Malaysia’s Tax Shake-Up: Who Wins, Who Pays, and Where the Smart Money’s Headed

Malaysia is pressing ahead with fiscal reform—and the latest expansion of the Sales and Service Tax (SST) marks a key moment. Effective 1 July 2025, the government is broadening the scope of SST to cover more sectors, from financial services to construction and healthcare.

At face value, new taxes often trigger concern. But this shift is more than a revenue-raising exercise—it offers insight into policy direction and reveals which sectors are resilient, and which might be tested. For investors willing to look deeper, it also highlights potential opportunities in Islamic finance, healthcare, and high-quality REITs.

Let’s break it down.

What’s Changing?

The Ministry of Finance announced that:

• Sales tax rates will remain at 5% or 10% for non-essential goods, while essential goods remain exempt.

• Service tax scope is expanding to include financial services, leasing, construction, private healthcare, education, and beauty services.

• A 6% service tax will apply to most new sectors, with 8% applied to financial services.

Banks: Islamic Finance Could Gain Ground

Banks providing financial services could face the new 8% service tax on fee-based income—though basic banking, Islamic finance, and remittances are excluded. This suggests that retail-focused banks will likely be less affected than those serving large corporate clients.

The key outlier is Islamic finance. With Islamic banking transactions fully exempt from the new service tax, we may see a migration of financial activity toward Shariah-compliant offerings. Banks with a pure Islamic focus could benefit from this structural shift.

Healthcare: Tax Hit, But Easy to Absorb

Private healthcare operators will now need to apply a 6% service tax—but only for foreign patients. Given that international patients contribute less than 10% of domestic revenue for major providers, the impact should be limited.

Moreover, Malaysia’s healthcare remains cost-competitive compared to Thailand and Singapore. That gives hospitals pricing power—they can absorb or pass through the tax without losing their edge in regional medical tourism.

Construction and Property: Mild Headwinds

Construction services will now be taxed at 6%, raising development costs. While most contracts will allow for price adjustments, the speed of renegotiation varies and could pressure margins in the short term.

For the property sector, the impact is twofold:

1. Rising construction costs could dampen margins.

2. An 8% service tax on commercial rentals may soften demand slightly.

That said, residential construction and rental are exempt, and residential remains the bulk of Malaysia’s property market—so the hit is more muted than it appears.

REITs: A Quality Filter Emerges

The service tax on rental income will affect tenants directly. For top-tier REITs with high-traffic malls and strong tenant profiles, this is manageable. Prime assets tend to retain pricing power even when costs rise.

However, REITs with weaker assets or lower occupancy may face tenant churn or be forced to offer rental rebates. This could weigh on earnings and reduce distributions to unitholders. In this environment, quality of assets and tenant mix will matter more than ever.

Big Picture: Reform Momentum Is Back

Despite concerns about inflation, Malaysia’s central economic team expects consumer prices to rise by just 2.0% in 2025—with the SST changes already factored in.

More importantly, this move shows that fiscal reform is back on the agenda. The government is aiming to reduce the budget deficit from 4.1% of GDP in 2024 to 3.8% in 2025. This SST expansion could contribute around RM5 billion in additional revenue, adding to projected SST collections of RM46.7 billion—surpassing peak GST collections in 2017.

This is not just about closing gaps. It’s about showing policy discipline and restoring investor confidence.

Final Thought

Taxes may be unpopular, but they can be revealing. This SST shake-up sends a clear message: Malaysia is getting serious about structural reform. Sectors that are flexible, cost-efficient, and able to pass on costs to customers are best positioned to weather this shift.

Islamic banks, healthcare operators, and top-tier REITs stand out as likely winners. Investors don’t need to fear change—they just need to know how to position around it.