Bayan Lepas Free Industrial Zone — What Free Zone Status Actually Does

Almost every published description of the Bayan Lepas Free Industrial Zone is now out of date, because of three gazette notifications from December 2024 that nobody noticed.

The zone’s boundaries changed. The 1974 declaration that created it was revoked and Bayan Lepas re-declared on new survey plans with effect from 23 December 2024. Sources still describing the zone by Gazette Plans 138, 281 and 289 — including reprints on government servers — describe the position before that date.

What is a free industrial zone in customs law?

A free zone is an area the Minister of Finance declares by notification in the Gazette under s.3(1) of the Free Zones Act 1990 (Act 438), and the notification must define the zone’s limits. Section 2 defines Minister as the one responsible for finance: this is customs law administered by MOF and operated by RMCD. MITI has no role under Act 438.

Section 3(1) allows two kinds, and the difference sits in ss.11 and 12 rather than in the definitions:

	Free industrial zone (FIZ)	Free commercial zone (FCZ)
Purpose	Manufacturing	Commercial — trading, breaking bulk, grading, repacking, relabelling
Goods admitted	Only goods used directly for manufacture, or PCA goods meant for export (s.11(1))	Any description, subject to ministerial prohibition (s.12)
Exit rule	Only for export, or to an FCZ with the Authority’s approval (s.8(1))	Governed by s.5

Everything else is the principal customs area (PCA) — s.2 defines it as any part of Malaysia excluding a free zone, Labuan, Langkawi, Tioman and Pangkor.

Under s.4, goods may be brought into, produced or manufactured in a free zone without payment of any customs duty or excise duty. Read that as a non-imposition rather than an exemption. The Minister can pull specific goods back out of s.4 by order under s.6(1), and s.6(2) then applies the Customs Act and Excise Act to them as if the zone were inside the PCA.

The deeming provision — the citation everyone gets wrong, twice

Guides routinely write that the Free Zones Act deems a free zone to be a place outside Malaysia. That sentence contains two errors.

First, it is not in Act 438’s operative sections. Act 438’s own deeming is s.7(1): goods going PCA-to-zone are deemed exported from Malaysia, and goods coming zone-to-PCA are deemed imported into Malaysia. The place outside Malaysia wording was inserted into other statutes by the Third Schedule.

Second, that wording has since changed. The current Customs Act 1967 s.2(1A) deems a free zone a place outside a principal customs area — not outside Malaysia — and applies s.31 and Parts IVA, V, VI and VII to it anyway. The Excise Act 1976 shifted the same way, and the Third Schedule’s other two targets are repealed.

How sales tax and service tax actually treat the zone

The Sales Tax Act 2018 (Act 806) uses a category called special areas, defined in s.2 as any free zone, licensed warehouse and licensed manufacturing warehouse, the Joint Development Area, and a petroleum supply base licensed under s.77B of the Customs Act 1967.

• s.55 — in that Part, Malaysia excludes the special areas and the designated areas
• s.56 — the Act does not apply to goods manufactured in a special area, which is why a manufacturer inside the zone cannot register as a registered manufacturer
• s.57(a) — no sales tax on goods entering a special area, moving between special areas, or moving to a designated area, save for goods prescribed by P.U.(A) 207/2018
• s.57(b) — sales tax is levied on goods transported to Malaysia from a special area, as if that transportation were importation into Malaysia

Section 57(b) is where the money is. Selling out of Bayan Lepas into the domestic market is an import event. The relief is a perimeter, not a subsidy. One rarely mentioned facility: item 54 of Schedule A to P.U.(A) 210/2018 covers a free zone manufacturer sending partially manufactured goods out for subcontract work and back, against security equal to the sales tax.

