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Service Tax Exemptions for Construction Services

Posted LnCoadmin

The Royal Malaysian Customs Department has issued Service Tax Policy No. 3/2025, introducing multiple exemptions and transitional arrangements for construction services. Effective immediately, the measures cover government projects, non-reviewable contracts, mixed developments, and religious buildings, creating new opportunities for tax planning.

Government & Public Sector Projects
  • Federal and State Governments: Fully exempt from service tax on construction services (no conditions).
  • Local Authorities (PBT): Temporary exemption from 1 July 2025 to 30 September 2025.
Non-Reviewable Contracts

Construction contracts that meet the criteria may enjoy service tax exemption until 30 June 2026, provided that:

  • The contract does not allow price revision or value adjustment.
  • It is signed before 1 July 2025 and stamped by 31 December 2025.
  • The contract value is fixed and remains effective after 1 July 2025.
  • Variation Orders (VO) that do not change the total contract value and Extensions of Time (EOT) based on the original contract remain eligible.
Mixed Development Projects
  • Residential buildings and related public facilities are eligible for service tax exemption.
  • Non-residential portions must be apportioned based on built-up area.
  • Proper documentation (planning approval, contracts, technical details) is required.
Business-to-Business (B2B) Exemptions

Design & Build contracts:

  • Consultancy services may qualify for B2B exemption.
  • Service tax is imposed only at the level of the total project value charged by the main contractor to the developer or landowner.

Newly taxable construction service providers (first reaching the threshold in July 2025):

  • B2B exemption applies from 1 July to 31 August 2025.
  • Refunds for service tax already paid may be claimed by 30 November 2025, subject to repayment to clients.
Religious Buildings
  • Construction of buildings used solely for religious purposes, including related public facilities, is fully exempt from service tax.
  • Renovation or extension of non-residential buildings converted for religious use is also exempt.
  • However, service tax previously paid on completed construction works is not refundable.

**Last Updated on 05.02.2026

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