The 1 July 2025 Service Tax Expansion, Sector by Sector

The single most common error in circulation about the 2025 expansion is that construction sits in Group K. It does not. Group K is rental or leasing, Group L is construction works, and Group M is education — and if you file against the wrong group you will apply the wrong rate and the wrong threshold on the same return.

The second most common error is quoting one registration threshold. There are now four different ones in play across the expanded groups, and the two most widely quoted figures were superseded on 30 June 2025 — one day before the rules commenced.

What actually changed on 1 July 2025

Three instruments did the work, all gazetted on 9 June 2025 and all effective 1 July 2025:

Instrument	What it did
P.U.(A) 172/2025	Amended the First Schedule to the Service Tax Regulations 2018 — inserted Groups K, L and M, added items 14 to 16 to Group I, and substituted Group H entirely
P.U.(A) 173/2025	Substituted paragraph 3 of the Service Tax (Rate of Tax) Order 2018 — set the general rate at 8% with a listed 6% schedule
P.U.(A) 174/2025	Amended the Service Tax (Persons Exempted from Payment of Tax) Order 2018

Then, on 30 June 2025, P.U.(A) 201/2025 amended P.U.(A) 172/2025 before it had taken effect. It did two things: it raised the threshold for Group H items 2, 3 and 4 and for Group K from RM500,000 to RM1,000,000, and it deleted the definition of wellness centre.

That last-minute order is why so much published guidance is wrong. Alerts written between 9 and 30 June 2025 — which is most of them — quote RM500,000 for rental and finance, and describe beauty services as taxable.

How the 6% and 8% split is actually decided

Paragraph 3(1) of the Rate of Tax Order now fixes service tax at 8% on all services. Paragraph 3(2)(a) then carves out a First Schedule taxed at 6%, and paragraph 3(2)(b) a Second Schedule taxed at a specific amount.

The 6% First Schedule is a closed list of thirteen entries:

1. Prepared or served food services
2. Prepared or served non-alcoholic beverages services
3. Sales of non-alcoholic beverages services
4. Food together with alcoholic or non-alcoholic beverages services
5. Telecommunication services
6. Telecommunication together with subscription broadcasting services
7. Parking space for motor vehicle services
8. Logistic services
9. Healthcare services
10. Practice of traditional and complementary medicine services
11. Services relating to allied health
12. Construction works services
13. Education services

Item 14, rental or leasing services, was added from 1 January 2026 by the Service Tax (Rate of Tax) (Amendment) Order 2026, P.U.(A) 125/2026, gazetted 13 March 2026 with retrospective effect. Customs had already granted the reduction administratively — Service Tax Policy No. 2/2025 (Amendment No. 3) exempted 2 percentage points of the rental rate from 1 January 2026 pending the gazette.

The Second Schedule carries one entry: credit and charge cards, at RM25 per card on activation and every twelve months thereafter.

Everything not on those two lists is 8%. That is the whole rule. You do not need to remember which sector is which — you need to check whether it appears in that fourteen-item list, and from what date.

Rental or leasing — Group K, RM1,000,000, 8% then 6%

The widest-reaching change, and the one whose rate has already moved. Rental or leasing was taxed at 8% from 1 July 2025 to 31 December 2025 and at 6% from 1 January 2026. Any guide still quoting a flat 8% is describing 2025.

Group K catches all types of rental or leasing of tangible assets, including any other service forming part of the rental, provided by any person who provides rental or leasing services. There is no industry limitation: a manufacturer subletting a warehouse is in scope.

Four exclusions sit in the group itself:

• rental or leasing of housing accommodation
• rental or leasing of reading materials
• rental or leasing of tangible assets located outside Malaysia
• financial leases of tangible assets

Note 2 to Group K expands housing accommodation to include a small office home office, serviced apartment, serviced condominium, serviced suite or residential suite. That is a deliberately generous reading and it takes a large slice of the urban rental market out of scope.