Service tax runs the other way, and this is the expensive one

The Service Tax Act 2018 (Act 807) borrows the same special areas definition and reaches a very different result:

• s.53 — no service tax on a taxable service provided within or between special areas, unless the Minister prescribes otherwise under s.56
• s.54 — a person whose principal place of business is in a special area must charge service tax on taxable services it provides within Malaysia
• s.55 — a registered person whose principal place of business is in Malaysia must charge service tax on any taxable service it provides to a special area

Read s.55 twice. Your Malaysian logistics provider, IT consultant and equipment maintainer all charge service tax on invoices into a Bayan Lepas plant. Only service moving between special areas is relieved. Writers who say a free zone sits outside the SST net are describing sales tax and wrongly generalising it.

Which instrument declares Bayan Lepas?

Three current ones, all recent — but a 1974 original came first.

The zone was originally declared by P.U.(A) 356/1974, gazetted 10 October 1974 under the Free Trade Zones Act 1971 (Act 24). It survived that Act’s repeal through s.50 of Act 438, which deems a surviving free trade zone to be a free industrial zone declared under s.3.

Then, with effect from 23 December 2024:

Instrument	Effect
P.U.(B) 510/2024	Revokes the 1974 declaration
P.U.(B) 511/2024	Re-declares Bayan Lepas under s.3(1) — Mukim 12, District of South West, Penang, bounded by the grey line on Gazette Plans PW2101 to PW2104
P.U.(B) 512/2024	Substitutes item 10 of the Second Schedule, under s.10(2), to match

Two structural points trip up researchers. Declarations are P.U.(B) notifications, not P.U.(A) orders — the P.U.(A) series returns only Regulations and Exclusion of Goods Orders, which is why declarations are so often reported as untraceable. And the Second Schedule is not the declaration: it is made under s.10 and lists zones against the activities approved in them, item 10 being Bayan Lepas and item 9 Prai.

So a free zone address is a surveyed parcel on a deposited plan. A Bayan Lepas postcode is not free zone status, and a pack citing Gazette Plans 138, 281 and 289 predates December 2024.

Who actually administers it?

Not MIDA, not MITI, not the Penang Development Corporation, and not InvestPenang.

Under s.3(2) the Minister appoints an Authority to administer, maintain and operate each zone — a statutory body, a government department, or a company. On RMCD’s published list, the Authority for Bayan Lepas, Pulau Pinang (Fasa I) is Majlis Bandaraya Pulau Pinang, the Penang Island City Council. The mainland Seberang Perai FIZ answers to Majlis Perbandaran Seberang Perai.

The Authority is not a passive landlord. Its approval, after consulting the Director General, releases goods into the PCA under s.5(2)(c) and governs transmission to an FCZ under s.8(1)(b), and under s.13 it must fence the zone and house customs officers. Day-to-day goods control sits with RMCD’s Cawangan Zon Perindustrian Bebas.

Penang’s free commercial zones serve the same supply chain separately: Kargo MAS and the Second Air Cargo Complex at Penang International Airport under Malaysia Airports Holdings Berhad, plus the Deep Water Wharf and North Butterworth Container Terminal under the Penang Port Commission. An exporter typically touches an FCZ outbound and the FIZ inbound.

The E&E supply chain reality

MIDA’s Malaysia Investment Performance Report 2025 puts Penang’s approved manufacturing investment at RM22,375.4 million of a national RM131,297.1 million — about 17% — across 232 projects, ranking second nationally on approved manufacturing investment. DOSM’s GDP by State 2025 release records manufacturing at 47.3% of Penang’s GDP against a national 23.0%.

One statistical trap. DOSM’s trade release prints a share of 51.3% for E&E — that is E&E as a share of manufactured exports, not total exports. Against total 2025 exports of RM1,606,650 million, E&E at RM711,613 million is 44.3%. The two get swapped.

Take these from DOSM’s publication releases, not its open-data CSVs — the state GDP CSV is a stale vintage that parses cleanly and returns wrong numbers.

