FROM July 1, 2025, all construction services are subject to a 6% tax, except those provided solely for residential projects, which certainly increases the prices of commercial projects.
In theory, the consumer ultimately bears the tax. In practice, this is not always possible, particularly for ongoing contracts where prices were agreed before the tax came into effect. In such cases, developers may have to absorb the cost and, depending on market conditions, construction companies themselves may also shoulder part of the burden. Over time, however, these additional costs will end up with the end-consumer.
Challenges faced by the Industry
The biggest challenge is the service tax is meant to be confined to services, but the industry supplies its services inclusive of materials and will now consequently have to charge the 6% service tax on both materials and services since the two are bundled.
Existing rules do not allow for the segregation between services and goods. This contradicts the spirit of the legislation and spirals the cost to the ultimate consumer. The government must address this anomaly and bring the application within the ambit of the spirit of this legislation of imposing the tax only on the services.
Currently, another hurdle preventing the split is the anti-avoidance provisions within the Service Tax Act 2018 that prevents such splits as it wants to avoid any artificial segregation intentionally done to avoid service tax.
The definition of the phrase “construction works” is very wide in the Service Tax Regulations 2018. It includes construction, extension, installation, repair, renewal, removal, renovation, alteration, dismantling, demolition of, or facility maintenance in the construction works period. There is even an overlap, for example, in the case of repair which is duplicated again in Group G of the regulations.
A dilemma of this nature should be avoided by the authorities to provide industries with certainty when reading the law. One of the fundamentals in tax law is certainty, not ambiguity.
The definition covers a whole set of works which is lengthy and detailed in paragraphs (a) to (f). However, there will still be exceptions where activities do not fall within the words from the regulations but could be caught if the spirit of this definition could be applied.
Where does it leave the business enterprises?
To avoid future disputes with the authorities, it is safer for the business enterprises to make sure that wherever there is a doubt in the coverage it is best engage the customs authorities and get a confirmation.
The other challenge the industry will have to face is the struggle in determining whether a contract is non-reviewable or not. From our past Goods and Services Tax experience, we anticipate that there will be disputes between the customs authorities and the taxpayer. Generally, the customs authorities will lean towards ruling contracts to be reviewable. Again, the government should look into this and provide more clarity and guidance to prevent disputes with the customs authorities.
Mixed contracts are another problematic area. Currently, if a project contains any commercial element, the entire contract becomes taxable, even if most of the work is residential. This all-or-nothing approach creates inequity and uncertainty. The rules for apportionment should be made available within the legislation.
There is also a supply chain tax cascade whereby there is a tax-on-tax element because the services that are absorbed by the construction companies would have already been subjected to service tax which would not have been eligible for any exemption. Consequently, when the construction enterprise bundles that cost and passes it on to the consumer, there is an embedded element of tax-on-tax.
There are many more issues facing the construction industry that need to be addressed by the government urgently.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).