leading accounting firm in Malaysia to explain why indirect tax is important and how it differs from direct tax.

Direct vs Indirect Tax: What’s the Difference?

Aspect	Direct Tax	Indirect Tax
Who Pays It	Individuals or companies directly to LHDN	Collected by businesses when selling goods/services
Examples	Income tax, corporate tax	SST, excise duty, customs, digital service tax
Authority	LHDN (Inland Revenue Board)	RMCD (Royal Malaysian Customs Department)
Timing	Paid on income/profit	Paid at the point of transaction
Visibility	Clearly stated in tax filings	Hidden in retail/service prices

Example: A marketing agency pays corporate tax (direct). But when it rents a coworking space or books a hotel for a client, it pays 8% service tax (indirect).

Types of Indirect Tax in Malaysia

1. Sales and Service Tax (SST)

The SST system, Malaysia’s main indirect tax was reintroduced in 2018 to replace GST.
It operates as two separate taxes:

• Sales Tax: Applied once at the manufacturing or import stage.
• Service Tax: Charged on taxable services at 6% or 8%, depending on category.

Recent Updates (Effective 1 July 2025):

Change	Previous Rule	Updated Rule (2025)
Service Tax Rate	6%	8% for hotels, entertainment, consultancy, leasing, financial services
Registration Threshold	RM500,000	Leasing/Rental services, RM1,000,000 over 12 months. Financial service
Fruit Imports	Apples & oranges taxable	Imported apples, oranges, mandarin oranges and dates are exempt
Beauty Services	Taxable	Proposed taxation of beauty services was dropped after public feedback

Real Example: A logistics company with RM700,000 annual turnover must register for SST. A car leasing firm hitting RM1.1 million in fees must charge 8% service tax.

2. Excise Duty

Excise duty applies to locally manufactured or imported luxury or controlled goods.

These include:

• Alcoholic beverages
• Tobacco products
• Motor vehicles
• Sugar-sweetened drinks
• Vapes and electronic cigarettes

Example: If a Malaysian distributor imports whiskey, excise duty is charged based on volume + alcohol percentage, often adding 40–60% to final cost.

“Excise is a key tool for both revenue generation and public health policy, discouraging unhealthy consumption.”

3. Customs Duties (Import & Export Taxes)

Malaysia imposes customs duties to regulate trade and protect local industries.

Type	When Applied	Examples
Import Duty	On goods brought into Malaysia	Clothing, electronics, machinery, cars
Export Duty	On specific export commodities	Palm oil, timber, crude minerals

Customs duty rates vary by HS Code (Harmonised System Code) and depend on trade agreements like ASEAN FTA, RCEP, or Malaysia–China FTA.

Example: A Malaysian café importing espresso machines may pay 10% import duty plus 5% sales tax. Meanwhile, a palm oil exporter pays export duty on shipments exceeding monthly price thresholds.

4. Digital Service Tax (DST)

Introduced in January 2020, the 6% Digital Service Tax applies to foreign digital platforms providing services to Malaysian consumers.

Examples:

• Streaming (Netflix, Spotify)
• SaaS tools (Canva, Zoom, Adobe)
• Online ads (Meta, Google Ads)

Foreign providers earning more than RM500,000 annually from Malaysian users must register with RMCD and charge DST.

Example for SMEs: If your local marketing agency subscribes to Canva Pro, the 6% DST is already included. However, if your company offers digital services abroad, you may also need to register under RMCD’s cross-border tax scheme.

Why Indirect Tax Matters for SMEs

Indirect tax impacts daily business costs and compliance obligations.

Here’s how:

1. Pricing Strategy
   Taxes like SST and excise are built into your selling price. Miscalculating them can make your products uncompetitive.
   
   
2. Cash Flow
   Service tax is generally on a payment basis, but a 12-month deemed-paid rule can make tax due even if a customer hasn’t paid, so cash-flow planning is essential.
   
   
3. Audit Risk
   RMCD conducts frequent desk and field audits. Incorrect classification or missed filings can trigger penalties.
   
   
4. Trade Efficiency
   For importers/exporters, customs compliance determines how quickly shipments clear ports and whether you qualify for exemptions under trade agreements.

Who Regulates Indirect Taxes in Malaysia?

• Royal Malaysian Customs Department (RMCD): Oversees SST, excise, customs duties, and digital service tax.
• Lembaga Hasil Dalam Negeri (LHDN): Handles direct taxes such as income, corporate, and withholding tax.

Most SMEs interact primarily with RMCD for indirect tax and LHDN for corporate tax, meaning both must align during audits and filings.

