Foreign digital service providers registered under the Service Tax Act must charge, collect, and remit Service Tax for providing digital services to customers based in Malaysia.
The Service Tax rate applicable to providing digital services to customers in Malaysia is 6% of the taxable amount. It’s important to note that not all foreign digital service providers have the obligation to impose Service Tax on their supplies to Malaysian customers.
The Service Tax Act instituted a threshold of RSM 500,000. If the Non-Resident entity is below the stipulated threshold, there isn’t per se an obligation to charge, collect, and remit Service Tax.
According to the State Budget for 2024, the Government decided to increase the Service Tax rate to provide digital services. However, this isn’t the only change introduced by the amendments to the Service Tax Act.
Some supplies previously outside the scope of the Service Tax Act became taxable after the amendment came into the picture.
The tax rate will increase from the present 6% to 8%.
Timeline
The effective increase of the Service Tax rate will start from March 1, 2024.
Effective Change
Domestic and foreign service providers that provide taxable services should be aware of this significant change. What it would mean for the businesses under the scope of change if they neglect it doesn’t need to be explicitly emphasized.
The businesses should consider this change as soon as possible if they haven’t done it already. They should modify the Service Tax rate within their billing software, tax engine, or other tool when calculating the Service Tax levied on the provision of services to customers in Malaysia.
The rate is effective from March 1, 2024, so the new rate is applicable if the payment is received starting from that date or the service is provided.
Non-resident digital service providers should be aware that starting from March 1, 2024, a new Service Tax Rate should be applied for electronically supplied services to customers based in Malaysia. The allocated rate for this kind of service will be 8% of the taxable supply. If they haven’t done so, the providers should put an announcement on their website and/or email their Malaysian customers about this significant change.
Aleksandar Delic
1stopVAT Senior Indirect Tax Researcher (Global Content)