Malaysia postpones tax expansion amid US tariff threats

[MALAYSIA] Malaysia has opted to delay a planned expansion of its sales and service tax (SST), offering a temporary reprieve to manufacturers facing mounting pressure from prospective U.S. tariffs.

Initially scheduled for rollout on May 1, the broadened tax measure will now be implemented at a later, unspecified date, according to a Ministry of Finance spokesperson via text message.

The deferral comes as concerns grow over the country’s export competitiveness, particularly in key sectors such as electronics and palm oil. The United States—Malaysia’s third-largest trading partner—imported more than $44 billion worth of goods from the nation in 2024, based on official data. With Washington considering tariffs of up to 24% on Malaysian exports, industry stakeholders have warned that additional domestic taxes could further erode already thin profit margins.

Local manufacturers, already grappling with cost pressures, have lobbied the government to delay new tax measures amid the uncertain trade environment. “The manufacturing sector is a critical revenue contributor but is under immense strain,” said Tan Sri Soh Thian Lai, president of the Federation of Malaysian Manufacturers, earlier this month.

Khoon Goh, head of Asia research at Australia & New Zealand Banking Group, said the delay should offer “some relief for businesses already grappling with the uncertainty caused by US tariff policy.” While postponing the SST expansion means deferring an estimated RM3 billion ($640 million) in annual revenue, Goh emphasized that safeguarding economic growth is currently the greater priority over fiscal collection.

Despite the delay, economists note that Malaysia’s fiscal fundamentals remain solid, with debt levels comparatively lower than those of regional peers such as Thailand and the Philippines. Still, the tax postponement could hinder Prime Minister Datuk Seri Anwar Ibrahim’s broader agenda of diversifying government revenue sources. The planned SST expansion, announced in the national budget last October, aims to include non-essential goods—such as premium imports like salmon and avocados—as well as commercial services.

The ringgit strengthened 0.7% against the U.S. dollar as of 11:15 a.m. in Kuala Lumpur, marking its highest level since October and outperforming other Asian currencies, second only to Thailand’s baht.

Across Southeast Asia, policymakers are weighing various strategies to buffer their economies from trade-related shocks. The Philippines and Singapore have already eased monetary policy this month, and market expectations are growing that Malaysia—currently the last major economy in the region resisting rate cuts—could follow suit within the next six months. Still, the central bank has indicated it is looking beyond interest rates, considering alternative tools to manage the economic fallout.

Analysts have suggested that Malaysia could introduce targeted subsidies or export-focused incentives to support vulnerable industries. Indonesia has recently implemented similar measures, including tax relief for labor-intensive sectors—an approach that could serve as a model for Malaysia.

Meanwhile, the government is seeking to engage with Washington during a 90-day reprieve on higher tariffs initiated by former U.S. President Donald Trump, who has already implemented a 10% levy on a wide range of imports, including those from Malaysia. As trade uncertainty looms, officials are reassessing Malaysia’s 2025 growth forecast of 4.5% to 5.5%.

Although the Ministry of Finance has completed consultations with industry groups on the SST expansion's scope and applicable rates, the rollout is now set to be formalized on June 1, according to Datuk Anis Rizana Mohd Zainudin, director general of the Royal Malaysian Customs Department. The measure had initially been targeted for implementation in the first quarter of the year.