Free zone status is not an incentive

It contains no tax rate, no exemption period and no allowance. It is a customs perimeter, and eighteen other zones have the same one.

Every fiscal benefit a Bayan Lepas manufacturer enjoys comes from a separate national instrument, and the historic default is now closed: MIDA stopped accepting new manufacturing incentive applications under the Promotion of Investments Act 1986 at 3.00 p.m. on 28 February 2026, with new applications assessed under the New Incentive Framework from 1 March 2026. Existing approvals are unaffected, but a plan that still reads apply for Pioneer Status in the FIZ is planning against a shut window.

MITI’s National Semiconductor Strategy of 28 May 2024 makes the same point: it mentions Bayan Lepas once, descriptively, and allocates nothing geographically. The cluster’s assembly, test and packaging depth is the asset. The designation is plumbing.

FIZ or licensed manufacturing warehouse?

The licensed manufacturing warehouse (LMW) is licensed under s.65A of the Customs Act 1967, which lets the Director General license a person to carry on a manufacturing process on goods liable to customs duty. On release to home consumption, s.65A(3)(b) calculates duty as if the goods had been imported.

	Free industrial zone	Licensed manufacturing warehouse
Legal basis	Act 438, s.3(1) declaration	Customs Act 1967, s.65A licence
Granted by	Minister of Finance; Authority under s.3(2)	Director General of Customs, per premises
Location	Only inside a gazetted area	Any premises Customs will license
Sales tax status	Special area, Act 806 s.2	Special area, Act 806 s.2 — identical
Service tax inbound	Chargeable, Act 807 s.55	Chargeable, Act 807 s.55 — identical

MIDA puts it plainly: LMWs exist so companies can enjoy FIZ facilities where establishing a zone is neither practical nor desirable, and the facilities accorded are similar. If your site sits inside PW2101 to PW2104, the FIZ route is natural. Three kilometres away in Batu Maung, the LMW delivers materially the same position without moving the factory.

The 80% export rule is not law, and it is not about FIZs. There is no export percentage anywhere in Act 438 — s.11(1) is qualitative, meant for export, and s.8 restricts removal absolutely rather than by proportion. The 80% figure comes from MIDA’s LMW eligibility guidance, which says companies normally approved are those whose entire production, or not less than 80%, is meant for export.

Neither route removes the need for a manufacturing licence under s.3(1) of the Industrial Co-ordination Act 1975 where the thresholds are crossed.

Common mistakes

Citing Gazette Plans 138, 281 and 289. Superseded on 23 December 2024 by P.U.(B) 511/2024. The current plans are PW2101 to PW2104. Government-hosted reprints still carry the old numbers and are correct only for their own date.

Writing that a free zone is deemed outside Malaysia. The Customs Act now says outside a principal customs area, and applies s.31 and Parts IVA, V, VI and VII to the zone anyway.

Assuming service tax follows sales tax. It does not. Under s.55 of Act 807 a Malaysian registered provider charges service tax on services supplied into the zone.

Citing the Second Schedule as the declaration. It is an s.10 activities schedule; the declaration is a separate P.U.(B) notification.

Naming the wrong administrator. InvestPenang promotes, MBPP administers the zone, RMCD controls the goods, MOF declares it.

Treating the zone as the incentive. It carries no tax rate, and the Pioneer Status route that sat on top of it closed to new manufacturing applications on 28 February 2026.

What’s next

Confirm three things before committing a site. First, whether the lot falls inside Gazette Plans PW2101 to PW2104 — that decides everything else, and it changed recently enough that older advice cannot be trusted. Second, whether your output mix can live with s.8. Third, model your service tax cost on inbound Malaysian services, because that line survives the fence.

Then run incentives separately through MIDA under the New Incentive Framework.

One note for anyone verifying independently: RMCD’s Guide on Special Area is dated 3 October 2018 and its authority list is stamped only to 3 August 2023, so both predate the re-declaration. Check the gazette, not the guide.