Where the asset is located was settled by Service Tax Policy No. 8/2025 on 7 November 2025 using an unusual test: tangible assets located within 12 nautical miles of the baselines under the UN Convention on the Law of the Sea 1982 are in Malaysia and taxable; beyond 12 nautical miles they are not. That matters to offshore vessel and rig charters.

The MSME tenant exemption is the provision most often missed. Under Service Tax Policy No. 2/2025 as amended, a tenant that is a micro, small or medium enterprise is exempted from paying service tax on rental or leasing where annual sales do not exceed RM1,500,000 based on the latest year of assessment declared to LHDN, and the tenant registers and declares through the MyPMK system. Tenants registered on or before 31 December 2025 get the exemption backdated to 1 July 2025; those registering from 1 January 2026 get it from the date of MyPMK registration only. A landlord who never asked its tenants to register has been charging tax that need not have been charged.

Non-reviewable contracts were exempted from 1 July 2025 to 30 June 2026. The conditions are strict: the provider must be service-tax registered, the contract must contain no price review clause or value adjustment mechanism, it must be written, signed and stamped by LHDN on or before 9 June 2025, it must state the service type, a fixed contract value and a duration, and it must still have been in force after 1 July 2025.

That relief has now run out. Service Tax Policy No. 2/2025 (Amendment No. 4), issued 6 February 2026, restates the same 30 June 2026 end date and does not extend it. Landlords relying on it should already have repriced.

Three further rental reliefs sit in the same policy and are easy to miss:

• Group relief. Rental or leasing between companies in the same group is exempt from payment, whether the counterparty is inside or outside Malaysia. Control means holding — directly, indirectly through a subsidiary, or in combination — more than 50% of the issued paid-up capital of the other company, with a further limb for holdings between 20% and 50%.
• Aircraft and ships. Rental or leasing of all aircraft other than drones, and of any vessel that sails or moves on or in water other than a floating storage unit and similar, is exempt from 1 July 2025.
• Newly incorporated MSME tenants. From 1 January 2026, an MSME tenant that has just started its business gets exemption for one year from the date of registration with SSM (or the equivalent Sabah or Sarawak agency), provided it registers on MyPMK and later files an income tax return with LHDN to qualify for continued exemption after the first year.

Construction works — Group L, 6%, RM1,500,000

Group L catches any person providing construction works services, excluding the construction of a residential building and public facilities related to it. The definition of construction works reaches buildings, civil engineering, mechanical and electrical works, telecommunication works, gasworks and waterworks, and bridges, dams, earthworks, pipelines, sewers, tunnels and reclamation works — plus preparatory and temporary works forming an integral part of them.

Note 2 removes the residential carve-out where the residential building sits in a mixed development approved by a local authority. Service Tax Policy No. 3/2025 (Amendment No. 3) then hands that back as an exemption, subject to verification by a surveyor, architect or other qualified person of the residential, non-residential and shared components, with shared public facilities apportioned by:

non-residential built-up area ÷ total built-up area × 100

Construction gets the longest transitional relief in the expansion. Non-reviewable contracts are exempt from 1 July 2025 to 30 June 2027 — a full year longer than rental — and the conditions differ in a way that catches people out. The contract must be signed before 1 July 2025 and stamped by LHDN before 31 December 2025. Rental required stamping on or before 9 June 2025. Two reliefs, two different stamping deadlines.

Variation orders keep the exemption to 30 June 2027 only if they do not change the overall contract value and were incorporated in a written document signed before 1 July 2025 and stamped before 31 December 2025. Extensions of time keep it if the original contract value is unchanged, the original contract expired before 1 July 2025, and the EOT document meets the same signing and stamping dates.

There was also a short refund window: contractors who first crossed the threshold in July 2025 and applied to register on or before 31 August 2025 were given B2B exemption for 1 July to 31 August 2025, with refund claims due by 30 November 2025, and only after refunding the tax to the customer. That window has closed.

Service Tax Policy No. 7/2025 handles EPCC contracts for ships and platforms by letting the industry elect: treat shipbuilding as construction and get B2B exemption on professional services, or treat it as manufacturing under sales tax and charge no service tax, but forgo the professional-services B2B exemption.

