Construction works services in Malaysia have been subject to service tax at 8% since 1 July 2025. Contractors must register once their annual taxable construction turnover exceeds RM1.5 million. The most important relief — the exemption for services under non-reviewable contracts signed before 9 June 2025 and stamped before 31 December 2025 — has been extended to cover services provided up to 30 June 2027, but it does not apply to new contracts entered into in 2026.

For an industry that prices work years in advance under fixed-sum contracts, a new 8% tax mid-project is not merely a compliance issue — it is a contractual allocation problem. This article explains the tax, the exemptions, and the contract-law questions that determine who actually absorbs the cost.

When did construction become taxable, and at what rate?

From 1 July 2025, all construction works services became prescribed taxable services at 8%. The scope is broad: it captures main contracting, subcontracting, and related construction works, and — significantly — it includes residential buildings forming part of mixed development projects. Pure residential construction and certain public-purpose works fall outside the net or benefit from specific exemptions, but the default position for commercial and mixed developments is taxability.

Contractors providing taxable construction works services must register for service tax once turnover from those services exceeds RM1.5 million in a rolling 12-month period — a higher threshold than the general RM500,000, reflecting the scale of even modest contracting businesses.

What is the non-reviewable contract exemption?

The centrepiece transitional relief recognises that contractors locked into fixed prices could not have priced in a tax that did not exist when they tendered.

The exemption applies to construction services provided under a non-reviewable contract — broadly, a contract whose price cannot be adjusted for the new tax — which was signed before 9 June 2025 and stamped before 31 December 2025. As originally granted, the exemption covered services provided up to 30 June 2026. The Government has since extended the exemption to services provided up to 30 June 2027.

Three points of caution:

1. The extension does not cover new contracts. Contracts entered into in 2026 are fully taxable from day one, and contractors must price and provide for the 8% at tender stage.
2. Both conditions are date-critical. A qualifying contract signed in May 2025 but stamped only in January 2026 falls outside the relief. Stamping records are now, in effect, tax records.
3. The exemption is time-limited by service date, not contract date. Work performed under a qualifying contract after 30 June 2027 becomes taxable, even though the contract predates the tax. Long-running projects should be programmed and certified with this cliff-edge in mind.

What other construction-related exemptions exist?

RMCD has issued a series of Service Tax Policies granting targeted relief:

• Places of worship. Construction of places of worship, and renovation of non-residential buildings into places of worship, is exempt under Service Tax Policy No. 3/2025 (as amended). Notably, no prior approval from Customs or the Ministry of Finance is required — but the parties must self-administer compliance with the conditions in the policy’s annexures. Self-administered exemptions are convenient but dangerous: if Customs later finds a condition unmet, the assessment lands years afterwards with penalties attached.
• Government works. Services provided to federal or state government bodies benefit from exemption, subject to conditions.
• B2B exemption. Exemptions between registered persons in the contracting chain can prevent tax cascading through main contractor–subcontractor structures, but the conditions must be satisfied at each link. A main contractor that assumes its subcontractors’ invoices are exempt without verifying registration status is building an audit problem into its cost base.

Who bears the 8% — employer or contractor?

This is where tax law meets construction law, and where most disputes will be fought.

For new contracts, the answer should be drafted, not litigated: the contract should state whether the contract sum is inclusive or exclusive of service tax, who bears changes in tax law, and how the tax appears in interim certificates and progress claims. Standard forms differ in how their change-in-law and fluctuation provisions respond to a new tax, and bespoke amendments are common — the clause actually signed governs.

For existing contracts that do not qualify for the non-reviewable contract exemption, contractors face a squeeze: they are liable to Customs for the 8% but may have no contractual mechanism to recover it from the employer. Whether recovery is possible depends on the change-in-law clause, any tax clause, and in some cases arguments on frustration of the pricing basis. These are precisely the disputes that end up in adjudication under CIPAA or in arbitration — and the tax treatment of adjudicated or settled sums adds a further layer that parties routinely overlook.

How does this interact with progress claims and CIPAA?

Service tax attaches when the taxable service is provided and invoiced. In construction, that means interim payment claims and certificates must correctly state the tax element — both for SST compliance and because a payment claim under the Construction Industry Payment and Adjudication Act 2012 (CIPAA) must accurately state the amount claimed. A contractor that omits service tax from its payment claim may find it difficult to recover it later; an employer served with a claim that wrongly includes tax on exempt works has a ground of challenge. Contractors should align their SST invoicing with their contractual claims machinery so the two never diverge.

What is Customs targeting in 2026?

With the general penalty-free period having ended on 31 December 2025, Customs has signalled that 2026 audits will focus on the sectors newly brought into the SST net — and construction is squarely among them. The recurring exposures we anticipate:

• Contractors above RM1.5 million who never registered, particularly subcontractors who assumed the tax was “the main contractor’s problem”;
• Misclassification of mixed development works as exempt residential construction;
• Non-reviewable contract exemption claims where the signing or stamping dates fail the tests;
• Self-administered exemptions (places of worship) without the required documentation.

Frequently Asked Questions

What is the service tax rate on construction in Malaysia? 8%, effective 1 July 2025, for taxable construction works services.

What is the SST registration threshold for contractors? RM1.5 million of taxable construction services turnover in any 12-month period.

Is residential construction subject to service tax? Pure residential construction is generally outside the scope, but residential buildings within mixed development projects are taxable.

What is a non-reviewable contract for SST purposes? A construction contract whose price cannot be revised for the new tax, signed before 9 June 2025 and stamped before 31 December 2025. Services under such contracts are exempt up to 30 June 2027.

Does the exemption apply to contracts signed in 2026? No. The extension to 30 June 2027 applies only to qualifying pre-9 June 2025 contracts. New contracts are fully taxable.

Can a contractor pass the 8% on to the employer? Only if the contract permits it — through a tax clause, change-in-law provision, or agreed variation. Otherwise the contractor remains liable to Customs and may absorb the cost.

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This article is for general information only and does not constitute legal advice. The position stated is current as at July 2026.

Reviewing a contract’s tax clause, claiming the non-reviewable contract exemption, or facing a Customs audit on construction services? The Tax & Customs and Construction Disputes practices at NZSK Legal act for contractors, subcontractors and developers across Malaysia. Contact us for a consultation.