Compliance, Filing, and Record-Keeping

SST Filing

• Submit Form SST-02 via MySST portal every two months.
• Pay by the last day of the month after each taxable period.
• Maintain sales invoices, import/export documents, and receipts for 7 years.

We have a whole blog on how to register SST right here, for businesses.

Customs Declarations

• File through uCustoms portal or appointed forwarding agents.
• Misclassification of HS Codes can result in penalties or shipment delays.

Excise & DST Filings

• Excise manufacturers must report monthly.
• Foreign digital service providers file quarterly.

Penalties for Non-Compliance

Offence	Penalty
Late SST Payment	10% (first 30 days) + 15% + 15%, max 40%
Failure to Register	RM50,000 fine or imprisonment up to 3 years
Incorrect Declaration	Penalty of RM500–RM50,000 depending on severity
Customs Underreporting	Confiscation of goods, additional duty, or compound fines

Example: A small importer underdeclaring shipment value may face double duty charges plus seizure of goods.

How Malaysian SMEs Can Stay Compliant with Indirect Tax

Indirect tax compliance may sound like something only large corporations worry about, but in Malaysia, even a small logistics firm or neighbourhood café (plenty actually!) can cross the SST threshold without noticing. 

Below are five practical steps SMEs can take to stay compliant, minimise risk, and manage cash flow confidently.

1. Classify Your Goods and Services Correctly

Before you issue any invoice, verify if your product or service is taxable under SST, customs, or excise duty rules.

• Use the MySST portal and the Customs Tariff Code (HS Code) directory to confirm tax treatment.
• For mixed businesses (for example, a beauty salon selling retail hair products), separate your SST-taxable and non-taxable items on invoices.
• Misclassification is one of the most common reasons RMCD issues audit queries.

Example: A car workshop offering repairs (service-taxable) and selling spare parts (sales-taxable) must issue two separate bills or clearly break down the charges.

2. Monitor Turnover and Registration Thresholds

In Malaysia, SST registration depends on annual taxable turnover.

• Most services are taxable once turnover exceeds RM500,000, while rental and financial services start at RM1 million.
• Set up monthly or quarterly tracking in your accounting software to avoid accidental breaches.
• Once you cross the threshold, registration must be completed within 30 days, or penalties apply.

Tip for SMEs: Even if your sales fluctuate seasonally (for example, during Ramadan or year-end sales), Customs assesses turnover on a rolling 12-month basis.

3. Maintain Proper Digital Records

RMCD requires all indirect tax documents to be kept for 7 years, in English or Bahasa Malaysia, and stored within Malaysia.

• Keep SST-02 filings, e-invoices, customs declarations, import/export forms, and excise statements in a secure cloud drive.
• Label folders by tax period for easy retrieval during audits.
• Many local SMEs now use cloud systems like AutoCount, SQL, or Xero to sync invoices and generate SST reports automatically.

Why it matters: During field audits, Customs officers increasingly ask for digital access instead of paper binders.

4. Train Staff Across Departments

Indirect tax compliance is not just the accountant’s job.

• Sales staff must know when to apply service tax on invoices.
• Procurement officers should check suppliers’ SST status before paying invoices.
• Finance teams must understand how to prepare returns, track penalties, and respond to RMCD queries.

Example: A café’s cashier mistakenly charges 8% service tax even though the business is below threshold. This creates over-collection liability, which Customs can penalise if not refunded correctly.

Regular internal training avoids such mistakes and builds confidence during audits.

5. Engage Licensed Tax or Customs Professionals

When your business expands into importing, exporting, or providing cross-border digital services, indirect tax becomes complex.

• Licensed tax agents and customs brokers can help classify goods, prepare declarations, and apply for exemptions (such as manufacturer or B2B reliefs).
• SMEs in Johor, Penang, and Sabah often rely on local forwarding agents familiar with uCustoms and RMCD procedures.
• Professional advisors also help you respond to audit notices, appeal penalty assessments, or plan ahead for SST scope expansions.

Practical tip: Always verify that your consultant or agent is registered with the RMCD to ensure advice is compliant.

Conclusion: Indirect Tax Is the Hidden Cost You Can Control

Indirect tax may seem invisible, but it affects every ringgit your business earns or spends.

From the price of imported goods to monthly SST returns, compliance is not just about avoiding fines, it’s about maintaining trust, clarity, and competitiveness.

At Accounting.my, we help Malaysian SMEs simplify indirect tax compliance through practical explanations, timely updates, and clear guidance based on RMCD’s latest regulations.

We offer taxation and accounting services, so you can worry about running your business, while we take care of the pesky but mandatory paperwork.