Financial services — Group H, 8%, RM1,000,000

Group H was replaced wholesale. Previously it covered credit and charge cards only; it now has four items.

Item 1 — credit and charge cards issued by a person regulated by Bank Negara Malaysia. Threshold nil, taxed at RM25 per card per twelve months. Fleet charge cards issued to the Government and closed-loop cards used only within a workplace, educational institution or sports club are excluded.

Items 2, 3 and 4 — insurance and takaful, fee- and commission-based financial services, and the Labuan equivalent, provided by persons regulated by Bank Negara Malaysia, the Securities Commission or the Labuan Financial Services Authority. Threshold RM1,000,000, taxed at 8%.

The critical boundary is that service tax attaches to fees, commissions and similar payments, and expressly not to:

• interest-based payment for credit facilities
• profit-based payment for syariah compliant financing
• payments that are punitive in nature
• returns through the difference between selling and purchase price

Basic banking is also outside: savings, withdrawal, payment or transfer of money, debit card issuance, basic counter and ATM transactions, and printing of account statements. So is anything relating to goods, land or matters outside Malaysia, other than outward remittance charges imposed on customers in Malaysia.

Financial services got a staged start. Service Tax Policy No. 1/2025 (Amendment No. 3) exempted all Group H financial services except a listed appendix from 1 July to 30 September 2025; fee- and commission-based financial services became taxable from 1 October 2025.

Private healthcare, traditional medicine and allied health — Group I items 14 to 16, 6%, RM1,500,000

These went into the existing Group I rather than a new group.

• Item 14 — private healthcare facilities registered or licensed under the Private Healthcare Facilities and Services Act 1998, excluding facilities run by universities under Act 30 or Act 173, and excluding University Malaya Specialist Centre, UKM Specialist Centre, UiTM Medical Specialist Centre and IIUM Medical Specialist Centre by name.
• Item 15 — private traditional and complementary medicine.
• Item 16 — private allied health services.

Here is where nearly every guide is imprecise. They say healthcare service tax applies only to non-citizens. As a matter of scope that is not what the regulation says — Group I items 14 to 16 are not limited by patient nationality. The relief for Malaysian citizens comes from the Service Tax (Persons Exempted from Payment of Tax) Order 2018 as amended, which is an exemption from payment. The distinction is not academic: revenue from Malaysian patients is still the value of a taxable service, so it counts toward the RM1,500,000 registration threshold. A hospital that tested only its foreign-patient revenue against RM1,500,000 has probably under-registered.

Compare Group M, where the non-citizen limitation is written into the regulation. The drafter clearly knew how to do it and chose not to here.

Service Tax Policy No. 5/2025 (Amendment No. 2) exempts consultation fees charged by doctors, traditional practitioners and allied health professionals, provided the consultation fee is separated from treatment charges on the same invoice. Any tax already collected from patients must still be remitted under s.26 of the Service Tax Act 2018 — collecting it and keeping it is not an option.

Service Tax Policy No. 6/2025 confirms there is no B2B exemption between healthcare providers in the same group of services. Where facility A refers a patient who walks in directly to facility B, B’s invoice to A for a non-citizen patient is taxable.

Private education — Group M, 6%, no threshold

Group M has a nil registration threshold. Liability is set by the nature of the institution and the fee level, not by turnover.

• Item 1 — private educational institutions registered under the Education Act 1996 providing pre-school, primary, lower secondary, upper secondary or post-secondary education where fees exceed RM60,000 per student per academic year. Special schools and language centres are excluded.
• Item 2 — higher education institutions under Act 30, the Private Higher Educational Institutions Act 1996 or the Education Act 1996, on services provided to a non-citizen.
• Item 3 — language centres registered under the Education Act 1996, on services provided to a non-citizen.

Service Tax Policy No. 4/2025 exempts a long list of ancillary charges: books, uniforms, food and beverage, transport, accommodation, refundable deposits that are not part of tuition, PTA fees, educational trips not part of tuition, and student pass or visa charges. Amendment No. 1 adds exemptions for children and dependants of foreign diplomats holding a Ministry of Foreign Affairs confirmation letter, and for fees fully sponsored by institutions, companies, foundations or other organisations.

Beauty — the expansion that never happened

Beauty services are the most persistent piece of misinformation in this cluster.

P.U.(A) 172/2025 would have inserted a definition of wellness centre covering treatment of any part of the body using any substance or equipment — including aromatherapy, acupuncture, reflexology and cupping — plus postnatal care and wellness care for the elderly. Combined with the renaming of Group C, that would have swept in a large part of the beauty and personal care sector.

On 27 June 2025 the Ministry of Finance announced it would not proceed with service tax on beauty services, naming manicure, pedicure, facial services, barbers and hairdressers. P.U.(A) 201/2025 gave that effect by deleting the wellness centre definition three days later.

What survives is the pre-existing position: wellness centres and massage parlours remain taxable under Group C at 8% above RM500,000, as they have been since 1 September 2018. So the accurate statement is neither “beauty is now taxed” nor “beauty was dropped entirely” — it is that the expansion of Group C was abandoned while the original Group C stayed put.

One loose end: with the definition deleted, wellness centre is now undefined in the Regulations. Operators near the boundary should get a Customs ruling rather than rely on a press release.

Logistics — Group J, 6%, RM500,000, and not part of this expansion

Logistics is routinely listed among the 2025 changes. It was not. Group J logistic services was inserted by P.U.(A) 62/2024 with effect from 1 March 2024, covering logistic management, warehousing, freight forwarding, port and airport services, shipping, aviation and cold chain facilities, at RM500,000.

It matters because a logistics operator reading a 2025 expansion guide may conclude it has until 2025 to register when its liability actually arose in 2024 — and the 2025 penalty amnesty did not cover Group J.

The penalty amnesty has closed

Every sector policy issued on 29 June 2025 carried the same concession: exemption from compound, prosecution and penalty until 31 December 2025 for late registration, late submission of returns, late payment, incorrect declaration, and errors in invoices, credit notes or debit notes.

It was conditional — the offence had to be detected by Customs or voluntarily disclosed, it did not cover fraud or intentional offences, and remission had to be formally applied for. That window is closed. From 1 January 2026 the ordinary penalty regime applies to the expanded groups.

Federal and state governments are exempt throughout. Local authorities were exempt only from 1 July to 30 September 2025.

Common mistakes

• Filing construction under Group K. Construction is Group L at 6% above RM1,500,000. Group K is rental at 8% above RM1,000,000. Getting this wrong reverses both the rate and the threshold.
• Using the RM500,000 threshold for rental or finance. Superseded by P.U.(A) 201/2025 on 30 June 2025. The figure is RM1,000,000.
• Charging 8% on rent in 2026. Rental or leasing dropped to 6% on 1 January 2026. The 8% figure describes the second half of 2025 only.
• Testing only non-citizen revenue against the healthcare threshold. Citizen revenue is exempt from payment, not outside scope, and still counts toward RM1,500,000.
• Assuming one non-reviewable contract deadline. Rental required stamping on or before 9 June 2025 and expired 30 June 2026. Construction requires signing before 1 July 2025, stamping before 31 December 2025, and runs to 30 June 2027.
• Charging MSME tenants service tax on rent. If the tenant is registered on MyPMK with sales not exceeding RM1,500,000, no tax is payable.
• Treating education as turnover-based. Group M has a nil threshold; the RM60,000 figure is a per-student fee test for item 1, not a registration threshold.
• Believing the amnesty is still open. It ended 31 December 2025.

What’s next

Work out which group each revenue stream falls into before anything else — the group determines the rate, the threshold and the return line. Then test each group separately against its own threshold, using the rolling twelve-month test in s.12(2) of the Service Tax Act 2018 and remembering that exempted revenue still counts.

If you are close to a threshold, read the registration mechanics and the twelve-month tests in detail. If you buy professional or construction services from other registered providers, check whether the B2B exemption removes the tax before you pay it. And if you acquire any of these services from outside Malaysia, the imported taxable services rules apply to you whether or not you are registered.